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The Integrity Of Stock During A Purchase

Garry Stephensen

Article Author: Garry Stephensen
Position: Managing Director
Read time: 6 mins

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If you're considering acquiring an Australian business that maintains a significant inventory holding, it is imperative to establish clear guidelines for the stock assessment to guarantee the viability of the assets being purchased. This encompasses both the age of the stock and the quality of its packaging. Acquiring a business with a substantial inventory or stock-in-trade demands meticulous evaluation to facilitate a seamless transition and ensure operational success following the acquisition. 

Below are essential factors to consider, to avoid paying for stock that is unsellable, over-valued or expired:

1. Inventory Valuation

  • Determine the current market value of the inventory.
  • Assess the age and condition of the inventory. Outdated or damaged stock may have limited value. Consider the cost of holding the inventory, including storage, insurance, and potential obsolescence. 

 2. Inventory Turnover

  • Evaluate the rate at which the inventory is sold and replaced. 
  • A high turnover rate indicates efficient inventory management, while a low turnover rate may suggest overstocking or slow sales. 

 3. Quality and Supplier Relationships

  • Examine the quality of the inventory and ensure it meets your standards and customer expectations.
  • Review supplier contracts, terms, and relationships. Determine if there are any exclusive agreements or dependencies that could impact the supply chain. 

 4. Storage and Logistics

  • Assess the current storage facilities and logistics infrastructure.
  • Determine if additional storage space or improvements to the existing facilities are required to accommodate the inventory. 

 5. Seasonality and Demand Forecasting

  • Understand the seasonality of the business and the demand patterns for the inventory.
  • Develop a robust demand forecasting model to manage inventory levels effectively and avoid stockouts or overstock situations.  Consider the buyer demand cycles.

 6. Inventory Management System

  • Review the existing inventory management system and processes
  • Determine if upgrades or changes are needed to improve efficiency, accuracy, and tracking of inventory. 

 7. Inventory Financing

  • Evaluate the business financing options within Australia available to purchase the inventory
  • Consider the cash flow implications and ensure that sufficient working capital is available to support ongoing inventory purchases and operations. 

 8. Due Diligence

  • Conduct a thorough due diligence process to verify the quantity, quality, and value of the inventory including financial models in your due diligence. 
  • Review inventory records, purchase orders, sales history, and other relevant documents to validate the accuracy of the inventory data provided by the seller. 

 9. Transition and Integration

  • Develop a detailed transition plan to integrate the inventory into your existing operations seamlessly
  • Communicate with employees, suppliers, and customers to ensure a smooth transition and minimize disruptions

10. Legal and Compliance

  • Ensure compliance with applicable laws, regulations, and industry standards related to inventory management, storage, and handling
  • Review any potential liabilities or risks associated with the inventory, such as warranties, recalls, or environmental concerns. 

 11. Cost of Goods Sold (COGS)

  • Analyze the historical COGS to understand the cost structure and profitability of the inventory
  • Identify opportunities to optimize costs and improve margins through better sourcing, pricing strategies, and inventory management practices. 

 12. Exit Strategy

  • Consider the potential resale or liquidation value of the inventory in case of business closure or exit
  • Develop an exit strategy to manage and dispose of excess or obsolete inventory effectively.


By carefully evaluating these factors and conducting thorough due diligence, you can make informed decisions when buying a business with a significant amount of consumables or stock-in-trade. It is essential to work closely with financial advisors, legal counsel, melbourne business brokers and industry experts to navigate the complexities of inventory acquisition and management successfully. 


View our track record of business sales.

Inventory Turn Over & Expiry Periods

Here are some common expiry date ranges for stock and consumables that often comprise an acquisition: 

  • Grocery and dairy items: 7 days 
  • Perishable items: 14 - 30 days 
  • Medicine: 60 days 
  • Construction materials: 12 -24 months 
  • Personal care products: 30 days 
  • Oils & flammable liquids: 60 days 
  • Long term non-perishable consumables: 24 months 
  • Metal: 24 months 
  • Timber: 24 months 
  • Cardboard: 6 months

Don't get caught out paying for unusable, expired or unsellable stock!


WIWO 

If you sign an agreement that is a WIWO (Walk in Walk out) price, you run the risk of buying stock which is unsaleable This is a risk for the purchaser as the seller has no responsibility for ensuring saleable items. They can also reduce stock levels which ultimately affects the trading ability of the business. A "Walk In Walk Out" (WIWO) business sale refers to a business transaction where the buyer purchases the business and takes over its operations exactly as they are at the time of purchase. Essentially, the buyer walks in, takes over, and the seller walks out, leaving the business in its current state with all assets, liabilities, staff, and operations intact. 

Here's how a WIWO business purchase typically works: 

1. Valuation and Due Diligence:  The buyer and seller agree on a purchase price for the business. The buyer conducts due diligence to verify the financial health, assets, and liabilities of the business. This may involve reviewing financial statements, tax records, contracts, and other pertinent documents. 

