Valuing Stock - Selling a Business
Stock can be a contentious issue when selling a business. If you are selling your business, it is likely that stock will be part of the deal but, when talking about asset sales, it is usual for the purchase to be quoted as ‘plus stock at value’.
It is advisable therefore to draw up an asset purchase contract which will include an agreement as to what assets are to be sold and how they will be valued. If disagreements do arise, an independent person can be appointed (via the contract) 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 because few sellers want to value stock in advance and then have to worry about keeping stock levels at that value up until the date of sale.
How to value stock - for a business sale
There are two main methods used to value stock:
(i) Cost value:
The goods will be sold for the same price that they were originally bought for. Here, the seller will get back what he had originally paid.
(ii) Net realisable value:
This works differently than the cost value method. Here, the value is calculated by deducting the acquisition cost from the now expected selling price of the goods.
Which method is better very much depends on your business. For example, prior to selling his business a grocer purchases a stock of vegetables. After two weeks, the goods would be in a less saleable condition and would therefore have decreased in value. The net realisable value will therefore be significantly less than the cost value.
On the other hand, stock 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 may be worth triple in value. Therefore the net realisable value will be higher than the cost value.
Generally valuation by cost value is more advantageous to a seller but a clause could allow for the higher of the two amounts to be taken as the amount payable.
Download our Guide to Selling your Business here.