Buying a business with a large amount of stock can look straightforward. You agree on a price for the business, add the stock value, and away you go.
In reality, it deserves a little more consideration.
For businesses such as retail, wholesale, distribution, manufacturing and automotive parts, stock can represent a significant part of the total investment. For example $500,000 of stock might appear to be worth $500,000 on paper; the real question is: how much stock is there, how much of it will actually sell, how quickly and how much cash will be tied up in it?
That’s where due diligence becomes important.
A buyer should understand not just the total value of the stock, but what sits behind that number.
· Is the stock current and selling regularly?
· Are some products seasonal?
· Is there slow-moving or obsolete stock?
· And is everything valued at genuine landed cost rather than retail or replacement value?
Top 10 Stock Issues When Buying a Business
1. How is the stock being valued? Stock should be assessed using an agreed valuation basis. Buyers need to be clear whether figures represent cost, landed cost, wholesale price, retail price or something else.
What can go wrong: The buyer thinks they are acquiring $500,000 of stock at cost, only to discover the figure includes freight, mark-ups, or other amounts that don’t reflect its real value to them.
2. Slow-moving stock A stock report can show plenty of stock without showing how long it has been sitting there.
What can go wrong: A significant percentage hasn’t sold for 12, 24 or even 36 months. The buyer effectively pays good money for stock that may take years to convert into cash.
3. Obsolete stock Products can become obsolete because of changing technology, fashion, regulations, customer preferences or replacement product lines.
What can go wrong: Stock may appear as an asset in the accounts but have little or no commercial value.
4. Damaged, expired or unsaleable stock Physical condition matters, particularly with food, cosmetics, chemicals and other products with expiry dates. It also applies to packaging damage, returned goods and incomplete products.
What can go wrong: The buyer pays for stock that subsequently has to be heavily discounted or written off altogether.
5. Too much stock Even if all the inventory is perfectly saleable, there may simply be too much of it.
What can go wrong: The buyer inherits $800,000 of stock when the business could operate comfortably with $500,000. That’s $300,000 of additional capital unnecessarily tied up.
6. Stock turnover is too slow Two businesses might both hold $500,000 of stock but have completely different economics.
If one turns its stock 3-4 times a year while the other takes a year or more, their working-capital requirements are very different.
What can go wrong: The buyer underestimates how long it will take to turn stock back into cash.
7. Stock counts aren’t accurate The accounting system might show $600,000 of inventory, but what’s physically sitting on the shelves?
What can go wrong: The buyer discovers shortages, incorrect quantities, unrecorded write-offs or discrepancies between the inventory system and physical stock.
That’s why a properly agreed stocktake around settlement is important.
8. Gross margins aren’t what they appear Buyers need to understand the relationship between stock cost and actual selling prices.
Historical margins don’t necessarily tell the whole story if old stock regularly needs to be discounted.
What can go wrong: The accounts suggest a 40% gross margin, but a significant amount of ageing stock can only be cleared at heavily reduced margins.
9. Supplier arrangements change after settlement The historical stockholding may be influenced by the seller’s supplier relationships, including payment terms, minimum order quantities, rebates and volume discounts.
What can go wrong: After settlement, suppliers revise the terms available to the new owner. The buyer may have to carry more stock, pay faster or lose favourable volume pricing, increasing the cash required to operate.
10. The Sale and Purchase Agreement doesn’t clearly define stock Buyer and seller should be very clear about what stock is included, how it will be valued and what will be excluded.
For example, how are obsolete, damaged, expired, demonstration, consignment or slow-moving items treated?
What can go wrong: The seller thinks there’s $700,000 of stock to be paid for. The buyer believes only $550,000 qualifies under the agreed terms.
That’s a recipe for a settlement dispute.
A Simple Example
A business has $600,000 of stock at cost.
During due diligence, the buyer discovers:
$350,000 is current, fast-moving stock
$100,000 is relatively slow-moving
$75,000 hasn’t sold for more than two years
$50,000 relates to discontinued product lines
$25,000 is damaged, incomplete or otherwise difficult to sell
The financials may show $600,000, but that doesn’t automatically mean the buyer should pay $600,000 for it. That distinction can materially change the value of the deal.
What I’d Want to See as a Buyer
For a stock-heavy business, I’d ask for:
· A detailed stock list
· Stock ageing by product/SKU
· Historical stock turnover
· Landed cost information
· Recent sales by SKU/product line
· Gross margins by product/category
· Obsolete and discontinued stock
· Damaged, returned or expired inventory
· Supplier terms and minimum order quantities
· A clear stocktake and valuation methodology for settlement
Stock Isn’t Necessarily a Bad Thing
Ultimately, when buying a stock-heavy business, the question isn’t simply:
“What is the stock worth?”
A better question is:
“How much of my money will be tied up in stock, and how efficiently will that money come back to me?”
Understanding that distinction can make a big difference to the price you pay, the amount of capital you need and, ultimately, the return you achieve from your investment.
Don’t Let Stock Undermine the Deal
Stock is more than a figure on a balance sheet, it can materially affect value, funding requirements and the final terms of a business sale. Whether you are preparing to sell or considering an acquisition, getting the stock position right early can prevent costly surprises and strengthen the outcome.
NZ Business Brokers can help you understand the numbers, identify the risks and structure the deal properly. If a business sale or purchase is on your horizon, talk to us before stock becomes a sticking point. Contact NZ Business Brokers today and put experienced deal advice on your side.
