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How To Investigate Any Business Opportunity
tory, called merchandise inventory.
The financial statements presented by the seller will probably reflect an inventory value different from
the one assigned in a buy-sell transaction. Inventories are usually carried on the books either at cost or
at the lower of cost or market. Market is defined as the current replacement cost to the seller.
In determining the value of inventories, the seller has to chose a method of arriving at cost. The most
common costing methods are first-in-first-out (FIFO), last-in-first-out (LIFO), and average cost. These
methods may give very different values and the buyer and seller must arrive at some value agreeable to
both. The most common methods used in valuing inventories for buying and selling small businesses
are cost of last purchase and current market price.
The quantity of the inventory is usually determined by a physical count. The physical inventory proce-
dures should be decided before the count, and each inventory team should include one representative
from the buyer and one from the seller. It is easy to omit items from the inventory count, and here the
seller is usually in a more vulnerable position than the buyer. There is more danger of omitting items
from the count than of double counting them.
It may be that some items of inventory are not to be sold. If so, these items should be segregated before
the count begins. Another problem is determining what quality of items are to be included in the inven-
tory. The buyer needs to be cautious when examining the inventories - in most buy-sell situations there
is some inventory that is not salable.
This is one reason why the buyer should employ as his representatives on the inventory team individu-
als who are acquainted with that type of inventory. If the buyer and the seller disagree on the value of
certain items, the seller will remove these items from the list of inventory for sale.
When the inventory is being priced, be very careful in matching price to quantity. Be sure that the units
in which the quantity is recorded and the units priced are the same. The physical count should be re-
corded in duplicate so that buyer and seller can each make separate extensions after all prices have
been listed. After independent extensions, the two inventories should be reconciled.
Manufacturer's inventory. When a manufacturing company is being exchanged, the raw materials in-
ventory is taken and priced like the merchandise inventory of a distributive business. The work-in-
progress and finished-goods inventories may present a problem. Usually, there is no market price or
cost of last purchase to relate to these inventories; consequently, the sellers cost is generally used for
establishing prices.
If the seller has unused plant capacity or if his plant is inefficient, his costs may be inflated. Such a situa-
tion requires the help of an accountant with a good knowledge of cost accounting.
Store supplies and office supplies. These two items are usually quite small. They should present no
problem, though some of them may have no value to the buyer if the name of the company is to be
changed. After the usable supplies have been determined, a physical inventory should be taken and