Diseases of due diligence

Diseases of due diligence

October 29, 2019 | Steve Wain

Diseases of Due Diligence

Pitfalls and tips to avoid when buying a business

This individual thought that with the money he had and the time off from work, he could handle almost any issue and get a deal closed. When asked what he would do to finalize on the sale, he thought for a minute and said, “I’ll put a plan together shortly.” The reason this individual was so cavalier about the next steps was that he did not understand the game.

The game is a very detailed and, at times, extremely nerve-racking process that can lead to failure almost as often as it leads to success. Buyers who take on this task without adequate professional help eventually come down with an illness I call Buyers Attention Deficit Disorder, or BADD.

BADD occurs when the sum of the moving parts exceeds the buyer’s ability to control them and then process the information to come up with a valid decision when needed; when a buyer tries to “squeeze” out dollars when hundreds of thousands are on the line; and when short-term desire for success outweighs long-established practices of successful concerns.

We all know that a business’s primary objective is to make a profit. Yet, could you be happy if you had a loss? The answer is yes if your other concern is cash flow. Ask yourself this: As a buyer, can you dissect a company’s financial operations to make a distinction between profitability and cash flow trends? What does it mean to lose money on one hand, and then take home a lot of cash on the other?

I am sure many people will say they understand the difference but do they really have the time to evaluate the nuances of cash flow, including effects of monetary policy on prospective debt service, capital expansion needs and use of funds, or short-term “tax-planning” vs. longer term inventory carrying costs?

These questions, and about 10,000 more, usually either pop-up during or just before the period called “due diligence.” (get a taste for what you have to review here in this interesting Forbes article) Good business owners will work with others to create a memorandum that helps paint a picture of the business they want to sell. As a buyer, you will rely on those “facts” to help in determining whether the business is a good investment. If you are one of the lucky buyers who happens to get comfortable with these facts and makes an offer for a business, then the next stage is where the fun starts.

Due diligence is a period of time between an accepted letter of intent, or more formally after definitive documents have been signed, and the exchange of money between the parties. During this period, you as the buyer need to get ready for battle. The battle is to convince yourself that both the facts presented and your belief in the future potential of the business are what you believe them to be before you take control.

The fact is you WILL find discrepancies, whether it be a reasonable or large amount. What you can be relatively certain of is that you will not find a “clean business,” because all businesses have issues — issues that are either not presented, not understood originally, not aware of by the owner, or classified as derived. A derived issue is one that “crops up” during the due diligence period. In any case, these should be expected.

So does this mean the deal is off? Absolutely not! As a buyer, you must go into the process knowing this will occur. The question is a matter of severity and resolution. Case in point: During due diligence, you find out the seller carried a line of insurance you feel is necessary upon further review of the company. Does that mean the seller was withholding the lack of insurance? No. It could be innocent on their part for not knowing, or more likely, they knew but decided to take the risk without the coverage to abate the loss if it occurred.

Now, think of trying to handle figuring out what this issue is, its impact to operations if a loss occurs and if coverage is obtained, how much it will cost, what it will cover and what impact it may have on your ability to financially run the business. These questions are reasonable, but when you are under pressure to investigate their answers, you must consider the analysis of that “inventory planning” you determined earlier. Is this the correct amount of warehouse space, and what about the eight years left on the lease that is $3 per square foot more than the current market?

Here is a fact: Even the best professionals in this business, those people who I respect, need to spread the analysis and investigation to make a purposeful and educated evaluation of a business to many people. The objective of the closing day is to feel confident about your decision to acquire a company. Buyers who do not recruit the best professionals will invariably make a decision that puts them at risk for poor pricing, poor financing and, worst of all, possible business failure.

As a buyer, put together a team of professionals who understand the game.  Who should be on it?  Here is a list of your team and the positions they play:

 

Business Broker or Intermediary

As a person who plays the game every day, this is your quarterback. Business brokers/intermediaries have a 12-month season, usually with no bye weeks. A certified and/or very experienced and competent business broker or intermediary will understand all the aspects of due diligence, what information needs to be collected, how to evaluate it, and how to work with the other team members to achieve a goal. A big benefit to the buyer is also this person’s ability to value a business and help negotiate a fair and equitable price that allows the buyer to acquire AND run the business from day one! That last point is important because many buyers tend to stretch themselves to acquire a business and then find themselves short of working capital to keep it running after the acquisition. Qualified business brokers and intermediaries will help ensure you do not misstep here.

