Question:
I am involved in a transaction and I’m having trouble valuing the inventory that is part of the deal. The seller says it’s all good but is there really a way to measure this or should I take their word for it?
Answer:
Never take their word for it! Assuming that it’s non-perishable product, you need to classify the inventory as either “Good and Resaleable” or “Obsolete”. G & R is product that you can sell in the normal course of business over the next 12 months (this way it’s still a “Current Asset”).
The way to calculate this is by reviewing the prior year’s sales and making sure that you do not have more on hand of any item than the company would normally sell in that period. As an example, if there are 24 widgets in stock and the company sold 18 in the last 12 months then 18 are G & R and 6 are “Obsolete”. Therefore, you can pay full acquisition cost of the 18 but you need a drastic discount on the 6 “Obsolete” ones.