Stock at valuation and working capital: the cash on top of the price

You have agreed a price, the lender is lined up, and then the agreement reads “plus stock at valuation”. For many buyers of established New Zealand businesses, that line, and the cash needed to run the business in its first two months, turns out to be the part of the deal they under-funded.

This guide explains how stock is priced and counted in a typical NZ business sale, why you start with an empty debtors ledger, and how to size the funding so settlement day holds no surprises.

What does “plus stock” actually mean in an NZ business sale?

Most small and mid-market business sales in New Zealand use the Auckland District Law Society (ADLS) Agreement for Sale and Purchase of a Business, or a lawyer-drafted variation of it. The price is split into parts:

• Goodwill and intangibles — the brand, customer relationships, systems and supplier terms.
• Plant, equipment and chattels — the tangible assets listed in a schedule.
• Stock-in-trade — shown as an estimate, not a fixed number.

The stock estimate is the vendor’s view of the value of stock on hand when they sign. It is not what you pay. The real figure comes from a stocktake on or just before the possession date, valued on the basis the agreement specifies, which is usually cost rather than retail, with allowances for damaged, obsolete or slow-moving lines.

That creates two uncertainties for a buyer: the count could come in higher than the estimate, and the value placed on older stock is open to argument.

How does the stocktake work?

The agreement normally says the stock will be counted jointly by the vendor and purchaser, or by people they appoint. Many buyers use a professional stocktaking service, particularly for retail, hospitality supply, hardware, pharmacy and wholesale businesses with thousands of lines.

Points to settle before you sign, not the night before possession:

1. The date and time of the count. Ideally after close of trade on the last day, so nothing sells between count and handover.
2. The valuation basis. Cost price excluding GST is common. Confirm whether freight-in and import costs are included.
3. What counts as saleable. Agree how damaged, expired, seasonal or discontinued lines are treated. “Reasonable allowances” is vague; a written write-down schedule is better.
4. Consignment and customer-owned stock. Goods held for others, or already paid for by customers, should not be in your count.
5. Who pays for the stocktaker. Often split, but it is a negotiation point.
6. The dispute route. Most agreements provide for an independent valuer if the parties cannot agree.

What is the maximum stock percentage?

This is the clause that protects your cash plan. The agreement can set a percentage above the estimate beyond which you are not obliged to take the stock.

A simple illustration: the estimate is $150k and the maximum is 10%. You are committed to taking up to $165k of stock. If the count comes in at $180k, you can accept the extra $15k or nominate lines for the vendor to keep, bringing the value back within the limit. The window to make that choice after the count is usually short (a matter of working days), and silence is often treated as acceptance.

Two practical consequences:

• Budget for the maximum, not the estimate. If your funding only covers the estimate, a strong trading month before settlement can leave you short.
• Watch for stock-loading. A vendor can build up stock ahead of the count. The percentage cap limits the damage, but you can also negotiate a minimum stock level so the business isn’t handed over with bare shelves.

Your lawyer will often hold an amount in trust at settlement to cover the gap between estimate and count while the final figure is confirmed. That money still needs to be available on the day.

Why is working capital the part buyers forget?

In an asset purchase, the usual position is that the vendor keeps the debtors and the creditors. The vendor collects what customers owed up to settlement and pays their own suppliers. That is clean from a legal point of view, but it means you take over a business with:

• no money coming in from sales made before settlement;
• full costs from day one: wages, rent, power, insurance, software subscriptions;
• new supplier accounts that may start on tighter terms, or cash on delivery, until you have a trading history with them.

If the business sells on 20th-of-the-month terms and customers actually pay in 45 to 60 days, you could be two months into ownership before receipts settle into their normal rhythm. The profit shown in the information memorandum is real, but it arrives later than the bills.

Our guide to debtor management for SMEs covers how to shorten that gap once you own the business. At the purchase stage, the job is to fund it.

What else changes the cash needed at settlement?

Holiday pay for transferring staff. Under Employment New Zealand guidance on restructuring when a business is sold or transferred, most employees only carry continuous employment to the new owner if the old and new employers agree. Where you agree to take on accrued annual leave, buyers commonly negotiate a matching reduction in the price, so it is your cash (not the vendor’s) that pays when staff take that leave.

