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Paying for Stock and Debtors

Guest post by: Timur Sultanov

Article Overview: Stock is changing on a day-by-day basis, so it is normally paid for separately on the day of takeover when it is normal to bring in an independent firm of stocktakers to do a full stock take and calculate value.

Paying for Stock and Debtors

Stocktakers

Stocktakers have their special systems for doing this job very fast, so unless it is the type of business that does not carry much in the way of stock don't try to do it yourself.

Sometimes the vendor and purchaser each appoint his own firm, and the two firms get together to agree a figure between them. However, in many cases this is an unnecessary duplication of expense and it is often easiest to use the firm that the vendor has used in the past to act for both sides. You can then split the cost.

Provided they are a reputable firm, and most are, this is not as risky as it sounds. Firstly, having undertaken stock checks in the past at this particular business they are very familiar with it, and can reach an accurate figure much quicker than a new firm would probably do. Secondly, they are at least as keen to impress you, the buyer, as they are to please the seller, because he is leaving and they will be hoping to retain the business after you take over. In any event, as a reputable firm, they would not certify a stock figure they were not happy with in any circumstances.

What to exclude

You need to agree with the vendor what stock you are prepared to take over and pay for. Just because it's on the shelf doesn't mean you have to pay for it.

If in discussions with the vendor it has become clear that certain lines or products have not been a success, tell him you don't intend to pay for that stock, or at least negotiate a reduced price so that you can afford to put it on sale at an irresistible sale price.

With most retail businesses you should put a limit on the age of stock that you will buy. In the case of food, it obviously has to be fresh. In the case of toys, maybe 90 days is reasonable. In the case of greetings cards, you would not want to pay for the leftovers of last year's Christmas, Mother's Day or other seasons. You will need to consider what is reasonable for the particular type of business you are buying.

Invoices

If the stock consists of items that could be faulty and need to be returned, make sure that you have details of suppliers, and preferably copies of the previous owner's account numbers and invoices.

Settling up

The completion of the purchase of the business is settled between the solicitors.

However, because of the last-minute nature, stock is usually paid for by way of cheque handed over directly to the vendor on the day.

Paying for debtors

The simple rule here is don't. What if you pay the vendor and then the debtor defaults?

The vendor should give you a list of outstanding debtors as at completion and should write to the debtors to notify them that all debts up to the completion date are payable to him, and any subsequent invoices to you. Obviously you can send on any cheques you receive for him.

If the vendor has factored the debtors, then the issue will not arise in quite this way, as the debtors will pay the amounts to the factoring company who will then account to the vendor.

If you decide to use factoring as a part of your finance you may find it advantageous to use the current factoring house, since they will already have set up limits for the existing clients of the business. It is highly likely that the vendor will put this to you, possibly being helpful, but possibly also thinking that if you take over the factoring agreements he will collect his money and be off the hook as far as any possible comeback is concerned.

However, the factoring house will consider any deal with you as a brand-new arrangement, so if you agree that you will take over the factoring from the vendor they will make a new advance to you, and you will pay him. There seems no point in doing that. What do you gain? If a debtor defaults, you will suffer whatever clawback may be claimed by the factoring house, whilst the vendor, who has made the profit on the original sale, gets off free and clear. It is much better to agree that the vendor gets the money when, and only when, the debtor pays. As the new owner you have no possible advantage in it being any other way.

In any event, before continuing the arrangement with the present factoring house, you will need to look at alternatives to ensure that the vendor had a good deal. The fact that the factoring house had limits already set up is not a very persuasive argument because a new factoring house, given the client list, could organise limits very quickly.

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