Accountant

Accountants typically work for smaller businesses as tax preparers. They do not spend a lot of time planning for the future. If sellers plan effectively, their accountants will work with them to determine reasonable times to sell their businesses, put the accounting records in order to be GAAP (Generally Accepted Accounting Principles) compliant, and be able to address trends and issues with buyers to answer their questions. In our experiences, many sellers do not use their accountants effectively or at the appropriate time, and therefore greater investigation by the buyer during due diligence is required. An experienced M&A accountant working for the buyer will help spot these issues and identify problem areas.

M&A Attorney

Your attorney will be chartered with drafting the definitive documents. His or her objective is NOT to negotiate the business terms of the agreement, but to adequately memorialize what you and the seller have agreed to, in principle, and ensure that the seller warrants you from anything that could cause loss for you after you take over the business or for which you were not told about and could not be reasonably expected to uncover during your due diligence. Ultimately, you have assumed risk when the money changes hands, so your attorney will try to protect you from issues that may arise after closing. Granted, there will likely be issues, but it is a matter of magnitude. An important and key area that many sellers and buyers overlook is to obtain a good and competent M&A attorney — not real estate, not litigation, not bankruptcy, etc. You want a qualified M&A attorney that has worked on commercial deals before.

Tax Attorney

Although your accountant may know taxes well, the intersection of the law and taxes sometimes need further clarification by a tax attorney. If you need one, the other professionals on your team will take notice to you so that you may select one. Typically, this person comes from the M&A attorney’s firm based upon his or her recommendation.

Financial Planner

Although needed far more for a seller, a buyer needs to understand what the reduction in their capital accounts will mean to them going forward. A good financial planner will work with you to help you understand what the outflows and “projected” inflows will mean to your everyday life.

Insurance Broker

You will need new insurance when you buy the company. The insurance broker can be the existing one that handles the company or you may find a new one. You need this person’s advice not only for pricing on existing policies, but also to advise you on what policies are available and possibly needed by you when you take over the company.

When due diligence starts, and your intermediary tells you to start analyzing the information — including financial reviews, operational reviews, technology reviews, quality of earnings, regulatory issues, union issues, contracts, competition, etc. — you will see why taking on the task of buying a business yourself is a “BADD” idea. The number of balls being thrown into the air is not the only issue; it is the fact that they are not all going straight up and straight down. When one goes off course, it makes grabbing the rest a challenge even for the best juggler.

Due diligence is the world’s biggest juggling act, partially because of the number of balls, and because some of them are invisible and require experience to know they are in the air and when to grab them. Typical due diligence periods last from 4 weeks (for a very small business) to 3-6 months (for a larger mid-sized business). It is a full-time job for the buyer, not a part-time exercise.

You are probably thinking, “Wow, that is a lot of work and a lot of people involved. How much is this going to cost me?” Although you think it will cost you a lot of money, you need to think of this as an insurance policy that is part of the acquisition cost. This cost can get bundled into the sale and amortized over a period of time. All of the professionals will charge a combination of retainers, hourly fees or a percentage of the deal. You will likely see a combined deal cost up to 10 percent or more just for the professional assistance you need. It is expensive, but these costs are typically factored into EVERY GOOD DEAL. Does planning to spend less mean you will fail? No, but your odds of jeopardizing the capital and acquired debt you put into the deal will increase significantly. On a $1 million deal, the $100,000 paid could be the difference between losing the $1 million because of poor analysis and decision or, just as likely, helping you from paying $1.2 million!

So as a buyer, go about the identification, offer and due diligence carefully. Buying a business should not be seen as an easy exercise. Because most buyers invest significant personal capital in their investments, make sure you do not take on what others can help you do better. Do not make a “BADD” decision.

As one attorney recently said to me, “In the grand scheme of things, 10 to 20 years from now the amount in a transaction will seem to blur, and the only memory will be one that shows you either succeeded or failed.”

