How should you classify stock before anyone counts it?
Raw: alloy, resin, board, film, ingredients — identified by spec and last-move date. WIP: jobs or batches with a traveler, a percent complete you can defend, and a customer. Finished: sellable to a living customer at a living revision. Excess-and-obsolete: everything that fails those tests.
Customer-owned material is not your asset. Consignment is not your asset. Tooling the customer paid for is not your inventory. Documents should say so.
ISM August 2026 PMI 54.6 and Prices 71.1 (Source: ISM) describe a world where owners hesitate to scrap expensive raw. Fed G.17 July 2026 utilization 76.0% (Source: Fed G.17) does not make dead programs current. Holding cost is not a multiple.
| Class | Peg treatment (rule-of-thumb) | Common seller fiction |
|---|---|---|
| Fast raw | Include at book if counts tie | Inflating safety stock to look “ready” |
| Slow raw (>12–24 months) | Write down or exclude | “Someone will need this alloy” |
| Job-cost WIP | Include if traveler and margin exist | Percent-complete on hope |
| Stranded WIP | Exclude / write down | Counting it as FG |
| Sellable FG | Include | Shipping after the peg date to juice AR |
| Private-label leftover | Exclude unless take-or-pay | Calling it finished goods |
| Spares for sold machines | Define separately | Mixing with M&E appraisal |
Preparing for sale puts this aging in week two. Waiting for the buyer’s count is how 223-day median manufacturing closes (Source: BizBuySell, 2025) lose another month.
What will quality of earnings do to the inventory story?
QoE tests method (FIFO, weighted average, job-cost), physical-versus-book, capitalized variances, and whether you changed methods to swell a year. It tests whether WIP margin matches historical scrap. It tests whether FG is returnable.
If you wrote up inventory to hit a number, say so now. If you have not taken a physical in two years, take one before the teaser. SBA lenders still live inside a $5 million 7(a) cap and a 10% injection (Source: SBA). They do not advance on rust because the CIM was optimistic.
ABL market practice often advances less on WIP than on eligible raw or FG, and excludes ineligible stock. That is lender practice, not a quote. It is why book value is not cash.
Should excess be a separate lot, a write-down, or a price cut?
Write-down: cleanest for the peg. Tax treatment is a CPA question.
Separate lot: useful when the stock has scrap or surplus-market value that is not ordinary-course working capital. Price it. Do not leave it in the peg definition.
Price cut: blunt. Use when you refuse to write down and the buyer refuses to treat book as peg. Everyone understands a lower check. Few understand a swollen “normalized” number.
Old equipment sometimes hides in the spare-parts cage. Parts for a machine you sold in 2019 are not working capital. They are leftover iron in a bin.
BizBuySell’s 2021–2025 manufacturing median SDE near $268k on about $1.13M revenue (Source: BizBuySell / Iconic) is a world where $80k of dead raw is not a rounding error. It is a third of a year’s discretionary earnings.
What does an illustrative true-up fight look like?
Illustrative only.
Peg defined as “T12 average AR + inventory − AP.” Book inventory $420,000. Physical finds $110,000 of raw with no move in 30 months and $40,000 of FG for a discontinued private label. If E&O was not excluded, the buyer argues the peg target was inflated and the true-up is a six-figure transfer. If E&O was written down in month one, the fight is a count variance, not a philosophy.
A second file ships a large job the day before close to “clean WIP” and inflate AR. The peg definition did not address cutoff. Counsel now earns its fee. Write cutoff rules with the peg.
How should the teaser mention inventory without inviting a dumpster tour?
Say “inventory will be normalized on a raw / WIP / FG definition with E&O excluded.” Do not say “$500k of inventory included” as if book were cash. Do not photograph unique labels that name a customer.
How to sell is the process. Sell my manufacturing business is the pillar. Buyers who want the buy-side view can start at buy a manufacturing business.
How should a pre-count be run so the true-up is a variance, not a trial?
