Inventory

[Clydesdale™]

I just sold my small business but I need advice before the new guy makes the offer in writing. Can someone tell me how to deal with the inventory at the time of possession date? The inventory can fluctuate from a couple thousand dollars in a week or two so how do we determine how much inventory do we leave them at the time of possession? We're selling the complete business for $45,000. which includes everything except building & property; they must move the business. There's about $20,000 worth of inventory but it goes up & down.

Can anyone give advice ? Once I know, he'll have his lawyer write up the offer.

Thanks

[Freelancier]

Are you paying cash for the inventory or are you doing it on credit? If on credit, then just run the business the way you normally do and pay the bills when you normally do, because that's what they saw in your books when they did their due diligence (they did that, right?).

If you're paying cash for inventory, then you might want to break the amount into two components: one for the business and its customers and another for the inventory and the inventory amount is based on the inventory value on the date of transfer, which you make a non-work-day (which is something the new owner probably wants anyway, so he/she can get their hands around the business without having to worry about the day-to-day stuff on the first day). Then you just go in in the morning and total up the inventory and you get a check and go home happy.

[Clydesdale™]

Makes sense. I have about $19,000. to $21,000. (changes on weekly basis) in inventory & verbally sold the whole company for $45,000. so I was kind of hiding / amalgamating all together. Having said that, I did tell him that there is $19,000. to $21,000. so I suppose you're right.

The inventory is paid Net 20 days.

Any other inputs from others?

Thanks

[Business Attorney]

In your case, charging for the full value of the inventory in addition to the $45,000 sounds like you are double counting the inventory. You said that you and the buyer arrived at the price based on your statement that your inventory is around $20,000. It sounds like the oral agreement was clearly based on getting the inventory as part of the sale price, and trying to get paid for the inventory is essentially increasing the price by almost 50%. I doubt that the buyer would go along with that.

One thing that is often done in business acquisitions is that the price is based upon a certain level of inventory and there is a dollar-for-dollar adjustment to the purchase price based on whether the final inventory on the closing date is more or less than the required level. Where the buyer is also purchasing receivables, the same type of test is applied to the receivables. Often, the inventory and receivables are measured together and the adjustment is then referred to as a working capital adjustment.

If your average inventory is $20,000, then you would based your sales price adjustment off that number.

Sometimes the amounts are not fixed but are a range. For example, in your case if you told him that the inventory was $19,000 to $21,000 you might agree that anything within that range is a wash. If the inventory level goes under $19,000 then you would give him a credit against the purchase price and if the inventory is more than $21,000 then he would owe you for the excess.

The reason for either the fixed amount or the range is that once the sales price is established independent of the level of inventory at the closing, the seller's best course of action is to sell as much inventory before the closing as possible and not replace it. Any cash the seller gets from sales is pure gravy and the buyer ends up needing to dig into his pockets to have inventory to sell. It is generally the fairest way to insure that the buyer and seller are both getting what they originally bargained for.