This article looks at the sale of a business by means of an asset sale and specifically in relation to stock and work in progress (often referred to as ‘wip’), which depending on the type of business in question, forms part of it.
Stock is usually an integral part of any asset purchase agreement and there are lots of points to consider in relation to it depending upon the form and type of stock in question.
Stock consists of all the raw material and ancillary items used to produce the goods/ products of the business together with any unfinished items and of course the finished items.
In an asset sale agreement if the stock levels fluctuate a lot (i.e it is fast moving stock) it is quite normal to value the stock close to the date of completion (date of the sale) so as to obtain the exact amount of stock and value. A buyer would also be concerned with buying too much stock and conversely not buying too little stock as that would mean that it would starve itself and not be in a position to meet the needs of its customers.
Due diligence enquiries need to be made relating to the stock. The enquiries would focus on ownership (any finance outstanding, any retention of title provisions from the suppliers (rompla clauses), whether the stock is of satisfactory quality, condition and fit for the purpose intended.
In the asset purchase agreement the buyer would then seek specific warranties to address any areas of concern or to seek assurances that the information, material provided which relates to the stock in question is accurate and materially correct.
There are various ways to value the stock and care needs to be taken to ensure that it is a fair and just way of doing so for both the buyer and seller thereby avoiding any disputes.
It is sensible to agree in advance the basis on which the stock is to be valued, the timescales involved and the procedure to be followed. In its simplest form the seller can value the stock and allow the buyer to comment upon it within 7 days failing which the valuation is deemed accepted between the parties. If it is difficult to value the stock then professional guidance and assistance ought to be sought. Standard accounting practice rules provide for stock to be valued at the lower of cost or net realisable value, depreciation can also be factored in. Market value based on an arms length sale/ purchase is also a useful yardstick. Finally, it is not unusual to use some form of mathematic formulae either. At the end of the day any method is fine providing it is just and fair and both the seller and buyer agree to it.
A dispute resolution procedure to iron out any problems that may arise such as the timescales involved in valuing the stock, the methodology used is advisable. If there are parts of the stock valuation that are not disputed then it is quite normal for any payment due which relates to the undisputed stock to be paid immediately with the balance due upon determination of the expert’s decision.