Why Inventory Valuation Method Matters More Than You Think at Closing

Inventory is usually treated as an afterthought in a letter of intent — a line that says "inventory to be valued at closing" with no further detail. That single omission is where deals get renegotiated in the final week, because how inventory gets priced is a separate decision from how much of it there is. A shop with $400,000 sitting on shelves can see that figure move materially depending on whether it's priced at cost, at lower of cost or market, or at net realizable value, and nobody wrote down which method applies until the buyer's accountant asks.

This matters most on deals where inventory makes up a large share of what's being purchased relative to revenue — distributors, retailers, parts suppliers, anyone carrying stock rather than selling services. On a deal with a high inventory-to-revenue ratio, the valuation method chosen for that inventory line can move net proceeds by a meaningful percentage of the total deal, simply because the inventory itself is a large percentage of the deal.

The three methods, and why they don't agree

Each method starts from a different question, and none of them is wrong — they're just answering different things.

Cost

This is what the seller actually paid for the goods, straight from purchase invoices or the accounting system's inventory ledger. It's the simplest number to produce and the hardest for a buyer to argue with on paper, but it says nothing about whether that inventory can still be sold for what it cost.

Lower of cost or market

This method compares the recorded cost against current replacement or market value and uses whichever is lower. It's a conservative convention meant to prevent a seller from walking away with a inflated inventory figure for stock that's become slow-moving, seasonal, or partially obsolete since it was purchased.

Net realizable value

This is the estimated selling price of the inventory minus whatever it will cost to actually sell it — markdowns, disposal costs, selling expenses. It's the most buyer-favorable of the three in most cases, because it discounts for the real-world friction of turning shelf stock into cash.

None of these methods is dictated by a universal rule the way SDE add-backs are defined by the IBBA's standard method. Inventory valuation is a negotiated term of the deal, which is exactly why it needs to be settled in the letter of intent rather than left as boilerplate.

Where the dispute actually happens

The fight rarely happens over the method itself — everyone can agree in principle to

This guide is for informational purposes only. It is not financial, legal, or business-brokerage advice, and it is not a formal valuation or appraisal. What a business actually sells for is set by a specific buyer, a specific lender, and a specific deal — no article or calculator can know that in advance, and we say so instead of pretending otherwise.

Last reviewed: September 2026 · Against primary sources cited in the body.