SAV, or stock at valuation, places a price or value on any stock the company has before being sold. Typically, the valuation is conducted just before the sale of the business and determines the final sum the seller needs to pay for the company. The valuation is vital to helping potential buyers determine the value of the business and whether it is a price they are willing to pay. It can also indicate any additional costs you might need to consider after purchasing the business, such as removing out of date stock or selling it quickly.
Today, we dive in to look at SAV in more detail, including its definition, why it is important, and how you calculate SAV.
What Does SAV Mean?
SAV stands for stock at valuation and is the value or price given to stock held by a company. It refers to the stock value just before the sale of a business. This is not included in the selling price for the business.
Once the stock valuation is complete, the cost price of the business will be adjusted for the buyer. When selling a business, the price of the business is considered, but the stock valuation is, too. It allows a potential buyer to see if there is any unsalable stock, more stock than anticipated, how easy buying stock and selling it could be, and the potential resale value of the stock.
The timing of SAV is important, especially when purchasing a business with perishable items like a restaurant, bakery, or any food and beverage business. You could profit from the stock if the timing is right on the SAV, allowing you to use or sell the stock to other businesses. But if the timing is wrong, you could pay for out of date items that cannot be sold or used, leaving you starting your business on the wrong foot.
Why Is SAV Important To The Sale Of A Business?
SAV is important to selling a business for the business owner and the potential buyer. It allows the buyer to see all of the potential costs involved. Not only will you have to pay the asking price of the business, but the SAV and any over-invested or unsold stock. This can add to your costs and potentially push the business out of your price point. In this instance, SAV provides you with a realistic look at your outgoings to help you decide if this business is worth purchasing.
It also provides you with an opportunity to negotiate the price. You can use the stock’s value, cost of purchasing the business, and other fees to negotiate a lower cost if you think the business is overpriced.
Not only does this allow you to save some money, but if the owner is after a quick sale, it could allow you to get a good deal. When negotiating to consider the SAV carefully, check if any of the stock will be unsalable or difficult to sell before the sell-by date.
SAV is also important as a business owner to ensure that you get the right price for your business and its stock. The stock valuation should be done as close to the sale of the business as possible. This provides you and prospective buyers with an accurate view of the worth of the stock. Businesses with perishable or old stock should have the valuation done to ensure that any depreciation or perishable stock is priced correctly.
How Do You Calculate SAV?
SAV is calculated by an Independent Valuer who specialises in SAV. They will perform a stocktake, looking at not only stock that shareholders possess but also stock the business sells, like perishable items, furniture, or other items the business sells.
The value of the stock is based on the cost price, including freight charges, rather than the selling price. Cost price here refers to the price paid for items from suppliers, wholesalers, and manufacturers.
We recommend having an independent specialise in calculating SAV, but you can do it by listing all the items at their cost price to see their value. Any stock diminishing in value should not be purchased at a cost price.
The price does depend on the stock items and how quickly they date or become unsaleable. The resale value of this stock is determined by their sell-by date. For diminishing value, a figure based on depreciation must be met. A business transfer agent or professional valuer best makes this calculation.
Why Is SAV Valued Separately To The Asking Price Of The Business?
The SAV is valued separately from the asking price of the business for a few reasons. When buying a business, the focus is often on sales, profits, overheads, and margins to a potential buyer rather than stock. Most business valuations are based on these metrics for this reason.
However, stock levels are essential to determine how healthy the business is. Quickly declining stock levels can indicate that a business is liquidating stock to get a higher profit.
The stock levels are used in many situations to show what stock a business purchases, the quantities, and the seasonality of the business, such as if stock levels are high before holidays and then fall. The separate valuation also lets you see if any stock has a short shelf life or is already past a sell-by date. It is essential to look at this so you are not left burdened with stock you cannot use or sell.
Businesses are typically sold for an asking price plus SAV for these reasons.
How Do I Place A Realistic Valuation On My Business?
Placing a realistic valuation on your business is best left to the professionals. Waker Hill are experts at this; working out the value of your business is a breeze to them and will allow you to see how much you could sell your business for realistically.
A realistic valuation not only allows you to see how much you could sell the business for but entices prospective buyers and can help you both have a sale you are happy with.