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

Defending Your Company’s Value: 4 Areas Worth Improvement

Defending Your Company’s Value: 4 Areas Worth Improvement

May 27, 2018 | Steve Wain

Defending Your Company’s Value: 4 Areas Worth Improvement

This is the first of a four-part series that will provide you with some food for thought,

Or more importantly, a way to defend your company’s value through four controllable areas worth improvement that can be worth millions more in your pocket.

There are many things you can do to make your business worth more—sort of like painting a house before you sell it. However, what we will cover here are longer-term fixes rather than quick fix-ups. The reason: Facades usually have limited value, and sophisticated buyers can see through them.

The four areas you will read about in this series are more under your control. They do not come without costs, but they do pay off handsomely and, more importantly, will help you with operational efficiencies and better earnings if done correctly. The four parts of the series are about numbers, organization, technology, and infrastructure. After years of dealing with business owners, as well as owning a few of my own businesses, it is painfully true that business owners like the work they do, but not other things in support of their business focus. Most important to this is record keeping. It is a necessary evil: You need it for the banks, you need it for the government, and you need it for yourself (for example, when you need to collect money others owe you).

Consider this one truism: If your record keeping is done well, it becomes an ASSET of the business. What does that mean? Well, you generally either use assets or create them for sale; but does that apply to business records? The simple truth…YES.

Business records are an asset because they have value. Not the paper or computer data itself, but the mere ACCURATE RECORDKEEPING you maintain will add to the value of your business. If that is the case, then you should look at record keeping as an investment – not a cost.

Consider this, and it may shock you, but if you had your corporate books audited for three to five years BEFORE you sold the business, that alone could increase the consideration (money) paid to you as much as what you earn in a full year. So, if you make $500,000 per year, by just auditing what you already do as part of the business operations, you may add $500K to your pocket.

How many units sold or hours of services would your business have to sell in order for YOU to get an extra $500K in TAKE HOME pay?

In a business, most business owners will keep their records as simple as possible. Some I have dealt with over the years actually maintain very detailed and structured books. Regardless, the numbers you collect are a picture of effectively managing your business. They should not be viewed as a task that has no rewards.

The information you collect should satisfy two key criteria – financial and operational information. If done properly, and the systems you use allow for it, you can “kill two birds with one stone.” For example, recording an order and subsequent sale of a product or service should provide for both needs.

The financial information allows you to understand issues which are central to the financial well-being of your company. The lifeblood of a company must be reflected on its Balance Sheet. The Balance Sheet SHOULD reflect what you own, what you owe, and how much you are “technically worth.” What does “technically worth” even mean? Your Balance Sheet is the most important financial document you can produce, and it reflects values recorded AT COST. So, if you buy a widget, it gets recorded at cost. If the widget is still in stock a year from now, it may not reflect the current market value of the product. True market value is not reflected in your records, except if you have taken an allowance for things such as an inventory write-down.

Years ago, the cost of computer memory was so volatile, that accurate record keeping of value was near impossible because of fluctuations in what sometimes seemed hour to hour. When goods you own can be subject to incredible swings in value in short periods of time, special accounting must allow for that, and invariably, those allowances will show up on your Balance Sheet.

Keeping records accurate and up-to-date is a joint responsibility of you and your accountant. Many business owners rarely analyze their Balance Sheet, as they spend more time looking at the income statement and how much money is in the bank. However, your accountant should assist you to ensure that the numbers on the Balance Sheet are accurate and the process of recording the data is effective and timely.

You have three choices in an accountants review: compilations, reviews, and audits. Audits are not to be confused with a dreaded IRS review, but simply a review of the financial recording methods and data accuracy in conformity to Generally Accepted Accounting Principles (or GAAP as it is known). It involves a number of key areas including accurate income and cost reflection to a particular date, sample validation of external unverified data (i.e., your outstanding A/R and A/P), and an evaluation of data recording processes (i.e., inventory recording and counts). It is a long process and can seem daunting, but if you are prepared for it, it is not a cost, but rather an investment in a 1X yearly earnings return.

