Business Broker Bulletin™

Welcome to your monthly Newsletter about Business Brokerage.

Inventory

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Inventory

This is another big issue that brokers must usually face. First let’s talk about commission. Some brokers charge, some don’t. We understand that it is an absolute MUST.
It’s not rare that the broker has more problems selling the stock than the business. It could be because it is too high, several parts are obsolete or some lines have a slow turnover and the best bulk acquisition is for a much higher volume (a box of 48 and you sell 2 pieces a month, therefore you have 24 months of stock for this item with all the risks of insurance, deterioration due to being old fashioned, new technology etc.).

However, that is not the subject that we are discussing. Our subject is: when the owner has $500,000 worth of stock and they have on the books 250,000, what do you do?
Many reasons can justify such an event. One is for “fair” reasons. For example, the owner bought it some time ago for 10, and the replacement cost is now 20.
If there is no alternative to buy for old prices, it is fair to demand the new “cost” price (and not the acquisition price). The selling price of each item will probably be much higher to reflect this inflation.
If the Buyer insists on the “original acquisition price” as best practice, it remains a question. Why will the owner sell it to them for 250, if at costing price, they can find buyers for 500? They can also sell all the stock, and later, sell just the business with a minor volume of stock. Remind the Buyer that the VENDOR is the one that can decide about the price of their stock until the moment it’s sold.
Yes, the buyer can negotiate, but nothing more than that. They can’t force the vendor!

However, there is also a range of reasons that are not so “nice” that could explain why the stock is much higher than the existing stock at cost price.
Sometimes, you face companies that heat their stock to avoid tax payment.
That tactic creates a huge challenge to us. Firstly, we are not in this industry to protect Vendors from their own tax evasion. Therefore, we must be very careful on how we deal with this and demand THEIR ACCOUNTANT to produce documents to base any claims that you will show buyers. If their accountant is not prepared to sign the real figures, why will you? In that case, you can also ask the owner to write a letter informing you of their REAL stock and detailing that it is different from the accounting report for reasons that they and their accountant will directly explain to the BUYER and BUYER’s accountant when the due diligence will come EARLIER than the letter of offer.
In that way, the broker isn’t involved in any way in such a problem. They are not trying to escape from the truth, but they are 100% not interested in supplying information to the BUYER that is not based on documents supplied by the Vendor or their accountant.

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