Competitor grossly overstating value of stock on balance sheet

Discussion in 'Accounts & Finance' started by singlemalt, Feb 19, 2021.

  1. singlemalt

    singlemalt UKBF Newcomer Free Member

    10 1
    I have a competitor who has, for a number of years, grossly overstated the stock on their balance sheet. I know this because I know their stock, I've been in their stock room and I'm very familiar with what it's all worth, as I'm dealing in the same products.

    They have stated, for years, that their stock has a value of ~£250,000 on their filed balance sheet. But I would estimate it at no more than £40,000.

    Question:

    1. Is this affording them a tax advantage, or any other unfair advantage over my business?

    2. Are they committing any sort of offence in misstating the value?

    I believe the reason they are in this position is because they probably did have £250k of stock 20 years ago, when the industry we are in was very different (it's declined over the years) but they have never done a proper stock take. When the accountants have drawn up the balance sheet annually they've just said, oh, the stock's similar to last year. And carried this on.

    Be interested in any feedback on this. Many thanks.
     
    Posted: Feb 19, 2021 By: singlemalt Member since: Nov 3, 2014
    #1
  2. Mr D

    Mr D UKBF Legend Free Member

    27,231 3,345
    How would they have an advantage? Like you they are using cost of goods sold?
     
    Posted: Feb 19, 2021 By: Mr D Member since: Feb 12, 2017
    #2
  3. The Byre

    The Byre UKBF Legend Full Member

    10,827 4,632
    It can be all sorts of funky things going on - but my 30 cents worth would be that c.a. £200k was sold off bit-by-bit over the years without going through the books. Then you have a problem - how to add stock without those purchases also going through the books?
     
    Posted: Feb 19, 2021 By: The Byre Member since: Aug 13, 2013
    #3
  4. singlemalt

    singlemalt UKBF Newcomer Free Member

    10 1
    Could they be reducing their tax bill?

    Or, it could improve their credit worthiness as they have a much stronger balance sheet, so they can finance the business more effectively than I can?

    I cant believe it's right or fair?
     
    Posted: Feb 19, 2021 By: singlemalt Member since: Nov 3, 2014
    #4
  5. Mr D

    Mr D UKBF Legend Free Member

    27,231 3,345
    Perhaps something for their shareholders or HMRC to look at.
     
    Posted: Feb 19, 2021 By: Mr D Member since: Feb 12, 2017
    #5
  6. MBE2017

    MBE2017 UKBF Ace Free Member

    2,125 807
    Incorrect valuation would have an effect on both the company valuation plus its perceived profitability. I would concentrate on your own business, any company doing this deliberately or not is badly run, and will have a myriad of problems.
     
    Posted: Feb 19, 2021 By: MBE2017 Member since: Feb 16, 2017
    #6
  7. STDFR33

    STDFR33 UKBF Big Shot Free Member

    4,614 1,232
    Holding more stock on the balance sheet won’t reduce the tax.
     
    Posted: Feb 19, 2021 By: STDFR33 Member since: Aug 7, 2016
    #7
  8. thevaliant

    thevaliant UKBF Regular Free Member

    113 28
    IF (And its a very big IF) your figures are right then:
    1. It will afford them a massive tax DISadvantage as they should have been writing this stock down over the last twenty years and claiming tax relief. They may well find they have paid (over the last twenty years) about £40k more tax than they should've.

    2. It's in breach of the directors duties to present accounts that are true and fair. This might even be a criminal offence (no idea) but its the usual dead letter in law. It might be illegal, or unlawful, but no one will do anything about it.

    What is likely to happen is that one day they want to sell/retire and suddenly the whole thing will come out, causing them to either be forced to restate their accounts or perform a massive write off in the current year (they should do a prior year adjustment, but probably won't).
    But it'll just be an massive internal bust up that you'll probably never hear about except as a note in the accounts, "Exceptional stock write off".
     
