Paid on top, counted at settlement.
In many business sales the price is for the business, its goodwill and plant, and the stock is paid for in addition, valued at its actual level at settlement. The usual mechanism is a stocktake carried out by the parties the day before settlement, so the buyer pays for the stock that is actually there. A maximum stock figure is often set in the contract so the buyer is not forced to pay for more stock than it wants, and the seller keeps trading normally so there is enough stock to carry on. We set these terms in the contract through our business sale and purchase service.
Valuation and the tax angle.
Where the parties deal at arm's length, the value they put on the stock in the contract is usually accepted, though the ATO can apply market value. There are planning options too: excluding stock from the sale and letting the buyer take it on consignment can defer the tax on it, and a seller who sells trading stock for less than its cost can claim the shortfall as a deduction. These are points to settle with your accountant, because they change the tax for both sides.
Why it is worth pinning down.
Stock is one of the most common sources of a last-minute settlement dispute, because the amount and value are not known until the stocktake. Agreeing the method, the cap and who bears the cost of counting avoids an argument on the day. It also matters most where stock is a large part of the business, such as retail, where the adjustment can be significant.
Without a maximum stock figure, a buyer can be made to pay for more stock than it wants at settlement. Agree the cap and the stocktake method in the contract, not on the day.
Law referenced: Income Tax Assessment Act 1997.