Stock Consignment: A Solution For Business Sales

Stock consignment is a strategic agreement where a vendor passes over possession of stock on settlement to the purchaser, but retains ownership of the stock until the stock is sold in the ordinary course of business by the purchaser. The purchaser only pays the vendor for the stock as and when the consignment stock is sold by the purchaser. This arrangement offers an alternative solution to parties in a transaction which may have a large stock in trade figure making the business difficult to sell due to the large upfront nature of such payment on settlement.

The solution however comes with benefits and some risks to be considered for both parties. 

Pros and Cons for Vendors
The use of stock consignment may provide access to a greater pool of purchasers who may not be willing or able to finance or take on the upfront inventory costs. The solution also reduces the risk of unsold or obsolete stock at the time of settlement since the vendor retains ownership and can retrieve goods that aren't sold. However, the arrangement comes with drawbacks, particularly delayed payment. Matters such as insurance will need to be negotiated, as often these costs reside with the owner of goods.  

Pros and Cons for Purchasers
For purchasers, stock consignment is appealing because it reduces upfront costs payable at the time of settlement and the amount of financing required will be reduced (along with interest thereon). Purchasers only pay for stock when it is sold, helping preserve cash flow and working capital. Additionally, it carries no risk of holding unsold inventory, which is beneficial for managing fluctuating demand. On the other side, there may be a requirement to sell the inventory within a set period to avoid having to return unsold stock, and managing consignment inventory requires diligent record-keeping, adding administrative overhead.

A Possible Solution
Stock consignment offers both vendors and purchasers flexibility and certain benefits, making it an attractive option especially for businesses with large inventories of stock.

A stock consignment clause should be drafted with precision and clearly provide for a number of considerations including dealing with ownership of the goods, payment terms, the handling of unsold stock, the allocation of risk for loss or damage to goods and insurance.

When done right, stock consignment can be a win-win for both vendors and purchasers in a business sale and purchase. It is therefore important to have the right professionals assist in preparing the appropriate clause and managing your interests and risks as either the vendor or purchaser based on the nature of the goods in question and the transaction. Contact ASCO Legal today for more information and assistance.