Due Diligence

Inventory Due Diligence

Learn to verify inventory (does it exist, is it sellable, is it valued honestly) so you don't pay dollar-for-dollar for dead stock and padding.

  • Intermediate
  • 10 min total
  • 12 chapters

What decision this helps you make: What a business's inventory is *really* worth: the sellable value, not the book value.

What this topic is

Inventory due diligence verifies that inventory on the books actually exists (physical count), is sellable (aging and sell-through), and is valued honestly (lower of cost or net realizable value), and not padded with dead, obsolete, or missing stock.

Why it matters

Inventory is one of the easiest assets to overstate, and buyers often pay near dollar-for-dollar for it. Overstated inventory is a direct overpayment: you pay real money for stock that's obsolete, damaged, or simply not there.

Who should learn it

Anyone buying, lending against, or valuing a business that holds inventory.

What you will understand

  • Understand the three inventory questions: exists, sellable, valued honestly
  • See why inventory is so easy to overstate
  • Learn to verify: physical count, aging, sell-through, lower-of-cost-or-NRV
  • Avoid paying dollar-for-dollar for dead stock

Prerequisites

Common misconception

"The balance sheet says $500K of inventory, so that's a $500K asset." Not necessarily. Some of it may be obsolete or unsellable (dead stock), some may be on the books but not on the shelf (shrinkage, errors, misstatement), and it should be valued at what it can actually sell for, not optimistic cost. The real, sellable value can be far below the book number, and in a deal, you often pay for the difference.