Most sophisticated buyers WILL PAY additional value for audited returns. The reason is that they can rely on the information with a greater degree of certainty. Being able to rely on that information will be beneficial to a buyer because it will save them time during due diligence, possibly allow them to get better rates on debt acquired, and reduce the risk of loss.

So, if getting an audit could lead to a 1X multiple addition, what will you get with a review or a compilation? A review is, for simplicity purposes, a mid-ground that provides a less stringent review. Your accountant will not do external validation, nor ensure proper methods in inventory counts, but they will look at your entries, make appropriate accruals, and ensure that certain accounting standards are being followed. Yet, they will NOT certify your Balance Sheet.

With a compilation, your accountant will not attempt to verify anything, and will simply present the data you provide in an acceptable financial format. As you are most likely already aware, a compilation and review are less costly—significantly in some cases. Yet, how much will your price suffer if you were to get compilations or reviews?

Compilations will not allow for any added value. In fact, it may be viewed as a negative and cause buyers to not even consider an otherwise good business. With a review, you have a much better chance of a sale, but the likely “premium” will be between 0% and 20%. The marginal difference vs. an audit is large and makes you wonder why you have not done this before.

If you do have an audit, try having at least three years of audits. If your business is saleable, the cost of an audit will almost certainly be recouped during a sale. Preparing for an audit by updating your data collection, recording methodologies and internal review will also have the secondary benefit that improves your operation and, by extension, your bottom line. So, not only will you make more when you sell your business, but you will gain better intelligence about your business and also earn more money each year until it is sold.

Consider updating your financial recording and audit possibilities. A certified or qualified intermediary can help you prepare for that eventual sale date. Working also with your accountant, your “team” may help you, as a shareholder or member, to achieve an even better return than you thought ever possible. Remember, defending your company’s value is critical in the end. Use the 4 areas worth improvement to improve your payout.

Want to learn more about improving your internal records and their worth? Contact Calder Associates, and let us show you how we’ve helped businesses optimize their value with improved operational and financial records.

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

Tax Reform. Will The Law Help Me Sell My Business?

Tax Reform. Will The Law Help Me Sell My Business?

January 5, 2018 | Steve Wain

Tax Reform. Will The Law Help Me Sell My Business?

Clients, acquaintances, and friends have been asking us that question since the tax reform became law.

First, let’s review some of the major components of the law that could have an impact.

What the tax reform law does is principally lower taxes. But, since Congress needs to keep spending in line with revenues, the supply side theory also must allow for ‘shortfalls’ in the math, and that is where your business might be impacted.

For example, to ensure that appropriate revenue to pay for the federal budget is in place, certain tax deductions that you’ve been used to have been taken away. One key one is meals and entertainment. You can no longer write-off those sales and marketing events where you brought clients or prospects to say, the PGA golf tournament, or other sporting events. What does that removal do to your bottom line? How does that change your company’s approach to future sales generation?

Since the tax reform will also add to the country’s debt, any tax savings could be eaten away from likely future increases in the prime lending rate. If you invest heavily in capital equipment that could impact your going forward operations.

If you own your company and are a pass-through entity, you may not see any gains to your profits depending on your size and type of business. For many small businesses, there will be a 20% adjustment to your AGI, but that benefit is not available if you are a SERVICE company, or if you earn greater than approximately $315,000. Is that your company? Do you just perform services, or are you a manufacturer, or retailer?

Work with your tax advisor to get a detailed breakdown of the tax reform legislation. Inc. magazine has a summary of relevant point for businesses in this article. Or try this Journal of Accountancy article.

The answer to selling your business though lies in five easy questions.

First, are you mentally ready to sell? Consider your personal situation. Even without tax reform, would you be able to sell your business now? If not, it’s highly unlikely the tax reform will make your company more salable.

Second, are you a “C” Corp? If you own a “C” Corp, you may now gain additional interest from investors since the marginal tax rate has been reduced by 15%. What this will do will bring more interested buyers to the table. It will also allow you to impute a higher value since your free cash flow will be greater and therefore be able to service a higher debt limit that a buyer may need to get you to sell.

