Selling your business is an exciting time. You’re closing one chapter of life and moving on to another. However, the sale itself can be filled with challenges, and one of those is valuing excess inventory beforehand — the process is more complex than you might think. Here’s a closer look at how to value extra inventory while selling your business.
General Rules for Valuing Inventory
Exactly how you should value your inventory depends on your industry. Generally, if you’re selling your business, you should value your existing inventory at the wholesale price you paid for it.
Keep in mind that not all inventory holds its worth. For instance, if you run a food business, you’ll need to check for and remove any expired inventory before you sell. If you sell clothing, items that have gone out of style might lose value over time.
With many kinds of inventory, it can be difficult to determine how having excess can impact your business’s value. That’s why it’s so crucial to work with a business broker when selling your business — brokers are experts when it comes to business valuation. If you want a quick valuation before you start the sales process, check out Sunbelt’s fast, free business valuation calculator.
The Advantages and Disadvantages of Excess Inventory
Having extra inventory can sometimes be advantageous. Here are some of the benefits of having more than you need on hand:
- Your business will be better equipped to handle shortages
- You can quickly fulfill orders
- Replenishing your shelves (if applicable) is more straightforward
However, having too much inventory on hand has its disadvantages as well:
- Excess inventory can tie up a significant amount of your business’s cash flow
- As it sits on the shelves, extra inventory can expire or otherwise become obsolete
- If inventory doesn’t sell as you predict, you might need to sell it at a loss to make room for new inventory
Every business needs some excess inventory on hand — it’s only when you have too much that it becomes a problem. So how do you strike a balance between the two?
The key is to take a look at each item and calculate your carrying cost. That’s the total cost of keeping it in a warehouse (including the purchase price, insurance and storage costs, handling costs, etc.). Then, you need to compare that to what it would cost your business if you ran out of stock.
Doing these calculations by hand is difficult and time-consuming, so the best way to avoid accumulating too much inventory is to use a software system specifically for inventory management.
What if You Have Too Much Inventory?
It’s wise to make sure you properly value your inventory before selling your business. But if you and your business broker decide you have too much on hand, you may decide to sell some of it. You might consider discounting it (but ensuring you still profit from the sale) and selling it to customers. You also could sell to a similar business or donate the inventory for a tax write-off.
Considering Selling Your Business?
Business brokers can help you assess the value of excess inventory and determine what to do with it before you sell. But they can help with much more than that!
At Sunbelt Business Brokers, we focus exclusively on small and medium businesses. We maintain an active database of buyers, and our brokers are with you through every step of the process. If you’re ready to sell or just want to learn more about the process, contact one of our helpful brokers today!