Small Business Inventory ManagementSmall business inventory management is probably the poorest understood and least cared-for system in the business world. I don't even have to go out on a limb to say that there is not a single inventory book value in the entire small business world that is accurate. You can go into any small business at any given moment and find errors in their inventory counts…and obsolete items…and overstocks…and understocks…items that should be in inventory but are not…and items that are in inventory but should not be…and on…and on. 
The point in bringing all this up is that because small business inventory management is a real problem with all businesses (that have inventory), you as the buyer must be aware of this and set your offer-to-buy based on this knowledge. An "observed" inventory prior to closing can help immensely as far as counts go, but unless you do an analysis of every item in inventory, you don't know what items are obsolete, nearing obsolescence, or just no longer in demand. And, you will not have time to make this kind of analysis prior to the purchase of the business.Unfortunately, small businesses that maintain inventories usually show inventory as a very large portion of their Balance Sheet. In other words, you will be paying a portion of your purchase price just for inventory. That is why you want it to be as accurate as possible. So, here is what I would suggest. When you are doing your analysis to come up with your initial offer, look at the inventory dollar amount on the Balance Sheet and discount it by at least 25%. If there have been no physical inventories for quite some time, you may want to discount it even further. When you perform your due diligence, be sure to look carefully at the systems used to control and manage the inventory. If the business's systems are sound and being used properly, you may be able to ease off on your pre-determined inventory discounts during price negotiations. But, what do you do about small business inventory management after you have acquired the business? Books upon books have been written, and classes upon classes have been given on the subject of inventory management. Yet, managing a business's inventory seems to be as big a mystery as ever, because they are never accurate. Having experienced this phenomenon several times in the past, I have developed some tips and techniques that may help other small business owners. So, watch for an announcement of a special ebook becoming available on Small Business Inventory Management." It should be available on this website early in 2012. In the meantime, I suggest you continue to the next report on buying a business, which deals with retaining valuable employees during the buying process and during the transition to a new owner. You can access that report on Employee Retention, here. Return to Top of Page Proceed to Employee Retention Return from "Small Business Inventory Management" to Buying a Small Business to view the "List of Reports" for this section. Return to Home Page.
9/29/11 |