GST. Inland Revenue treats the sale of a going concern between two GST-registered parties as zero-rated, provided every condition is met at settlement. If the deal fails a condition, for example the business stopped trading before handover, GST at 15% applies to the whole price, stock included. You would normally claim it back, but you still need the cash in the meantime.

Purchase price allocation. Where the total price is $1m or more, Inland Revenue’s purchase price allocation rules apply, and trading stock is one of the categories that must be allocated. If the parties haven’t agreed an allocation, the vendor has three months from settlement to set it, then the buyer has a further three months. Agreeing the stock figure in the agreement avoids a tax disagreement later.

Prepayments and adjustments. Rent paid in advance, deposits held by landlords, and subscriptions are often apportioned at settlement and can move the final number either way.

How much should you fund on top of the price?

A disciplined buyer builds a settlement budget with four lines:

The working capital figure is best built from a week-by-week forecast rather than a rule of thumb. Our 13-week cash flow forecast guide shows how to model receipts in the week they actually arrive. For the purchase, start the debtors column at zero.

If you are still testing whether the price is fair, how to value a small business and our due diligence checklist should come first. Stock levels and stock turn are worth checking against the last three years of accounts in any case.

Already under contract with a finance condition running? Start a 60-second enquiry and we can look at funding the whole settlement, not just the headline price.

A worked example

Illustrative scenario only. Not a client.

A buyer agrees to purchase a building-supplies distributor in the Bay of Plenty for $900k plus stock, which is estimated at $220k with a 10% maximum stock percentage. The business turns over about $250k a month, and trade customers pay in roughly 45 days on average. Eight staff transfer, and the vendor agrees to a price reduction of $28k for their accrued annual leave.

The buyer’s settlement budget:

• Price: $900k
• Stock at the cap: $242k (the count came in at $236k)
• Holiday pay adjustment: minus $28k from the price, held back as cash for when staff take leave
• Working capital: about eight weeks of wages, rent and supplier payments before trade receipts settle, modelled at roughly $300k, because two key suppliers moved the new entity to 7-day terms for the first quarter
• Costs: legal, stocktaker and accountant fees

The buyer had arranged funding against the price and the stock estimate only. The working capital line, which was the largest surprise, was covered by a separate facility secured on the buyer’s home, arranged before the finance condition expired. Without it, the buyer would have been chasing trade customers for payment in week three while facing the second fortnightly payroll.

The lesson isn’t that the deal was risky. The business was sound. The funding simply needed to match how cash moves in the first 60 days, not how profit shows on the annual accounts.

How do lenders look at stock and working capital in an acquisition?

Lenders separate the purchase into what they can take security over and what they can’t:

• Goodwill supports limited borrowing on its own, which is why many acquisitions are funded against property. See using property as security for a business loan.
• Stock has value, but lenders discount it heavily because it is hard to realise at book value.
• Working capital is judged on the business’s cash flow and the buyer’s experience, and is often better suited to a revolving facility or a separate loan than to the main purchase loan.

Our page on funding to buy an established business explains the structures in more detail, and working capital finance covers facilities that suit the first months of ownership. Unsecured and property-secured options range from $20k to $1m, and property-secured funding can in some cases settle within 24 hours of approval, which matters when a finance condition date is close.

Before your finance condition runs out: see if you qualify

The stock clause and the first 60 days of cash are where good acquisitions come under strain. If you know the maximum stock figure, the staff liabilities and roughly how long until your own invoices are paid, you already have most of what we need to look at funding the whole settlement properly.

Here is how it works:

• The enquiry takes about 60 seconds, and there’s no credit check when you first enquire.
• We won’t send your details to a pile of lenders or sell them on. Your phone won’t light up with calls from people you’ve never heard of.
• A real person reviews your purchase, whether it’s a price-plus-stock deal, a partner buyout or a bolt-on acquisition, and calls you to talk it through.
• Please fill the form in accurately: the price, the stock estimate and the settlement date help us match the right option the first time.

See if you qualify →