For businesses that carry inventory — retail stores, restaurants, auto parts suppliers, liquor stores, pharmacies — how inventory is valued and who pays for it is a standard negotiation point in every sale. Understanding the conventional approaches helps both buyers and sellers negotiate this component efficiently.
The Two Common Approaches
In most small business sales, inventory is handled one of two ways. The first is inclusion in the stated sale price: the business is sold for a fixed price that includes inventory up to a specified amount, with purchase price adjustment if actual inventory at closing is materially above or below the stated amount. The second is exclusion from the sale price: the business assets (goodwill, equipment, customer base) are sold for a fixed price, and inventory at closing is purchased separately at cost, based on a physical count conducted shortly before closing.
Physical Count Process
The physical inventory count is typically conducted 1–3 days before closing, with both buyer and seller (or their representatives) present. Inventory is counted and valued at cost (seller's invoice cost for purchased inventory) or lower of cost or market. Damaged, obsolete, or slow-moving inventory may be valued at less than cost. The final inventory amount adjusts the cash the buyer pays at closing.
Sellers should avoid running down inventory significantly in the period before closing to improve cash position. A depleted inventory at closing frustrates the buyer's ability to operate immediately and may generate claims under representations and warranties that the business was delivered in normal operating condition.