Selling a Business With Inventory: How Stock Is Counted and Paid For

If your business sells products, uses parts or keeps supplies on the shelf, inventory is often one of the biggest numbers in the sale after goodwill and equipment. It's also one of the most common things to argue about late in a deal. A little planning on how stock is priced and counted keeps it simple.

Is stock in the price, or on top of it?

There are two common ways to handle inventory, and your listing should say which you're using:

• Price plus inventory. The asking price covers the business, its equipment and goodwill. Stock is paid for separately, at its value on closing day. This is common for retail, auto parts, hardware and similar businesses where stock levels move a lot.
• Inventory included. The price includes a stated amount of stock, for example "includes approximately $40,000 of inventory at cost". If the closing count comes in higher or lower, the price is adjusted by the difference.

Either works. What causes trouble is leaving it vague. Put the approach in your letter of intent, then in the purchase agreement.

How inventory is usually valued

In most small business sales, stock is valued at cost: what you paid your suppliers, sometimes including freight in. It is not valued at the retail price, because the profit on selling it will belong to the buyer.

Agree in writing which stock counts and at what value. Common rules include:

• Current, saleable stock at its most recent supplier cost.
• Slow-moving stock, for example anything not sold in 12 months, at a reduced value or left out.
• Damaged, expired or discontinued stock left out entirely, or taken away by you.
• Supplies and packaging either included in the price or counted like stock.
• Consignment goods that belong to a supplier are not yours to sell and stay out of the count.

Counting stock at closing

Because stock changes every day you trade, the final count is usually done on or just before closing day. It often runs like this:

1. Agree a date, the counting method and the price list you'll use, in advance.
2. Count together with the buyer, or share the cost of an independent inventory counting service.
3. Mark anything damaged, expired or slow-moving as you go, using the rules you agreed.
4. Both sign the count sheets and the total at cost.
5. Your lawyers put the final figure into the closing day adjustments, so the price goes up or down to match.

A practice count a few weeks before closing helps a lot. It shows how long the real count will take and surfaces any items with missing costs.

Clear out old stock before you sell

Most buyers won't pay much for stock that hasn't moved. Rather than debating its value at the count, consider clearing it in the months before you list: a clearance sale, returns to suppliers where allowed, or donation. It also makes the shop or storeroom look better when buyers visit. Ask your accountant about how to record stock you write off.

Keep stock records buyers can trust

Buyers check inventory during due diligence because it affects both the price and the profit figures. Helpful records include:

• A recent inventory list with quantities and costs, from your point-of-sale or accounting system.
• Year-end inventory figures that match your financial statements.
• Your main suppliers, their terms and any minimum order rules.
• How quickly stock turns over, and your best and worst sellers.

If the stock on your books doesn't match the stock on the shelves, a buyer may start to doubt your profit figures too. Our list of documents needed to sell a business covers the rest.

Don't run stock down or build it up

Between signing and closing, keep ordering normally. Letting shelves empty to save cash can hurt sales and the buyer's first weeks. Building stock up can mean the buyer pays for more than they want. Purchase agreements often include a promise to run the business "in the ordinary course" until closing, and some set a minimum or maximum stock level.

Customer orders, deposits and work in progress

If customers have paid deposits for goods not yet delivered, or you have jobs partly finished, agree who completes them and who gets the money. Deposits you're holding are often credited to the buyer at closing, since they'll be the one delivering. Supplier orders already placed but not yet received need a plan too.

Taxes on inventory

In an asset sale, part of the price is for inventory, and how the price is split between inventory, equipment and goodwill affects your taxes and the buyer's. GST/HST can apply to inventory unless a sale-of-business election is available, and in BC PST generally doesn't apply to inventory bought for resale. See our guides to GST and PST when selling a business and taxes when selling a small business, and agree the split with your accountant before you sign.

In a share sale, the stock stays with the company, but the count still matters, because the price is usually set on the basis of a normal level of stock.

A practical checklist

1. Decide whether you'll list at a price plus inventory or with stock included.
2. Get a current inventory list at cost from your system.
3. Clear slow-moving, damaged and expired stock before you list.
4. Remove consignment goods and anything you're keeping from the list.
5. Agree the valuation rules with the buyer in the letter of intent.
6. Do a practice count a few weeks before closing.
7. Keep ordering normally until closing day.
8. Count together on or just before closing and both sign the sheets.
9. Have your accountant agree the price split between inventory, equipment and goodwill.

A note on advice

This guide is general information, not legal, tax or accounting advice. Inventory rules vary by industry, and so do the tax rules on how a sale price is split. Please have your own lawyer and accountant review the purchase agreement before you sign.