What is Inventory Consignment in Business Purchases?

What is Inventory Consignment in Business Purchases?

What is Inventory Consignment in Business Purchases?

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Inventory consignment in business purchases is a practical way to reduce initial cash outlay when acquiring a business. By keeping ownership of inventory with the seller until items are sold, buyers can maintain cash flow and manage costs more effectively. This article breaks down how inventory consignment works, its potential risks, and provides essential tips for both buyers and sellers to navigate a successful consignment arrangement.

Understanding Inventory Consignment in Business Purchases

When structuring inventory consignment in business purchases, buyers and sellers agree that the seller will retain ownership of the inventory. This consignment structure benefits buyers by allowing them to pay only for sold items, which helps avoid large upfront costs.

Example: How Inventory Consignment Works

Consider a seller who values their inventory at $400,000 alongside a $1.3 million purchase price. In an inventory consignment model:

  • Title Retention: The seller retains ownership until items are sold.
  • Payment as Sold: Buyers pay only the cost price for sold inventory, not the full retail value.
  • Defined Consignment Period: A timeline is set based on the business’s historical turnover rate, creating an efficient payment structure.

For businesses with high inventory values, this model allows buyers to maintain cash flow by deferring large payments until sales are made.

Benefits of Inventory Consignment for Buyers

Inventory consignment in business purchases provides a lower-risk approach for buyers, particularly when dealing with slow-moving or obsolete inventory:

  • Payment Tied to Sales: Buyers pay only for inventory that sells, reducing the risk of covering unsellable stock.
  • Return Option for Unsold Inventory: At the end of the consignment period, unsold items can be returned to the seller, minimizing expenses for the buyer.

By avoiding seller financing or outright purchase of inventory, consignment arrangements can alleviate financial pressures for buyers early in the acquisition process.

Seller Risks in Inventory Consignment and Mitigation Strategies

Inventory consignment in business purchases, while beneficial to buyers, poses certain risks to sellers. Sellers may face issues with unreported inventory sales or unsold stock returns. To mitigate these risks, sellers should consider:

  • Regular Payment Intervals: Monthly or even weekly reconciliations can ensure prompt payments and allow sellers to track inventory turnover.
  • Setting a Balanced Consignment Term: Sellers typically prefer a period that matches the business’s inventory turnover rate. For example, a one-year consignment term may be appropriate if inventory cycles every six months.

Sellers also face the potential return of unsold inventory, making it essential to agree on a consignment term that balances both parties’ needs.

Explore more inventory consignment risks

Best Practices for Effective Inventory Consignment in Business Purchases

To ensure a successful inventory consignment in business purchases, buyers and sellers should follow these best practices:

  1. Conduct Thorough Inventory Due Diligence: Buyers should assess the inventory to identify any outdated or unsellable items. This sets realistic expectations and minimizes disputes over inventory value.
  2. Agree on a Flexible Consignment Period: Set a consignment term that reflects the business’s historical inventory turnover rate. For example, companies with a biannual inventory cycle might need a one-year consignment period.
  3. Document Payment and Ownership Terms: Establish clear payment schedules, valuations at cost, and a process for unsold stock returns. This documentation provides transparency and aligns expectations for both parties.
  4. Prepare for Seller Financing Alternatives: If a seller hesitates on consignment, consider seller-financed inventory as a fallback option. While less ideal, it allows buyers to manage costs for high-value stock.

Learn more about consignment agreements

Key Takeaways

Inventory consignment in business purchases offers a flexible approach that benefits both buyers and sellers. Buyers can lower upfront costs and align payments with sales, while sellers retain ownership until items are sold. By understanding sales cycles, negotiating reasonable terms, and keeping communication clear, inventory consignment can be a beneficial arrangement for all involved.


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Picture of Meet Roland Frasier

Meet Roland Frasier

Roland Frasier is an investor and business strategist with over 1,000 acquisitions and exits completed for himself and his clients.

His current portfolio companies include real estate, restaurants, business and home services, events, eLearning, e-commerce, franchise and SaaS businesses.

He has been a principle of 6 different Inc. fastest growing companies and serves on the Stanford University Advisory Board for Global Projects and their Family Office Steering Committee.

He has been featured in Business Insider, Fast Company, Forbes, Entrepreneur, Inc, Yahoo Finance and has appeared on all major television networks.

Roland has interviewed Sir Richard Branson, Sarah Blakely, Arnold Schwarzenegger, Martha Stewart, Magic Johnson and other business celebrities, many on his award winning Business Lunch podcast.

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