Pick a date. Freeze receipts and issues with a cutoff memo. Count with two-person teams. Tag dead raw as you go instead of arguing later. Photograph sealed skids. Reconcile to the book the same week, not the week of close. Give the reconciliation to QoE.
If you have never cycle-counted, do not pretend the first physical in three years will be tidy. Budget time. BizBuySell’s 223-day median (Source: BizBuySell) still gets eaten by a sloppy count.
Customer-owned and consigned stock should be tagged with a different color. If the buyer’s team counts it as yours, you will refund it at true-up. That is not a philosophy. That is a tag.
What about tooling cribs, inserts, and “free” consumables?
Indexable inserts, welding wire, and abrasives can be real working capital if they turn. A crib of inserts for a program you lost in 2021 is E&O. A shadow board of specials for a machine you sold is leftover iron. Define consumables in the peg or they become a second equipment fight.
Do not gift the crib to the buyer in a hallway sentence and then also include it in the peg target. Pick one.
Illustrative only: $95,000 of inserts and holders, $40,000 unused in 18 months. Write down $40,000. Peg uses the rest. True-up is a count. The alternative — “inserts are always assets” — is how $40,000 becomes a personality dispute.
How do food, chemical, and electronics files change the aging rules?
Shelf life and revision control replace “24 months” as the only test. Expired ingredients are not FG. Obsolete firmware-loaded boards are not FG. Hazardous raw that you cannot ship is not a surplus-lot fantasy without a licensed outlet. Age with the actual constraint, not with a metal-shop default.
How do you keep the owner from “helping” the count?
Owners wander. They move a skid to look busier. They tell a counter “that’s good, count it as FG.” They pull a job off WIP to ship and juice AR. Write a cutoff memo and stay off the floor except to answer a location question. Help is how true-ups become trials.
If a job must ship during the count window, log it as a cutoff item with the QoE team. Silence is worse than a logged exception.
Illustrative only: owner moves $60,000 of slow raw into a trailer “so the aisle looks clean.” Buyer’s team finds the trailer. Character finding. The raw was always going to be E&O. The trailer made it a story.
A better count: tags, two-person teams, owner in the conference room with the binder. Variance is a number. Numbers close.
What scrap, rework, and return cages belong in the peg conversation?
Scrap that will be sold to a dealer is not FG. Rework that has no traveler is not WIP. Customer returns sitting in a cage pending a credit are not silently your inventory. Define them or they will be argued twice — once in QoE and once at true-up.
How should you treat vendor-managed and consigned stock at the dock?
If title has not passed to you, it is not your peg inventory. Tag it. If title has passed but the vendor will take it back, that is a return, not FG. Write the rule in the cutoff memo so two-person teams do not invent a policy in the aisle.
How should you treat kits, hardware bags, and “free issue” that live in unlabeled bins?
Unlabeled bins become arguments. Label kits to a job or a SKU. Free-issue hardware that is actually yours should have a bin and a count. Free-issue that is customer-owned should have a tag. Unlabeled is how $25,000 becomes a philosophy.
Spend a Saturday with two people and a labeler. That Saturday is cheaper than a true-up.
How should you treat samples, show parts, and trade-show crates?
They are usually not peg inventory. Box them and exclude them, or write them down. A crate of last decade’s show parts is not FG.
A last inventory habit: freeze cycle-count adjustments the week of the peg physical unless both sides agree in writing. Quiet adjustments look like a second set of books. If a correction is real, log it as a cutoff item.
One more inventory note: if a customer sent material that you never booked, tag it as customer-owned before the count. Unbooked inbound is not a gift you can peg. It is a title problem.
If you use a third-party warehouse, include that location in the count plan. Off-site stock that “everybody knows about” is how true-ups grow after close.
If a trailer behind the plant holds “maybe later” raw, include it in the count plan or write it down now.
Educational information only. Inventory accounting and tax write-downs are CPA work. Counts should be done by people who know the SKU. No peg language guarantees the true-up number.