Does Your Asset Purchase Agreement Address the Transfer of Inventory?

Checklist: What to Confirm About Inventory Before You Sign an Asset Purchase Agreement

• Define what counts as inventory.
• Identify what is excluded.
• Check whether the inventory list will be documented in a schedule.
• Decide whether you will participate in the physical count.
• Verify where the inventory is stored.
• Confirm whether bailment agreements exist.
• Review the condition of inventory.
• Check whether packaging components will transfer.
• Determine how work in progress will be valued.

Welcome back to our ongoing series for business owners, “What’s Missing from Your Asset Purchase Agreement.” Today, we answer a direct question that shapes price and risk in an asset acquisition: Does your agreement address how inventory is transferred, counted, and paid for?

If you are the buyer, you want to avoid paying for units that do not exist, cannot be sold, or have already been allocated to customers. If you are the seller, you want clear rules that produce a predictable number at closing and prevent disputes about what inventory is included in the sale.

We outline the steps that keep inventory included in line with the purchase agreement, from defining specific assets to practical count procedures, so you can reach closing with predictable terms and fewer surprises.

What Counts as “Inventory” in an Asset Deal

Inventory means the goods held for use or for sale in the business, wherever they are located. Here are a few examples:

• Raw materials: Bolts for a metal fabrication shop, green coffee beans for a roastery, APIs for a pharmaceutical manufacturer.
• Work in progress (WIP): partially completed work, such as products still moving through assembly and service projects that have been started but not yet delivered.
• Finished goods: Completed units ready for sale, including boxed products, bottled lots, and sealed kits.
• Spare parts and service parts: Items kept to support ongoing sales or warranty in the ordinary course of the business.
• Returns eligible for resale: Customer returns that pass inspection and can be resold after re-boxing.
• Packaging and labeling supplies: Boxes, inserts, sleeves, and labels that ship with current products.

Some materials look like inventory but should be treated differently under the purchase agreement so the inventory schedule remains clean and verifiable:

• Tools, molds, dies, fixtures: Typically tangible assets, not inventory.
• Maintenance, repair, and operations (MRO) supplies: Cleaning chemicals and lubricants, usually excluded or valued separately.
• Marketing samples and demo units: Often expensed and not resalable.
• Software keys, digital files, licenses: Handled as intellectual property (IP) or licenses, not inventory.
• Customer-furnished materials: Remain the customer’s property unless title is assigned in writing.
• Obsolete, expired, or damaged stock: Exclude or reserve so the number reflects items salable in the ordinary course.

How Will the Inventory Be Documented for the Sale?

Now that you have a clear sense of what belongs in the inventory list, the next step is documenting it inside the purchase agreement.

This is done through a schedule, which is a numbered exhibit attached to the contract. It is simply a table that identifies the inventory included in the asset purchase, describes the specific assets being transferred, and sets the figure the parties agree will be used as inventory value at closing.

That brings you to the practical question, which is who actually counts the items.

As the buyer, you need to decide whether you will accept the quantities the seller provides or whether you will be involved in the count so the schedule reflects what is actually on hand at closing.

Who Will Verify the Physical Existence of the Inventory?

If you, the buyer, do not verify the physical stock, you will be relying entirely on the seller’s internal counts. Those counts may not reflect what is actually on the shelf on the day of closing, which affects the inventory value assigned to the purchased assets under the purchase agreement. Verification gives you control over three points:

• What you are paying for: A count confirms that the items listed in the schedule exist in the stated quantities and are located where the seller’s agreement says they are.
• Whether the inventory matches the condition described in the purchase agreement: It allows you to identify obsolete, expired, or damaged units so that such inventory does not inflate the price.
• How the final price will be adjusted: Any shortage or difference from book value found during the count affects the closing adjustment the parties agree to.

In most asset purchase agreements, verification is shared. The seller performs the initial count, and the buyer participates or brings in a third party so the inventory included in the purchased assets is confirmed before the transaction closes.

If the Inventory Is Not on the Seller’s Property, What Happens Next?

When inventory is part of an asset purchase, you are not only buying what sits on the seller’s shelves. You are also inheriting the logistics behind it. That is why you need to know whether any portion of the seller’s inventory is stored with a warehouse, a contract manufacturer, or a fulfillment partner.

