How is inventory valued in a business sale?

Inventory sits in a different category than the rest of the purchase price. Goodwill and equipment are usually priced as part of a negotiated multiple of earnings, but inventory is a physical, countable asset with its own value on the day the sale closes, and that value moves depending on how much stock happens to be on hand at that moment.

If inventory were baked into a fixed purchase price, either party could be advantaged or disadvantaged simply by the stock level on closing day, which has nothing to do with the underlying value of the business. Carving it out and settling it separately, usually at closing based on an agreed valuation standard, keeps the core price focused on earnings and removes that timing risk.

• Cost, meaning what the seller paid for the inventory, is the most common baseline standard
• Net realizable value, adjusting for stale, damaged, or slow-moving stock, is often applied on top of cost
• Obsolete, expired, or unsellable inventory is typically excluded or heavily discounted rather than paid for at face value
• The agreement should specify the standard in writing, since 'fair value' left undefined invites disputes

A physical count is typically done at or very close to closing, sometimes jointly by buyer and seller or with a third party present, and the purchase price is adjusted up or down against a pre-agreed estimate. Disputes usually arise from what counts as sellable inventory rather than from the counting process itself, which is why defining the standard clearly in the purchase agreement matters more than the count logistics.

Inventory that looks strong on the balance sheet but is actually slow-moving, seasonal, or tied to a discontinued product line can inflate the apparent asset value without adding real worth. A buyer’s advisor will typically want an aging analysis, not just a total dollar figure, before accepting the seller’s inventory number at face value.