Third, do you have a service based pass-through entity like an ‘S’ Corp or an LLC/LLP? If you are an “S” Corp or LLC, the likelihood is that most of the value of your business, as viewed by an outside investor, will likely not change significantly. Yes, if you happen to have a low cash flow and are not a service based entity, there will be that 20% incentive, but for most business owners who’ve built up their business over the years and are now ‘ready’ to sell, their income will likely lead to exclusions or reductions of that allowance.

Fourth, will other personal tax reform changes COST you money? Start with this. Do you live in a high-tax state like NY, CT, NJ, CA? If so, most business owners will likely have new limitations to the deductibility of their yearly earnings related to state and local taxes as well as property taxes. If that changes your lifestyle, you may want to sell now and either retire, or even find/start a new opportunity in a new state, or at least one with a lower tax base.

Fifth, have you considered the future or are you stuck in the present? With all the elation of lower taxes will it improve your life and continue indefinitely? No one knows the future, but the new reforms do have some personal tax adjustments being terminated or phased out in the future years, so what’s a benefit to you today, and what a buyer sees for their personal benefit will not look as rosy in say 5-7 years.

Selling a business is not easy. Continuous changes to the economy, business operations, and your life make planning to sell a business difficult. Consider all your options. Look to the future, but be cognizant of where your company currently is in its lifecycle. If your company is really ‘ready to sell’, then consider it now – these reforms will only have prospective investors more interested!

Steve Wain is the President of Calder Associates. Steve advises companies on strategy, business sale preparation, finance, and process, technology, organizational, and financial improvements.

Considering selling or buying a business? Call the professionals at Calder Associates. Learn what your company is worth, and get educated on the process.

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

At What Age Should I Sell my Company?

At What Age Should I Sell my Company?

May 21, 2015 | Steve Wain

At What Age Should I Sell my Company?

That’s a question I hear often. The easy answer… well, there is no easy answer.

A lot can be said about the individual who wants to continue working as they progress in age, but invariably the real question is not about their age as much as it is about their desire to retain equitable value.

I’ve seen business owners who’ve owned and run  their business into their 90’s. I’ve also seen 30+ year-olds tell me that they are “burned out”. So, how do you know if it’s time to go? That depends upon YOU!.

First, lets dispel a myth that says for a business owner to work, they can’t work after they sell their interest. A business owner can work as long as they like, either for the entity they are selling, or if that is not possible, for another entity. Most of these “Type A” individuals have dedicated their lives to their business, and enjoy challenges, being productive, thinking, and working in a team environment to achieve goals. When you sell your company, that is not something that can be easily turned off.

But the key factor, as noted, is not your age. Actually, its a point on the timeline that intersects current corporate value, age  of owner, an owner’s ‘effectiveness’, and a prospective buyer’s perception of risk.

Although no scientific study has determined a magical number, my opinion is that the confluence of those lines becomes much more clear the later in life you work. In fact, I have seen owners take a reasonable tumble in value the longer they wait; in one  instance having someone even pass away right while talking to Calder Associates after they realized they should have sold earlier.

Many times, I use the age of 68 to have owners really think of their “value” factor. It’s true, I’ve seen many 68 year old’s who could win an arm wrestling contest with a 35-year-old. But the issue isn’t just strength, it’s, as I like to think, the ease at which you can push a snowball … up a mountain.

As we get older, and after years in your business, the drive and passion of most business owners is “different” (notice I didn’t say ‘less’) than it was when they first started the company. That is likely true for any business owner at any age after a few years. But there are other factors active.

The most important of those is perception and risk. When an owner sells their interest, the buyer not only buys a going-concern, but they buy the knowledge and usually time of the owner to ensure they receive the value they paid for. As Ben Franklin  said, … “In this world nothing can be said to be certain, except death and taxes”. Because of that forthcoming and likely terminable event, buyer’s understandably know and feel that they are acquiring an asset that is becoming less valuable over each day after closing unless they can understand and transition the company to their new style of leadership. Rome wasn’t built-in a day – neither is a corporate transition.

Accordingly, you will see owners always thinking about that day they will sell all or a part of their equity, and buyers trying to determine when will they start taking on greater risk. For the business owner, it’s an inflection point where the mountain changes its upward angle and rolling that snowball becomes harder. Buyers perceive and believe that.