    Posted: Feb 19, 2021 By: thevaliant Member since: Dec 9, 2008
    #8
  9. singlemalt

    singlemalt UKBF Newcomer Free Member

    10 1
    Thanks for all the info everyone.

    I can forget about it....!
     
    Posted: Feb 19, 2021 By: singlemalt Member since: Nov 3, 2014
    #9
  10. SillyBill

    SillyBill UKBF Regular Free Member

    358 196
    We made an enquiry to acquire a very small company a few years back (as a bolt-on for its customer list) that had a ridiculous stock value...c. £1M on a T/O of £150k and a net profit of £60k. TBH I wouldn't have turned up if I had known those were the headline numbers, clearly ridiculous.

    Laughed the guy out the room and walked out when he said he wanted stock paid for at the balance sheet value (i.e. £1M) + a price for the business itself. Yeah right...so in 17 years with your net profit maintained I'll be somewhere close to buying your stock and wiping my face. Where do these idiots come from? Never did sell his business to my knowledge. Was listed for years after. This delusion is not uncommon sadly. Like dealing with hoarders who think they are sat on a gold pile when another sees it for what it is...junk. High stock value that is not in proportion to a debtor book is a massive red flag, indicates you are sitting on crap that you haven't sold in donkeys years or you haven't been writing down/off as you should. It is a liability to get rid of at cost or dispose of, not an asset.

    I've bought a few businesses and at the enquiry stage stock is one of the clearest indicators you can have as to whether you are dealing with amateurs or people who know business in terms of how it is approached.
     
    Posted: Feb 19, 2021 By: SillyBill Member since: Dec 11, 2019
    #10
  11. Spur Support Services

    Spur Support Services UKBF Regular Free Member

    195 41
    Higher stock is increasing their profit and therefore their tax bill, as it carries the costs forward.

    There may be practical reasons for making the business seem more profitable, normally meeting investor expectations,
    In these bizarre times, that may even include the access to Covid support, in which case HMRC would be concerned.
    As others have said the balance sheet should be true and fair.

    I agree with SillyBill's comments on stock at point of a business sale. Any buyer of the business would reassess the value of that stock, irrespective of the value stated in the balance sheet

    However, I would be very careful about assuming that you have sight of all their stock and stock locations.

    If they hold high stock, they should benefit from being able to fulfil orders faster, but will have more storage costs.
     
    Posted: Feb 20, 2021 By: Spur Support Services Member since: Aug 21, 2020
    #11
  12. Clinton

    Clinton UKBF Legend Full Member

    5,162 2,334
    You would think so, wouldn't you?! That would be the normal thing to do.

    Yet we see time and time again, even here on UKBF, plonkers who get so excited about acquiring a certain business that they make excuse after excuse in order to just proceed with the transaction (but this usually happens only in the micro business market, the sub £1m deals).

    And if a vendor says, "This is how much I want for the stock because this is how much I paid for it", said plonker will just go along with that rather than getting stock revalued.

    How do you find such plonkers when looking to sell a business? I've no idea but if I find the formula, I'll bottle it and advertise the product in UKBF.
     
    Posted: Feb 20, 2021 By: Clinton Member since: Jan 17, 2010
    #12
  13. JEREMY HAWKE

    JEREMY HAWKE UKBF Legend Full Member

    5,565 1,992
    I read the same as you and learn and study the advice you give although irrelevant to me it does fascinate me :cool:
    They all end up on here but I have always hoped that they all end up on here and there are no others in this country . I really hope there are not that many more :eek:
     
    Posted: Feb 20, 2021 By: JEREMY HAWKE Member since: Mar 4, 2008
    #13
  14. Spur Support Services

    Spur Support Services UKBF Regular Free Member

    195 41
    Business buying is definitely an area to seek support.
    My favourite is where the seller inflates profit by hiding costs in other business enterprises they own.
     
    Posted: Feb 20, 2021 By: Spur Support Services Member since: Aug 21, 2020
    #14