Selling a Business which carries Stock

AUTHOR

Bruce Coudrey

Not every business needs to carry stock to operate, but many do, and when selling a business which carries stock there are many issues to consider. Some obvious, and some not so obvious.

Obvious.

When selling a business with stockholding the sale may be either “Walk In Walk Out”, or “Plus Stock”. Walk In Walk Out (WIWO) means that the price includes the stock, and (obviously) plus stock means that the purchaser will acquire the business for a price and will pay an additional amount for the stock.

Purchasers will not want to acquire old or out-of-date stock.

When transferring ownership a Stocktake will be needed. The cost of hiring an independent stocktaker is usually borne equally by the Purchaser and the Vendor.

The Purchaser will pay the “landed invoice cost” price for stock – not the retail value.

The Purchaser can set a limit for the Maximum amount of stock that they are obliged to acquire from the Vendor at completion of the transaction.

Not So Obvious.

Some business owners do not conduct a stocktake at the end of the financial year and therefore the profit shown on the Trading Statement and the Profit and Loss is not accurate. If the real stock holding is higher than the amount stated in the Trading Statement the real profit will be higher. If the real stockholding is lower than the stated stockholding – the real profit is lower than stated.

Business buyers and Sellers should ensure that the closing stock used in the financial statements used is accurate.

It is always best for a business owner to run-down stock levels prior to sale. There are many benefits for doing this. Some benefits are:

• Less stock to count (saving time and money)
• The stock which is retailed will have a profit on it, but stock sold to the business purchaser is sold at cost, and carries no profit

There is no GST payable on stock acquired in a business sale, as the Vendor has already paid the GST, and claimed the GST.

In some states Stamp Duty is payable (by the business Purchaser) on stock acquired from the Vendor.

Most Australian states have a “standard” Business Sale Contract which has been produced by either the state’s Real Estate body - or Law Society, and these standard contracts all include provisions which address the variables and issues which can impact a business sale transaction. It is recommended that parties in any business sale should familiarise themselves with those provisions, as they are both simple and comprehensive.

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