With an Asset Purchase Agreement (“APA”) that involves substantial inventory being sold, provisions in the APA related to that inventory are crucial. The sale of an Amazon FBA business is generally an asset purchase type of agreement since a larger percentage of the value of Amazon FBA businesses is tied into their inventory and IP assets.
For this and other reasons, inventory provisions in the APA must be negotiated carefully. There is usually a large gap in time between the signing of the APA and the closing/consummation of the purchase sale. This time is used to conduct due diligence, confirm information provided by the seller, satisfy contingencies (like obtaining financing), and more. During this time gap, the business is ongoing, and, as such, there are customer purchases and new inventory that arrives. Put another way, inventory is fluid in the ordinary course of business operations.
There are a couple of ways of handling the fluidity of inventory issues. One option is to set a purchase price that is based on providing an inventory between a designated value range. In that case, the parties would negotiate a provision something like this:
“Seller shall use commercially reasonable efforts to manage its purchases and sale of inventory in the Business such that the value of the Transferred Inventory at the Closing shall not be more than $NUMBER less or more than the Base Inventory Value unless the Seller has received the written consent of the Buyer …”
A more common method is to negotiate a price adjustment based on an actual inventory count done on — or shortly before — the date of Closing. Based on the inventory count, the purchase price is adjusted based on the result. Finality and certainty are a couple of advantages to “day-of” inventory counts, along with the fact that the SELLER conducts the inventory count.
Another option is to negotiate an inventory count for sometime AFTER after the Closing — even a month or two after the Closing. In those circumstances, a portion of the purchase price will be held back to be reconciled once the inventory count is taken. This can be a better solution, depending on the inventory. Some incoming inventory might be in transit from a supplier, might not arrive, might be defective or non-saleable when it arrives, might be under consignment, etc. Where the inventory count is done after the Closing, the BUYER conducts the count. Typically, the process involves:
- Buyer provides a report or list to the seller within the specified number of days
- Seller can accept or object
- If there is a dispute, a mechanism has been negotiated to resolve the dispute
- Eventually, any dispute is resolved, and the inventory is reconciled
- Seller receives the adjusted portion of the holdback money
Price adjustment provisions can be difficult to negotiate depending on how many total different items of inventory are being purchased. Further, disagreements often involve the basis for the value/price inventory items being adjusted. Usually, the basis is cost-price to the seller. But, some buyers want a discount, and sometimes, sellers want the basis to be price-as-sold-to-customer. Other issues that can become difficult to resolve include price-to-be-paid for “slow-moving” and obsolete inventory. Those can have value, but some buyers want to exclude them entirely or want a severe price discount
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