Discounting Inventory & Deferring Payments During Escrow

In the middle of a transaction of selling your business, the topic comes up of counting the Inventory.  You say, of course, to ‘do it’ so an accurate sales price can be determined for the business plus the inventory at your cost.  You also let the buyer know that the inventory amount is ($500,000 for example), and it is all in good saleable condition.  The buyer asks you how often you turn the inventory and you tell him that some items sell infrequently, but you reassure the buyer that it is still good inventory because you receive regular but infrequent orders for those items.

Racks of Inventory to Be Counted

Well, be prepared, because there is a funny little thing called Present Value of Money that buyers will bring up.  What you as a seller need to know is that for a buyer, inventory that takes too long to sell is considered ‘sunk money.’   As a smart, qualified buyer, the buyer will not want to sink money into inventory that will not return the capital in a reasonable amount of time.

You say that that is not fair to you, as you have put in many years of blood, sweat and tears, and you know what your customers want and need, and you know that you have to keep it in stock to keep your customers happy.  You let the buyer know that even if it moves slowly, it is important to have on hand, and that the buyer should pay dollar for dollar for the inventory.

The buyer says no, so now what to do.  Well, you are both right, the slow moving inventory is valuable, and it does take a long time to realize a return on it.

What are some compromise ideas?

If you, indeed, do want dollar for dollar, one way to accomplish this is to consign the portion of the slow moving inventory.  This involves deferring payments and letting the buyer pay on a pre-negotiated payment schedule.   This does involve some trust, but it certainly alleviates some of the cash flow problems for the buyer and offers you as the seller the cash you were looking for around the same time had you kept the business.  In this scenario, you are acting like a vendor selling your buyer inventory.  Some examples of deferred payment schedules that we have seen in transactions are having the buyer pay for the inventory as it is sold, or one simple monthly/quarterly/annual payment schedule.

If you want cash up front, be prepared to negotiate a discount on the inventory.  Pull out records of sales, then figure out the inventory turn, and propose a discount schedule on the inventory.  Negotiate back and forth until you have settled.   Of course, you can negotiate a hybrid schedule, where the buyer pays for some of the inventory upfront and the rest of the inventory in deferred payments.

For More information on how Just Elementary, Inc, Commercial brokers can help you with finishing a small business transaction, email cs@justelementary.com or call (323) 213-9193.