Work-in-Progress in business acquisitions

WIP represents open customer work orders that have been started but not finished. When buying a business, WIP can be a sensitive topic. If the business has open work orders and there is a mismatch between work completed and work billed, one of the parties stands to lose. If the business has: - Completed more work than it has billed, the seller. - Billed more work than it has completed, the buyer. Where that mismatch is material, the parties should adjust for it. For each open work order, the parties need to agree on or identify: (A) The completion percentage as of the closing. (B) The amount the business will receive upon completion of the work. WIP earned = (A) x (B) When WIP earned is: - More than billed, the parties should consider increasing the purchase price. - Less than billed, the parties should consider decreasing the purchase price. Simple on its face but often heavily negotiated. Calculating the completion percentage is often more art than science. And the WIP adjustment could have a material impact on the purchase price. If the business you want to buy has material WIP, get out ahead of it. If possible, flag how you intend to adjust for WIP in the Letter of Intent. In any event, start the conversation with the seller early.