Contact Us Licensee Login

Professional Standards Manual

Trading Services

10. Sale Of A Business

(h) Inventory Valuation

The inventory of the business is often purchased separately from the purchase of the business itself. The method for valuing the inventory should be referred to the parties’ advisers and a valuation date agreed upon by the parties prior to entering into the Contract of Purchase and Sale.

Licensees must be aware of the problem associated with inventory. It is important to seek the guidance of those experienced in evaluating inventory.

Some concerns are described in the following examples:

  • shoe stores: stock on hand includes not only current styles, but also boxes of out-of-fashion shoes;
  • grocery stores: stock includes large amounts of time-dated products and foods;
  • florist shops: stock includes aging, wilting, and dying flowers;
  • gift stores: stock includes items that a buyer is not interested in buying at all or for which he or she does not see a market; and
  • lawn mower and small engine repair shops: stock includes boxes of parts for old and obsolete engines.

One of the differences between residential and business/commercial transactions is that often the parties involved in the transaction are far more knowledgeable than the licensees in the operation of the particular business and, more than likely, meetings and discussions have taken place previously between the parties. Frequently, the function of the licensee is to put into an agreement format those things that have already been discussed and agreed to by the parties.

The contract must state clearly whether or not the price includes inventory. The following clause can be used:

Inventory Clause

Purchase price(select either includes or does not include) (select either inventory or stock) .

This offer is conditional on the Seller and Buyer and their respective advisers establishing an agreed method for the purpose of valuing the inventory/stock. This agreement is to be in place and in writing within (number of days) days of acceptance of this offer. Inventory/Stock taking is to be performed within (number of days) days before the completion of this transaction. The Seller will allow reasonable access to the Buyer for purposes of reviewing the inventory for purposes of this condition.

This condition is for the benefit of both the Buyer and the Seller.

If the business is occupying leased space, the following clause should be inserted in the contract:

Lease of Premises Clause

Subject to the Buyer being able to arrange on or before (date) a lease for the premises satisfactory to the Buyer.

This condition is for the sole benefit of the Buyer.

OR

The Buyer will assume all payments, obligations and covenants of the existing lease covering the business premises.

Subject to the Buyer receiving, perusing and being satisfied with the said lease on or before (date) .

This condition is for the sole benefit of the Buyer.

OR

The Buyer will assume all payments, obligations and covenants of the existing lease covering the business premises.

Subject to the Buyer receiving approval of the lessor to such assumption on or before (date) .

This condition is for the benefit of both the Seller and the Buyer.

Subject to the Buyer receiving, perusing and being satisfied with the said lease on or before (date) .

This condition is for the sole benefit of the Buyer.

Adequate time must be allowed within the contract for the buyer to receive the documents and review them. A specific date on the contract for the provision of the documents to the buyer by the seller, in addition to the date for their acceptance, is recommended.