Stock at valuation: how stock is counted, valued and paid for when a business is sold

When a business that holds stock is sold, the stock is often priced separately from the goodwill and equipment and paid for at a value worked out at settlement. This guide covers how that usually works, what to agree in the contract, and the cash and tax side. For the rest of the price, start with how small businesses are valued.

What "plus stock at valuation" means

"Plus stock at valuation" (SAV) means the asking price does not include stock. The buyer pays the price, then pays separately for the saleable stock on hand at settlement, valued the way the contract says.

If the price includes stock, the stock is part of the price whatever is on the shelves, so the buyer needs the contract to set a level the seller must leave.

Stock is priced separately for two reasons:

• It changes every day. Stock at settlement can differ a lot from stock when the price was agreed.
• It is a cash outlay on top of goodwill. Paying for it separately means the goodwill price does not depend on how full the shelves are.

The listing estimate and the amount you pay

On BizExchange, a listing where stock is extra shows "plus stock at valuation" beside the asking price, with the seller's approximate figure if they give one. What you pay is set by the count under the contract, and can be higher or lower. The Multiple on listing cards uses the asking price alone, so your total outlay is higher (see how to read a business for sale listing).

Ask how the estimate was reached: a recent count, the stock system or the last accounts. business.gov.au suggests buyers ask how inventory is managed and what its current state is.

How the stocktake usually works

• Timing. On or close to settlement, usually outside trading hours. If trade continues after the count, the contract should say how later sales and deliveries are adjusted.
• Who counts. Buyer and seller, or their representatives, count together. Or, if agreed, an independent stocktaker does it, and the contract says who pays and whether their figure is final.
• What is counted. Everything the contract calls stock: fuel in a service station's tanks, food in a cool room, materials in a tradesperson's van.
• Disputes. Agree in advance how disagreements over items are resolved.

Agreeing the valuation basis

The basis. A common basis is the seller's cost price, excluding GST. Settle the detail: latest or original invoice price, and whether freight and supplier discounts count. Other bases, such as a discount from retail, give different numbers.

What is excluded. Contracts commonly exclude or discount:

• damaged, faulty or expired stock, and stock close to its use-by date
• obsolete or discontinued lines
• slow-moving stock, defined by something checkable, such as no sales in an agreed period
• consignment stock or stock otherwise owned by a supplier
• stock customers have already paid for, such as laybys and special orders
• opened items, packaging and consumables, unless you agree to include them.

Supplier-owned stock. The PPSR explains that when goods are supplied on written credit terms and do not belong to the customer until paid for, this generally creates a security interest the supplier can register. Stock on the shelves may still belong to a supplier, so your solicitor's PPSR search should cover it. See legal and tax steps in a business sale.

Caps, minimums and ranges

The final figure is unknown when you sign, so some contracts limit it. Options to discuss with your solicitor include:

• A maximum. The buyer does not have to take stock above an agreed value, and the contract says what happens to the excess.
• A minimum. The seller must leave at least an agreed value, so the business is not run down before settlement.
• A range. A floor and a ceiling, or, where the price includes stock, an agreed level with an adjustment either way.

Work in progress and deposits

Trades and other service businesses may hold little stock but have jobs under way and money taken in advance.

• Work in progress. Who completes unfinished jobs, who invoices, and how the value of work done before settlement is shared.
• Deposits and prepayments. If the seller has taken deposits or sold gift vouchers, the buyer may have to supply the work or goods. Agree how that money is accounted for at settlement. business.gov.au suggests buyers ask what refunds and warranties still exist.

The cash you need

• Budget for it. Stock is often added to the amount payable at settlement. Plan for a figure above the estimate, or agree a maximum. See how to finance a business purchase.
• Ask your lender early. Whether a lender will fund stock, and how much, varies. Make sure any approval covers the full amount due at settlement, and test repayments with our business loan calculator.

Tax and GST

This is general information, not tax advice.

• What counts as trading stock. The ATO says trading stock is anything a business acquires, produces or manufactures for manufacturing, selling or exchanging. It excludes, for example, spare parts for maintaining equipment and consumables such as cleaning agents. A contract can define stock differently.
• Valuing stock for tax. The ATO lists three methods for the end-of-year stocktake: cost price, market selling value and replacement value. A business entitled to GST credits generally excludes GST, and under the simplified rules an eligible business whose stock value changed by $5,000 or less may not need a formal stocktake. So the stock figure in the accounts may be an estimate, or on a different basis.
• Stock sold with the business. The ATO's guidance on changing business structure says that when a business is sold in its entirety, its stock is disposed of outside the ordinary course of business. Where the small business restructure rollover does not apply, the contract price for the stock is ignored for income tax and its market value counts instead, for the seller and, in the ATO's example, the buyer. Ask your accountant how this affects you.
• GST. The ATO says no GST is payable on the sale of a going concern if certain conditions are met. Ask your accountant how GST applies to the stock, and have the contract say whether the stock price includes GST.

For sellers

• Stop overstocking. Buy for the trade you expect before settlement. A buyer may cap what they take.
• Clear dead stock. Sell off slow lines and remove damaged or expired items before the count.
• Keep accurate records. Records that match a physical count make your estimate believable. See preparing a business for sale.
• Give a realistic estimate. When you list your business, you can mark stock as extra and add an estimate. Buyers arrange finance around it.

An illustration

The figures below are invented round numbers. They are an illustration only, not typical of any business or industry.

A gift shop is listed at $200,000 plus stock at valuation, with stock estimated at about $40,000. The contract values stock at cost excluding GST, with a $45,000 maximum.

• Stock counted at cost, excluding GST: $50,000
• Less damaged and expired items: $2,000
• Less lines with no sales in the agreed period: $4,000
• Less special orders customers have paid for: $1,000
• Agreed stock value: $43,000
• Business and stock together: $243,000, before other settlement adjustments

The stock came in $3,000 above the estimate but under the maximum. Had the agreed value come to $52,000, the buyer would pay $45,000 and the contract would decide what happens to the rest.

Questions to settle in the contract

• Is stock included in the price, or extra at valuation?
• What counts as stock, what is excluded, and how are expired and slow-moving stock defined?
• Is the basis cost excluding GST, and is that latest or original cost?
• When is the count, who attends, and is there an independent stocktaker?
• Is there a maximum, a minimum or a range?
• How are consignment stock and supplier security interests handled?
• How are work in progress, deposits, laybys and gift vouchers dealt with?
• When is stock paid for, and does its price include GST?