In our previous articles, we have considered the key components that make up the assets being sold as part of a business sale. In addition to goodwill and plant and equipment, the Seller will need to focus their attention upon how they value and structure stock as part of the business sale.
Stock is essentially the raw materials, spare parts or other goods that are sold by a business as part of its business. Obviously some business sales will not involve stock as part of the sale process (for example, a professional service type business) but on the whole, most business have some amount of stock which will need to be taken into account as part of the sale process.
Stock Issues from a Seller’s perspective
From a Seller’s perspective, the key considerations:
- What is saleable stock?
- How do you treat deposits paid for stock?
- Is stock part of the sale price or in addition to the sale price?
- How and when do you value the stock?
- What clearances you need to sell the stock?
For some businesses, not all stock is saleable. A buyer will not want stock that is out of date, damaged or otherwise is out of fashion. A Seller would clearly prefer to sell all or most of its stock. Once a business is sold a Seller will likely not want to incur the trading and storage costs associated with holding excess stock. From a Seller’s perspective, it may be worthwhile to adopt different valuation methods for certain stock items depending on its saleability. For example, stock which is imperfect (such as close to out of date) can be valued at a lower percentage of cost price as an incentive to ensure the stock is sold as part of the sale of business.
For some stock, a customer may have paid a deposit for the purchase of the stock. If that order is not fulfilled by the time of settlement, it is likely that the buyer of the business will have to fulfill the sale. Given this, the purchaser will be looking to receive the benefit of the deposit paid. This issue can become more complicated when the Seller has already undertaken work for which part of the stock has been used. In that instance, there may need to be an adjustment between the Seller and the buyer of the business to reflect the agreed value of the ‘work in progress’.
Whether the sale price for a business includes the value of stock is an important issue for the Seller. Ideally, a Seller would like to receive full repayment for any stock that is being sold to the buyer. However, on the flip side, Sellers often like to simplify sales so as to entice a buyer to acquire the business. Known as a ‘walk in walk out’ sale, the stock is usually included in the price without the need for a formal valuation. From a Seller’s perspective, they will need to ensure that they have properly priced in the value of the stock and ensure that they do not have excessive levels of stock (and thus value) left in the business. Conversely, a buyer will need promises that a minimum level of stock will be available at handover/settlement. This is often a matter that needs to be negotiated and settled in a contract.
The valuation of stock can often present a problem. The usual process is for the stock take to occur just prior to the settlement of the business sale (usually the night before settlement). Typically the price of stock is based on the price paid by the Seller to acquire the stock not including any GST (or value added tax). Any Seller of stock will need to be able to justify the value of stock (documentary evidence such as purchase invoices are best) and the quantum of stock. If the volume of stock is extensive, third party valuers may need to be considered. Also, where the items of stock are large (for example, “nails” in a hardware shop), the method to value stock such as by weight for a fixed price or by way of sample, should be considered and agreed as part of the sale process.
Like any business asset being sold, you need to sell the stock ‘free of encumbrance’. If any stock is purchased from a supplier on credit, it is not unusual for the stock supplier to register a security interest over the Seller. Before selling it is always useful to undertake a search of the Personal Properties Securities Register to ascertain whether there are any existing security interests. If there are, those security interests will need to be discharged at or prior to settlement to satisfy a purchaser.
Properly assessing and valuing stock is an important part of the sale process. It is essential that a Seller give full consideration to what stock is being sold and what is the fair value of that stock. As stock may represent a large part of the value of a business, proper consideration of how to structure the stock sale may maximise the return that a Seller can realise when selling their business.
Written by Cameron Spanner.