Buying a Business? Be Careful…!

AUTHOR

Bruce Coudrey

Don’t pay for outdated or unsalable Stock.

When signing an agreement to purchase a business, it’s important that you know what you’re actually purchasing.  This may sound obvious but there can be pitfalls, particularly in relation to stock in retail businesses.

In most cases businesses will sell at an agreed price “plus SAV”.  The SAV stands for “Stock at Value”.

The value of stock is not based upon the selling price, the value is based upon the cost price. In fact (to be specific) the value of stock is based upon the “landed invoice cost price” which means that the value assessed is to include any freight charges. 

When buying a supermarket, it’s important to set the parameters for the stocktake process to ensure the stock you are buying is still in a saleable condition. That refers to both its age and standard of undamaged packaging. When buying a business, the purchaser is only obliged to acquire the “good and saleable stock”.

The average benchmark for “use by” codes from date of stocktake is 30 days for grocery and frozen items, and 7 days for perishable items such as dairy and bread/bakery products. Saleability of stock will be determined by (either) the company performing the stocktake - or an agreement between the two parties at time of stocktake.

Some items of stock (such as batteries) will have an expiry date on them. In most cases the stocktaker will determine if such items are “good and saleable”.

If you sign an agreement that is a WIWO (Walk in Walk out) price, you run the risk of buying stock which is unsaleable This is a risk for the purchaser as the seller has no responsibility for ensuring saleable items. They can also reduce stock levels which ultimately affects the trading ability of the business.

So for added peace-of-mind, it’s best if, when buying a supermarket business, you buy it “+ SAV”.  

David Zampech Supermarket Specialist    

Benchmark Business Sales and Valuations