Warehouse audit when buying a business: checking inventory value

When buying a business, a buyer usually looks at three things: profit, customers and assets. Among the assets, inventory causes the most arguments, because it is both the largest and the most flexible item to value: its worth depends on cost, on the chance of selling it and on whether it is really on the shelves. And the inventory figure in the seller's balance sheet is not yet its true value. Below is what a warehouse audit when buying a business checks and how to use the result in negotiations.

Why inventory in particular

Inventory often sits in the books at full cost for years: unsold goods, batches nearing expiry, outdated models, returned goods with no paperwork. Goods that no longer exist may remain on the balance sheet, and someone else's goods may be shown as the seller's own. If the stock is spread across several branches, the check is harder still. That is why a buyer accepts inventory not on the seller's word but on the basis of an independent count.

Five questions the auditor seeks to answer

1. Existence: is the stock shown in the records really in the warehouse? A count on an agreed date will show it.
2. Ownership: do the goods belong to the seller? Consignment stock, goods held for others and pledged goods are not part of the assets being bought.
3. Valuation: is cost calculated correctly, are there goods whose price has fallen, how many batches are obsolete or close to expiry?
4. Reliability of records: how closely does the balance in the system match reality, and how often and by whom are stock adjustments entered?
5. Liabilities: debts to suppliers, goods due to be returned, customers' prepaid orders.

How the work proceeds

The work usually runs in three steps. First, on an agreed date, often when the warehouse is not working, at night or at a weekend, the stock is counted and compared with the system. Second, each discrepancy is traced through the paperwork: receipts, issues, returns and write-offs, and who entered them and when. Third, valuation: a list of slow, near-expiry and damaged goods is drawn up and their likely selling price is estimated. At the end, discrepancies are reviewed with the seller; some can be explained, for instance if goods were in transit or at another site.

A hypothetical example

The seller values the warehouse at 2,400 million so'm. An independent audit finds the following (all figures hypothetical):

• goods not found in the count: 4%, or 96 million so'm;
• another company's consignment goods: 10%, or 240 million so'm, included in the inventory total but not owned by the seller;
• goods with no movement for over a year: 15%, or 360 million so'm; to sell them the price must be cut by about half, so the loss is 180 million so'm.

Adjusted value: 2,400 − 96 − 240 − 180 = 1,884 million so'm. The difference is 516 million so'm, about 21.5% below the original valuation. Without an audit the buyer would have overpaid that amount. The valuation method, for example what discount to apply to goods with no movement, is agreed in advance by the parties, because this part rests on professional judgement.

Using the result in negotiations

• Price adjustment: the auditor's findings are grounds for reducing the contract price.
• Count date and closing date: a count attended by both buyer and seller leaves no room for dispute about the balance. Movement between the count and the signing day is accounted for separately.
• Guarantees and payment terms: part of the price may be held back until the audit results are confirmed. Agree such terms with a lawyer.
• The document: a count certificate signed by both sides is a reference point in any later dispute.

What an audit does not settle

An audit assesses inventory and the controls around it. It does not replace a legal review (contracts, title, disputes), a tax review or a financial audit of the whole business. Those are usually carried out by separate specialists, and the warehouse audit becomes one part of the overall picture. For confidentiality the work is done under an NDA, and access to the seller's and the buyer's data is restricted.

Conclusion

Inventory is one of the hardest parts of an acquired business to value. Only after checking existence, ownership, valuation and the reliability of records can a price be stated with reason. OmborAudit carries out an independent count, reconciles it with the accounting system and hands over discrepancies as documents, so in negotiations both sides rely on the same figures.