Stocktake vs WIWO
When selling or purchasing a business, you will need to determine the best approach to handling stock under the contract of sale. Stock generally refers to the inventory or goods that a business holds for sale or use in its operations. Depending on the type of business you are dealing with, stock can be included in the purchase price (‘walk in walk out’), or the contract can be subject to stocktake where the buyer must pay the purchase price and the value of the stock as determined during the stocktake.
Walk in walk out (‘WIWO’)
Businesses that are usually sold on a WIWO basis are typically service businesses or businesses where stock is not heavily relied upon. This may include gyms, online businesses who use drop shipping and creative businesses like graphic designers or marketing agencies. WIWO contracts works best for these types of businesses however, any business can be dealt with on a WIWO out basis if the parties elect to proceed with this approach. It will be up to the seller of the business to determine whether this is the best approach for their business.
For a stock reliant business, the purchase price will need to account for the included stock to ensure that the seller receives the full value of the stock in addition to their desired purchase price if the seller elects to sell on a WIWO basis. It is important to note that stock levels and demand may change between the contract date and the settlement date. The seller must consider this risk prior to proceeding with a WIWO contract, especially when demand is high, and the prospect of ordering excess stock may be attractive.
From the buyer’s perspective, a WIWO contract for a stock reliant business can also be risky. When the purchase price is inclusive of stock, there is no standard stock minimum under the contract. In such scenarios, it is recommended that a special condition is inserted into the contract requiring the seller to hand over the business with a minimum stock amount to ensure that the seller is not substantially reducing stock prior to settlement, leaving the buyer with insufficient stock to operate the business upon settlement.
There may also be tax implications associated with selling a business with stock as a WIWO contract and recommend you consult an accountant prior to agreeing to proceed with this approach.
Stocktake
When a business is sold subject to stocktake, this generally means that the purchase price does not include stock in which case a stocktake is undertaken prior to settlement with the value of the stock being in addition to the purchase price under the contract. Selling subject to stocktake is ideal for most businesses who are stock reliant. This may include convenience stores, clothing retailers and cafes/restaurants.
Stocktake is generally undertaken the day prior to settlement. This can be arranged between the parties or, if the parties elect, undertaken by an independent stocktake where the cost of the third-party valuer is usually split between the parties.
Under a standard contract, there is usually a stock maximum. The buyer is only required to pay the maximum amount nominated under the contract regardless of whether the value of the stock exceeds the maximum specified amount. If the stock were to exceed the stock maximum, the buyer may reject stock to reduce the value to the stock maximum and if the seller fails to remove the rejected stock by settlement, possession of the rejected stock transfers to the buyer at no additional charge. It is therefore essential that sellers manage their stock throughout the contract process to prevent stock from exceeding the stock maximum. In the event that the stocktake determines that the stock value is less than the maximum, the buyer is only required to pay the value of the stock as determined at stocktake.
Buyers must ensure that a stock maximum is nominated under the contract. If there is no stock maximum, the total value of the stock may exceed the funds available to the buyer therefore, placing the buyer in a position where they cannot complete settlement and at risk of defaulting under the contract. Buyers also must consider that stamp duty is payable on the total consideration of the purchase which will include not only the purchase price but also the value of the stock.
Our team at The Small Business Lawyer have significant experience and expertise dealing in business transactions. Please feel free to book in a free 20-minture consult to discuss which approach would work best for your business.
