Buying a business: Stock

If you are purchasing a business, it is likely that you will also want to acquire the stock in order to continue trading. However, problems can arise if you and the seller of the business cannot come to an agreement on the value of the stock. It is advisable to include in any asset purchase contract negotiated between you and the seller clauses dealing with what stock is to be included and how it will be valued. If disagreements do arise, an independent person can be appointed (via the agreement) to value the stock.

When to value

Stock can be valued either:

a) On a specific date between exchange of contracts and completion, with stock movements after valuation being monitored and reflected in the purchase price of the stock at completion, or

b) At completion, by a stock take with the purchase price for the stock being paid as soon as the valuation has been agreed.

The latter method is more commonly used as a buyer then knows with certainty that they are getting what they expected and are not being short changed 

How to value

There are two main methods used to determine the price of stock on the sale of assets.

(i) Cost value:
This means that you would buy the stock for the same price that your seller originally paid for them.

(ii) Net realisable value:
This works differently than the cost value method. Here, the value is calculated by reference to the expected sale price of the goods. Depending on what the stock is, this can result in either a lower or higher figure than the cost value.For example, if we look at perishable items (such as vegetables) after two weeks, the goods would have decreased in value and be in a less saleable condition. The price that they are now worth (the net realisable value) will be significantly less than the original cost of purchasing them.

Goods can also increase in value. For example, a car dealer may have purchased vintage car parts at a low price but after many years, they are now worth triple in value as they are no longer readily available.

Generally any purchaser will want the contract to result in the lower figure being payable.

In addition to calculating the cost, as a purchaser, it would be advisable to obtain warranties from the seller that the goods are in satisfactory condition when they are bought and belong wholly to the seller. If stock is damaged, it is advisable to allow the seller to retain them and destroy them or to offer them to you at a low price.