When selling a business, the sale of stock can often form a major component of the sale. If you do not clearly identify these details in the sale contract, you may end up in a dispute with the buyer at or after settlement.
This article explains what the contract of sale should set out regarding the sale of stock, and how to deal with disputes regarding stock.
Defining Stock and Stock Value
If you operate a retail, wholesale or distribution business, your stock is probably the core part of your business. When selling your business, you should ensure that your contract of sale contains:
- a clear description of what stock will be included in the sale; and
- what the value for your stock will be based on.
This is usually a commercial issue to be negotiated with the buyer.
There are various methods you can use to define the value of your stock. This is generally a matter for negotiation with the buyer. For example, you could choose to value your stock based on:
- the original invoiced price you paid for the stock, plus an appropriate portion of the delivery cost; or
- the costs set out above plus “landed costs”, which includes any taxes, exchange rate conversions, and customs and handling fees.
The valuation method you choose should reflect standard practices in your industry.
Depending on the type of stock you sell, you may also have accumulated ‘dead stock’. This is stock that you have had for a number of months, or stock that will expire soon. The buyer will usually want to negotiate how to deal with this obsolete or perishable stock with you. You may choose to:
- sell this stock at a reduced value; or
- disregard this stock altogether when calculating the value of your stock.
Whatever you and the buyer decide commercially, you should inform your lawyer so it can be reflected in the contract of sale.
Process for Stocktake
Once you have decided how to define your stock and its value, you should specify how to undertake a stocktake in the sale contract. The greater the importance of stock in the sale of your business, the longer the stocktake process will take.
Generally, you should conduct the stocktake the day before the settlement date to ensure the figures are as up-to-date as possible. This will give you enough time to calculate the stock value. However, you will need to allow more time if you have:
- a large amount of stock; or
- valuable stock that requires appraising.
The stocktake should be undertaken using your usual stocktake procedures. You may choose to do it with the buyer, or the buyer may prefer for you to do it yourself and provide them with the figures to review. Either way, it is important to conduct an accurate stocktake. Set it out clearly in a spreadsheet and provide copies for both the buyer and your lawyer for their records.
Dealing with Disputes
If the sale of your stock is an essential part of selling your business, your sale contract should set out a process to deal with any disputes between you and the buyer regarding stock value. Usually, this dispute resolution process involves appointing a stocktaker to conduct a stocktake:
- at the outset, to determine the final stock value; or
- in the event of a dispute between you and the buyer, where you cannot agree on the stock value.
Appointing an independent stocktaker can be expensive. When considering whether you want to appoint one to conduct a stocktake at the outset, think about the:
- value of the stock;
- value of the sale in total; and
- ability of you and the buyer to pay the stocktaker.
Generally a buyer and seller will each pay half of the stocktaker’s costs, but this is a commercial issue to negotiate with the buyer.
Other Issues to Consider
Two additional issues that often arise in contracts for the sale of stock include:
- whether a maximum sum for stock should be inserted in the contract of sale; and
- how the parties intend to deal with any warranty claims from existing customers.
1. Maximum Sum for Stock
It is common for a buyer to request a provision for ‘maximum sum for stock’ to be inserted in the contract of sale. This generally means that they do not have to purchase stock above that sum. It can also allow a buyer to decide which stock to include or exclude in their purchase.
A maximum sum term allows the buyer to better prepare for the costs payable to you at settlement, as they will only have to pay you up to that amount. Whether you choose to include this term in your contract is for negotiation between you and the buyer.
2. Warranty Claims
When you sell your business to a buyer, be aware that you may still be responsible for certain consumer guarantees. Under the Australian Consumer Law, your customers have certain rights regarding the products you sell to them. For example, all products you sell must be of “acceptable quality“.
If your product does not meet these consumer warranties, a customer could claim a refund, repair or replacement. Your business might also have offered additional warranties to customers, such as agreeing to replace a laptop if it malfunctions within 12 months of purchase.
You will still be responsible for these warranties after settlement, unless the buyer expressly assumes them under the contract of sale. If the buyer chooses not to accept these potential liabilities, you may need to maintain your business insurance after settlement to cover you in case any claims arise. Whether or not the buyer assumes these warranties is, again, a matter for negotiation. It may impact the price they are willing to pay for your business.
If the sale of your business includes the sale of stock to a buyer, make sure that your contract of sale clearly defines what stock is to be sold, and its valuation process. It should also set out a process for undertaking a stocktake, and include dispute resolution mechanisms. Dealing with these issues in a sale of stock can be a complicated exercise.
If you want help with your business’ contracts of sale, contact LegalVision’s sale of business lawyers today on 1300 544 755, or fill out the form on this page.
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