Inventory valuation in business purchase price allocation
Accurate inventory valuation should be high on your list of priorities. Some reasons why:
One of the key business tangible assets, inventory is well understood by both business people and appraisers. Businesses determine the value of inventory to close the books on a regular basis. Inventory is a unique type of asset in that it tends to turn over rather quickly flowing to the cost of goods sold on the company’s income statement.
Accountants are used to checking the inventory amounts and determining its value. The fair market value standard is typical in inventory valuation.
Business buyers often prefer high inventory values because they can allocate a greater proportion of the business purchase price to this tangible asset. As the inventory is sold the amount flows directly to the cost of sales reducing the business taxable income.
Another motivation for high inventory values is that less of the business purchase price needs to be assigned to goodwill. Many business owners do not like to carry large amounts of goodwill on the books as investors tend to be rather unimpressed with such financials.
Remember that using the fair market value standard when valuing inventory may help avoid undervaluing this important business asset.