Understanding Stock Value Adjustments When Selling Your Business

Congratulations, you’ve found a buyer that has the financial means and relevant qualifications to purchase your business, and the wheels have been set in motion.

To protect yourself and your business while due diligence is carried out, a Sale and Purchase of a Business Agreement will be prepared. As part of the purchase price, you’ll be asked to put down an estimated value for stock and the value needs to be as accurate as possible.

What Is a Maximum Percentage Stock Value Adjustment?

Your agreement will have a Maximum Percentage Stock Value Adjustment. This is a financial buffer, mainly in the interest of the Purchaser, in the event that the estimated stock value is higher than expected. Both the Vendors and the Purchasers Lawyers will hold in their trust account, a sum equivalent to the total maximum percentage of the estimated stock until such time as the actual value of the stock has been determined between both parties.

Any stock over the agreed percentage is called ‘excess’, and the Purchaser can decide what to do with it. On the day of settlement, a joint stocktake will be conducted by the Vendor and the Purchaser to determine an accurate stock value.

How Does It Work in Practice?

For example; you estimate you have $100,000 worth of stock and your agreed Maximum Percentage Stock Value Adjustment is 10%. At the final stocktake, it turns out you have $115,000 work of stock. $10,000 will be covered by the Maximum Percentage Stock Value Adjustment, however, there is an additional $5000 in excess stock.

What Happens to Excess Stock?

The Purchaser may then;

a) choose if they want to accept all or a portion of the excess; and

b) may choose which items the vendor shall retain in order to reduce the actual value to the estimated value (plus the relevant maximum increase).

The purchaser only has 5 working days to notify the vendor of their choice to have the vendor retain some stock, or it is deemed the purchaser accepts all the stock in trade.

Selling or Buying a Business? We Can Help!

Whether you're buying your first business, expanding your existing operations, or preparing to sell, understanding the finer details of a Sale and Purchase Agreement can help avoid costly surprises. Seeking legal advice early can make the process smoother and ensure your interests are protected from the outset.

Contact the team at Sutcliffe Matson Law to discuss your business sale or purchase and how we can help guide you through the process.

Found a business you're interested in? Read our blog on due diligence to learn what to look for before signing on the dotted line.