---
title: Don't pay the price of poor inventory control when selling a business
description: A few years back the JPAbusiness team facilitated the sale of a business involved in import and distribution.
---

[JPA Case Studies ](https://blog.jpabusiness.com.au/case-studies)

# [Don't pay the price of poor inventory control when selling a business](https://blog.jpabusiness.com.au/case-studies/dont-pay-the-price-of-poor-inventory-control-when-selling-a-business)

 Written by [James Price | JPAbusiness](https://blog.jpabusiness.com.au/case-studies/author/james-price-jpabusiness) | Dec 15, 2021 12:28:26 AM

A few years back the JPAbusiness team facilitated the sale of a business involved in import and distribution.

It was a well-known, independent brand that had been **established for well over 50 years and had solid bottom-line performance.**

Unfortunately, when it came time to exit the business, it soon became apparent** there was too much inventory (stock on hand)**.

We negotiated a price for the goodwill, plant and equipment etc, based on a multiple of [Business Maintainable Earnings (BME)](https://www.jpabusiness.com.au/business-valuations/determining-business-values), which is essentially the cash flow of the business.

Then it was **time to address the stock value.**

 

## Parties disagree over value

Usually stock on hand is valued by way of a stocktake and its value is paid by the purchaser at completion.

**Ideally, its agreed value is the buy price** the vendor paid for the stock at the time of the original purchase.

In this case **there was considerable disagreement about the value of the stock on hand – a difference of 50%.**

The buyer basically said: “You have X amount of stock, but a reasonable level of stock to run this business is Y. I don’t need X amount so I won’t pay for it. I will pay for Y.”

## How it impacted the bottom line

This disagreement **hurt the vendor’s bottom line in two ways**:

1. It represented a **large reduction** in the value of the business on exit – **several hundred thousand dollars**;
2. It meant **the cash flow the owner had diverted to stock holdings over the years was lost** – he couldn’t get that value back out.

This experience was a timely reminder to me: **“Don’t forget to actively manage your inventory, because there’s big dollars to be won or lost there as a business owner.”**

 

### Manage inventory like a share portfolio

Inventory can provide **positive cash flow, **but only** if it is managed like a share portfolio.**

For example, most people who have shares will actively look at what those shares are worth on a daily, weekly or monthly basis to see how they are trading versus the market.

**If the shares are underperforming, they will be sold.**

Similarly, inventory must be **closely managed and moved on** when necessary.

 

### Don’t be tempted to sell off excess stock quickly

Simply planning to **reduce your stock level just before selling** your business is **not a good option.**

This **will reduce the margin on the items sold** and **create a sudden reduction in your gross profit,** which will negatively impact the [Business Maintainable Earnings](https://blog.jpabusiness.com.au/blog/how-to-calculate-your-business-maintainable-earnings-infographic) (BME).

As we've discussed in other eBooks, **BME is a key consideration when assessing business value**.

Rather than losing money on the stock, you will lose money from the business price.

**If you have over-stock or obsolete stock items, they must be sold off gradually,** over an appropriate period of time.

[View full post](https://blog.jpabusiness.com.au/case-studies/dont-pay-the-price-of-poor-inventory-control-when-selling-a-business)

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