How to Sell a Business for What It's Really Worth: No-nonsense secrets from a forensic accountant and CFO by Gerry T. Pandaleon

Author:Gerry T. Pandaleon [Pandaleon, Gerry T.]
Language: eng
Format: mobi
Publisher: Golden Alley Press
Published: 2013-07-15T14:00:00+00:00

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Inventory II: What’s It Really Worth?

LET’S ASSUME YOU just completed taking the physical quantity of your inventory. Now it is all saleable—no damaged, old, or obsolete items. So how much is it worth?

WHY AN AUDITED INVENTORY IS SUCH A BIG DEAL

Inventory is probably the biggest dollar value of your deal. The difference between the dollar amount shown on your books and the number calculated after inventory can be very big, and not usually in your favor. This is where the expensive auditor who prepares the information for the sale is worth every penny.

If you’re a fairly large company, you’re probably already covered because your bank requires an annual audited financial statement. But if you’re a smaller company, and all you have is a tax return, then your inventory is not audited. It is worth whatever you, as the owner, say it is.

So why have an audited physical inventory? Because buyers know that inventory is the place where sellers can ‘play games.’ It’s difficult to count. Did you ever try to count fish in a fish tank? They don’t stay still for you to count, and neither does inventory. The minute after you take the inventory, forklifts start moving things, and you can’t recount it or check for any errors.

The best situation, of course, is for the buyer to be there the day you take inventory. But since several days can pass from the time a seller takes the inventory until a potential buyer visits the plant, an audited inventory adds credibility to the inventory number.

So if you want to sell, better to have audited inventory. A buyer who trusts your audited physical inventory is more likely to give you full value for it.

USING COMPUTER PROGRAMS TO CALCULATE INVENTORY VALUE

Even if you use a specially-designed computer program, valuing inventory remains a debatable item. There do not seem to be many systems that do this extremely well. Most are passable for raw material and finished goods inventory, which can be proven by market value, invoices, and source documents. But work-in-progress (WIP) has wiggle room—and room for debate. Everything is half-made, half-cooked, or half put together, making it difficult to assign material, labor and overhead.

Many companies simply use what the computer program calculates. That is fine, but be aware that that value is only as good as the person who designed the calculation.

That number is also calculated to satisfy GAAP requirements, which works great for your accountant. But it is a problem when you are considering inventory as part of your business sales price. Why? Because GAAP does not recognize market value. And you want to use market value on your inventory when you sell your business.

So even if you don’t have an audited inventory, make sure your numbers make sense.

INVENTORY VALUATION AND WORK-IN-PROGRESS

Let’s return to the challenge of valuing work-in-progress. Each business is unique, but I want to give you at least an idea of how it works. Your auditors’ experience with this will make them worth their hire.

WIP is a product that is partially made.

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