Key Insight
Inventory on the balance sheet is what the seller says it's worth. Inventory in the warehouse is what the buyer can actually sell. These are often different numbers — and the difference comes out of the purchase price.
Inventory in Acquisitions
In asset sales, inventory typically transfers with the business at a value negotiated as part of the purchase price. The most common approaches:
Fixed price: Inventory valued at cost (book value) and included in the purchase price as stated. Risk: inventory may be worth more or less than book.
Adjusted at closing: Inventory is physically counted and valued at closing; purchase price adjusts up or down based on actual count. More accurate but logistically complex.
Excluded: Some buyers exclude inventory from the deal and purchase it separately at actual cost post-close.
Inventory Valuation Methods
The value of inventory depends on the accounting method:
- FIFO (First In, First Out): Oldest inventory is sold first; COGS reflects older costs; balance sheet shows current costs
- LIFO (Last In, First Out): Newest inventory sold first; COGS reflects current costs; balance sheet may show very old, understated costs
- Weighted Average: Blended cost across all inventory
Red Flags in Inventory Review
- Slow-moving or obsolete inventory: Products that haven't sold in 12+ months may have zero real value
- Inflated inventory values: Sellers sometimes overstate inventory on the balance sheet as closing approaches
- Product liability exposure: Recalled or defective products in inventory
- Seasonal inventory: A seasonal business with peak inventory at closing may be selling buyers inventory they can't move for months
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