Handling WIP at close with cash-basis accounting
April 22, 2024
by a searcher from University of Michigan - Ann Arbor in Atlanta, GA, USA
Seller runs books on cash-basis, and will have a significant work in progress at time of close, and has asked how it will be handled. Assuming that the work in progress deal is closed prior to Seller and I closing on the business sale, and a 45% deposit is received, and some expenses are paid immediately with other larger materials/goods not payable until after Seller and I close the business sale, and final payment is also not received until after closing of business sale, what is the community-consensus best way to handle this?
from Babson College in Boston, MA, USA
Generally speaking however, any deposits less expenses paid, would transfer to the buyer. There will be a cost of delivery that the buyer will be required to fulfill it sounds like, and so the deposit needs to follow through with the delivery of the sale.
If the seller is not agreeable to this, there are other options as well. One being transferring deposit less a reasonable commission for making the sale which is a % of the expected gross profit. This is not suggested if the gross profit is not determined at sale (i.e. a project/solution based offering that has volatile margins).
If you provide some more specifics on the WIP, I'd be happy to provide more pointed suggestions.
Last point from a diligence standpoint, you want to be asking questions to understand if seller is advance booking deals in anticipation of this deal closing. Meaning is this closing of the WIP going to pull a deal out of the expected pipeline/sales for 2nd half of 2024 and therefore skew all of your forecasts? Very much a concern on annual subscription type service providers.
from University of Michigan in Atlanta, GA, USA
As for the last part, I think that’s unlikely. It’s not a subscription model, it’s strictly project based. From my perspective, I think it would actually be beneficial to me to take over in the middle of such a project, as the seller can walk me through completion of the project and show me how he got his numbers and how he sets everything up.