When you’re looking to buy a business, it’s essential to have a good understanding of its assets. One of the most critical parts of the process is stocktaking – the physical count and valuation of the business’s inventory or stock of goods. With an accurate assessment of the stock value, you can avoid overpaying for the stock, purchasing outdated stock or buying stock you’d struggle to sell in the future.
This guide will take you through everything you need to know about stocktaking when buying a business, including why it’s important, what the process entails, and how to reduce your risk. Whether you’re a seasoned business buyer or a first-time entrepreneur, this guide will give you the knowledge to navigate the stocktaking process confidently.
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So what is stocktaking?
Stocktaking is physically counting and valuing a business’s inventory or stock of goods. It’s a crucial part of buying or selling a business, as it helps both parties determine the actual value of the business’s assets. Stocktaking involves a comprehensive physical count of all the goods in the business’s inventory and may include a valuation of each item. This process ensures an accurate estimation of the inventory’s value and can help prevent discrepancies or inaccuracies in the business’s inventory records.
Asset and Trade Purchase
If you purchase the business as an asset and trade sale, you’ll likely need to pay for the stock on top of the asking price unless it has been agreed otherwise. Typically you see advertisements that state “+SAV” or “Plus Stock”.
As stock levels constantly fluctuate in most businesses, you will want to get an accurate stock figure before you complete it so the solicitors can request additional funds from the purchaser. It is typical for the vendor to specify a maximum stock figure, which is then asked by the purchaser’s solicitor and held on account until the confirmed stock price is firmed up, and the balance refunded to the purchaser.
Share Purchase
Typically with a share purchase, you agree to a mechanism that includes everything on the balance sheet. If this figure is overstated, you are overpaying for the stock element. With this in mind, having a stock take before completion will give both parties peace of mind that the figures are accurate and not over or understated.
Benefits of Stocktaking When Buying a Business
- Accurate Assessment of the Business’s Assets
Accurately conducting a stocktake assesses the value of the business’s inventory, meaning you’re not overpaying as a buyer, and the seller isn’t undercharging. - Avoid Purchasing Short-Dated Stock
Conducting a stocktake can also help you avoid purchasing stock that might be nearing its end date or has become perishable. - Avoid Purchasing Stock You’d Struggle to Sell in the Future
Conducting a stocktake can help you avoid purchasing stock that may be difficult to sell in the future. This helps prevent potential losses and ensures that you’re making a wise investment in the business, especially if you are financing the stock via a lender.
How Stocktaking Works When Buying a Business
Do I even need a stocktaker?
That depends on several factors, including the number of items and their value. If you and the seller have the time to sit down together, work through all the stock and come to a reasonable and rational conclusion about its value, then you don’t need to hire a stocktaker and save some additional fees.
Who Pays for the Stocktaker?
It is typical for the buyer and seller to split any costs related to hiring the stocktaker; however, this can be a negotiable factor should this point be raised early on during the sale process.
Finding and Hiring a Stocktaker
The first step in conducting a stocktake is finding a professional stocktaker. A stocktaker is a person or company specialising in counting and valuing a business’s inventory or stock of goods.
Always read their reviews, and if possible, get a recommendation from your business broker.
Timing and Process of Conducting a Stocktake
The stocktaking process typically occurs the night before completion or the day of completion while the stock business is not trading stock. Once both parties have agreed on the final value of the stock, they need to inform their respective solicitors, so they can include it in the sale price if it is a trade and asset sale.
Assessing the Value of Inventory and Stock of Goods
The stocktaker will determine the value of the business’s inventory and stock of goods through a physical count or a sampling of the inventory. The valuation is based on the cost of the items (not the retail price).
Differences Between a Physical Count and a Sampling of Inventory
A physical count involves counting every item in the inventory, while a sampling of inventory involves counting a representative sample. A physical count provides a more accurate inventory assessment but can be more time-consuming and expensive than inventory sampling.
Conclusion
In conclusion, buying a business can be an exciting and rewarding experience, but you must do your due diligence to ensure you’re protecting risk factors along the way. Stocktaking is sometimes overlooked until later in the sales process, but planning this is essential to ensure everything is in place for a smooth ownership transition.
