Valuing Inventory for close
March 15, 2021
by a searcher in Los Angeles, CA, USA
How should one go about verifying the value of inventory being acquired? Should a third-party appraisal include this, or should the operator review seller purchase orders placed with the manufacturer? What's the best way to go about doing this?
from New York University in New York, NY, USA
I'd add the wrinkle that every industry is different. In pharmacy, our inventory is very high cost per item, as you may imagine. We'd get full market value for all of that product because it's useful. Especially if the turns are higher on the industry avg. scale, it may be more expensive for you to do a full, thorough eval than to simply be content with an estimated small margin of error in the company's inventory. Just my opinion. So getting that industry data is crucial for helping you understand what you're looking at.
On the flipside, if you're buying inventory that's not as useful going forward (if you have a new business direction in mind, are moving locations, etc.), I wouldn't buy that inventory because it's not useful. Or, if that's a sticking point to the seller, negotiate a lower price on the less useful inventory.
For example, if we sold our pharmacy to a CVS, they'd give us full price for our drugs, but pennies on the dollar for our over the counter inventory. They don't care about it. They want to gut the business and take what matters most to their core as they expand. However, if we sold to another independent pharmacy or specialty pharmacy, suddenly that non-drug inventory is more valuable to them.
Just my perspective. But beyond the turns and other questions mentioned above, I'd consider how useful the inventory will be to you as the new owner going forward. Maybe it's useful to you. Maybe it's not. That's a bit subjective, of course, but just another point to consider.
from Naval Postgraduate School in Bellevue, WA, USA
In a stock sale, it is not an issue unless the acquisition financing is based upon the value of the inventory.
I always calculate the the excess inventory as anything with over one year of usage. I then communicate it to the seller for his/her item by item review to see if I'm missing something. I then segregate and package the excess with a slightly different item code/description and revalue all of the excess at a very low value ($.05 each?). This enables the buyer to retain the inventory during a transition period without having to dump it. After a year with greater knowledge of the business and minimal demands for the excess items, it might be appropriate to dispose of them if there are storage constraints.
Story: Seller loved his excessive inventory and didn't want to see it scrapped. Buyer segregated all of the excess inventory and excluded it from the acquisition. Seller retained title but was charged a reasonable monthly storage fee. Buyer agreed to pay for any inventory that they had to obtain from the storage boxes. At the end of two years (with no purchases of excess inventory by the buyer), the Seller agreed to scrap it.