2. Negotiation and Agreement:  Both parties negotiate the terms of the sale, including the purchase price, payment terms, and any conditions or contingencies.  Once both parties agree on the terms, they sign a Business Sale Agreement or Contract of Sale. 

3. Transfer of Assets and Liabilities:  On the completion date specified in the sale agreement, the buyer pays the agreed-upon purchase price to the seller. The seller transfers ownership of all business assets to the buyer, including equipment, inventory, intellectual property, licenses, and goodwill.  The buyer assumes responsibility for all business liabilities, unless otherwise specified in the sale agreement. 

4. Employee Transfer and Transition:   If the business includes employees, the buyer usually takes over the employment contracts and becomes the new employer.  The seller may assist with the transition by introducing the buyer to key employees and providing training or guidance during the handover period. 

5. Licenses and Permits:  The buyer must ensure that all necessary licenses, permits, and approvals required to operate the business are transferred to their name.  This may involve applying for new licenses or updating existing ones with the relevant authorities.

6. Customer and Supplier Relationships:   The buyer takes over existing customer relationships and supplier contracts.  The seller may introduce the buyer to key customers and suppliers to facilitate a smooth transition. 

7. Ongoing Operations:  After the sale is completed, the buyer assumes full responsibility for running the business.   The seller typically provides a handover period to assist the buyer with any questions, challenges, or issues that may arise during the initial stages of ownership. 

8. Post-Sale Support:  Some sale agreements may include provisions for post-sale support from the seller, such as consulting services or assistance with business operations.

This can help the buyer navigate the transition and ensure the ongoing success of the business. 

It's important for both parties to seek professional advice from accountants, lawyers, and business brokers to ensure that all legal, financial, and operational aspects of the WIWO business sale are handled correctly and efficiently. 


Buying A Business? Ensuring the Integrity of Stock Assets


Inventory & Overseas Supply Chains

Some businesses rely upon overseas suppliers for stock. Many of these businesses were frustrated with supply issues during the COVID pandemic. Most businesses were impacted during this period and as a result many businesses have chosen to hold higher than normal stock levels in order to hedge against supply chain issues like this again. We are seeing significantly high stock values in financials when appraising businesses for sale. 

Some key reasons explaining why the pandemic led to significant disruptions in global supply chains includes: 

1. Demand Shock:  Consumer Behavior Changes: As countries implemented lockdowns and restrictions, there was a shift in consumer behavior. People began stockpiling essential goods like food, medicine, and household items, leading to a sudden surge in demand. - Shift to Remote Work and Learning: The sudden transition to remote work and online learning led to increased demand for electronics, laptops, and other IT equipment. 

 2. Supply Shock:  Factory Shutdowns: Many manufacturing units and factories around the world were temporarily shut down or operated at reduced capacities due to lockdowns, labor shortages, and health concerns. - Raw Material Shortages: Restrictions on transportation and border closures disrupted the supply of raw materials and components, affecting various industries. 

 3. Logistical Challenges:   Transportation Disruptions: Air, sea, and land transportation faced disruptions due to restrictions on movement, reduced availability of transport personnel, and quarantine measures. - Container Shortages: There was a shortage of shipping containers in key ports around the world, leading to delays and increased shipping costs. - Port Congestion: Major ports experienced congestion due to reduced workforce, social distancing measures, and increased container volumes. 

4. Global Trade Restrictions:  Border Closures and Tariffs: Many countries imposed restrictions on international trade, including border closures, tariffs, and export bans, which further disrupted supply chains. - Export Restrictions on Essential Goods: Some countries restricted the export of essential medical supplies and equipment, exacerbating shortages in other parts of the world.  

5. Inventory Management and Just-in-Time Manufacturing:  Reliance on Just-in-Time Inventory: Many companies relied on just-in-time inventory practices to minimize holding costs. However, this made them more vulnerable to disruptions in the supply chain. Lack of Inventory Visibility: The complex and global nature of modern supply chains made it challenging for companies to have real-time visibility into their inventory levels and anticipate demand fluctuations.  

The pandemic exposed vulnerabilities in the existing supply chain models and highlighted the need for greater resilience, flexibility, and adaptability in global supply chain management. If you are a looking to buy a business in the current economic environment, you will need to accept that stock values for most businesses are not normal at present due to supply issues and availability. 

There are ways to negotiate these excessive stock levels when the business sells. Speak to our specialist team of sydney business brokers .

Business Broker - Garry Stephensen

Garry
Managing Director
Business Broker - Karen Dado

Karen
Director NSW
Business Broker - Geoffrey Tulett

Geoffrey
Lloyds Corporate Partner - Mergers & Acquisition Specialist
Business Broker - Edward Alder

Edward
Director Victoria
Business Broker - Kevin L Sutherland

Kevin
Director International Business Sales
Business Broker - Dianne Reynolds

Dianne
Research Director and Corporate Broker

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