If third parties are holding the purchased assets, you, the buyer, need clarity on access, control, and any lien rights those third parties may assert. A bailment agreement evidences that the goods are held for the seller’s benefit, but release may still be subject to warehouse, carrier, or contractor liens unless those are waived or satisfied.

Without a bailment agreement, you risk paying for inventory included in the purchase agreement that cannot be released at closing until someone settles old obligations.

Packaging raises the same problem from a different angle. It may look like a small category, but it supports the finished goods the buyer expects to start selling immediately after the transaction.

If the inventory consists of boxed items or products that require branded sleeves, inserts, or bottles, that packaging needs to transfer as part of the purchased assets.

You need to know whether the packaging is generic or branded, whether it matches the products included in the asset acquisition, and whether the quantities on hand match the records in the seller’s balance sheet. Missing packaging can stall day-one operations and create unnecessary cost adjustments at closing.

Key points to confirm:

• Who holds the inventory stored off-site, and what rights those third parties have.
• Whether a bailment agreement exists so such inventory can be released to the buyer at closing.
• Whether packaging is branded or generic, and whether it matches the finished goods being transferred.
• Whether the quantity of packaging aligns with the inventory value used in the purchase agreement.

Final Thoughts

We hope this article clarified how inventory should transfer in an asset purchase agreement and why the details matter for both sides of an asset acquisition. Our New York and New Jersey business attorneys can help you review the schedules, compare the figures against the seller’s balance sheet, and confirm that the purchased assets you expect to receive match what the seller agrees to deliver.

Our next article addresses another question that affects pricing and risk: Does your agreement address the transfer of guarantees and warranties?

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the clarity they need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®

FAQs

How Do Buyers and Sellers Usually Agree on the Final Inventory Value?

The final inventory value is rarely a single fixed number, because both sides want the figure to reflect what is actually on hand at closing. Most asset purchase agreements rely on a schedule that lists quantities and values using methods such as book value, standard cost, or a market-based adjustment if certain items cannot be sold in the ordinary course. At closing, the count is compared against this schedule, and the price is adjusted up or down based on agreed rules. A well-drafted agreement makes these calculations clear so neither side is surprised by the final number.

Do We Need a Separate Count at Closing, Even if the Seller Provided Numbers at Signing?

In most transactions, the signing numbers are estimates. Because sales, receipts, and production continue, the parties either perform a physical count close to closing with buyer observation rights, or they use an earlier count and roll forward to the closing date. That approach verifies what the buyer is purchasing and reduces disputes about missing or outdated quantities. The agreement should specify timing, who can attend, and how differences are resolved.

What Happens if the Physical Inventory Count Is Different From the Seller’s Records?

Most agreements compare the physical count to the inventory schedule and adjust the price under agreed thresholds. Common mechanics include:

• Shortages below agreed levels reduce the price.
  
  
• Overages may increase the price only if the parties agreed to value excess stock and it meets condition and age criteria.
  
  
• Disputes are handled through a short review period, escalation to CFOs or an independent accountant, and binding determination for the adjustment. Materiality thresholds and caps prevent small variances from triggering a price swing.

How Is Work in Progress (WIP) Valued in an Asset Purchase Agreement?

WIP sits between raw materials and finished goods, so its value must be defined. Parties may use percent-complete or cost-to-complete methods tied to production or project records, and they specify which costs count, such as direct materials and labor, and whether overhead or profit is included or excluded. Manufacturing and service WIP often require different rules. Clear definitions and examples prevent disputes about partially built products or in-process service engagements during the closing adjustment.

What if Some of the Inventory Is Obsolete, Expired, or Slow-Moving?

Obsolete or slow-moving inventory is usually excluded from full valuation because it cannot be sold in the ordinary course and should not inflate the price. Parties often use one of three approaches:

• Exclude the items entirely from the purchase.
  
  
• Apply a discount or reserve, reducing the value assigned to those units.
  
  
• Set inspection criteria so the buyer can confirm the condition of the stock before closing.

Addressing these categories up front prevents the buyer from paying full price for inventory that is unlikely to generate revenue and protects the seller from disputes raised late in the deal process.