A company is made up of its people, products, customers, vendors, and processes. It’s also an understanding of how those work together that help define a company’s “secret sauce“. Buyer’s want to understand and know that, and Seller’s usually can’t specifically tell them. It’s second nature.

As age and time creeps up on an owner, the confluence of factors that diminish a company’s growth, effectiveness, and transitional value become ever more prevalent. Owners have asked me why then doesn’t a buyer take out a key-man policy to protect against any downside risk? Although in some cases they do, the cost of that policy could be large and it will be taken out of delivered cash flow in the form of a purchase consideration reduction. More to the point, buyer’s don’t want to get these policies inherently because their goal is to make GREATER CASH FLOW AND PROFITS, not just get a refund on their injected capital. Like you, the only factor they can’t prolong is time.

So, when you start thinking about your future and when you likely would sell your interest (we all do the day after we start or buy our company, admit it!) separate your emotional view from your economic one. Make sure to sell when the value is greatest and the road ahead is not one where you need twice as much effort each succeeding year to push that snowball up the mountain. You  can always work, but its easier to push a snowball up an increasingly steep mountain if you’ve received your money to buy a few $250,000 Snow-Cats!

 

Want to discuss your situation? Call me at 732-212-2999, or email at info@calderassociates.com.

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.

Valuing Inventory – The Dilemma

Valuing Inventory – The Dilemma

December 27, 2014 | Steve Wain

Valuing inventory – The Dilemma

When you sell a business, invariably, one of the most often asked questions are about inventory. The issue is that most business owners don’t understand how their inventory is to be ‘valued’ by a buyer.

The truth is that there are many ways to look at inventory value. You can say its worth what you paid for it (option 1), or what it is worth today (option 2), or what it should be to continue to run your business efficiently (option 3). these are three options you should consider.

Option 1 seems simple. You buy 1,000 widgets for $1.00 a piece, so logically, it should be worth $1,000, right? What about freight? What happens if you are a manufacturer, and some of your inventory is now in work-in-process? Does it also include the labor cost? These are not only good questions, but sometimes difficult to answer given the variations in business operations.

Option 2 seems somewhat illogical, but you do need to recognize the possibility that variations to inventory can be occurring. Take, for instance the value of highly commoditized stock, like computer memory. You could buy a 1GB inventory chip for $32/each per lot of 100 on a Thursday, and by Monday it may be worth $31.65/each per lot of 100. Since accounting rules require you to value assets at the lower of cost or market, do you continually revalue the inventory to have accurate financial statements? Likely no, but you can be assured that a buyer is NOT going to pay you for inventory that highly fluctuates for a value worth more than it is on the day of closing.

In option 3, you need to be aware of what is necessary to adequately run your business, and maintain it as a ‘going concern’. Although the rationale and details behind this are beyond the scope of this article, consider that many business owners and purchasing managers buy inventory and raw goods that are NOT in optimal quantities. For example, the business owner who purchases 1,000 widgets because he ‘received a  great price’ may make some sense, but on the day they sell the business, the buyer may only NEED 200 to keep the business running well. How much is the excess 800 units worth in that case?

These questions, and a myriad more exist. The challenge is to prepare your business to ensure that you receive the optimal value for your inventory.

Need to know your options, and how to handle it? Speak to an intermediary at Calder Associates that is well versed in inventory and tax requirements who can review the issues YOUR company faces. Get an idea of what is valuable in the marketplace and your role in achieving the greatest return.

About the broker blog

The Blogger- Steve Wain

Steve is the President and CEO of Calder Associates worldwide operations, and also the past Chairman of the International Business Brokers Association, and President and Founder of the Mid-Atlantic Business Brokers Association. A professional whose owned and sold a number of businesses in the past, Steve has provided expertise to thousands of business owners and buyers. Steve’s background in technology and finance has served many business owners and buyers over the years. Steve is a Certified Business Intermediary (CBI), and one of a select few worldwide to be awarded the certification of Mergers and Acquisition Master Intermediary (M&AMI). Steve is also a frequesnt speaker at industry conferences, as well as mentor and educator to many professionals in the industry. Steve sits on the Boards of Directors of multiple companies and associations.