What is ‘Work in Progress’?
The term ‘Work in Progress’ (WIP) in the context of business sales generally refers to ongoing jobs or projects that have been started by a business but have yet to be completed. In manufacturing industries, ‘Work in Progress’ refers to partially finished goods awaiting completion. ‘Work in Progress’ is considered a current asset of a business (on the balance sheet) since either the ongoing jobs or inventory of unfinished products can be converted into cash within one year. The disposition of a company’s WIP is particularly important for construction and service-related businesses which typically have a large amount of ongoing partially completed jobs.
‘Work in Progress’ Differs from Contracts
It is important to distinguish WIP from a contract that a business may have to perform future services or deliver products to a customer for which it has not yet started to accomplish. Such a contract has no accounting value and is not considered an accounting asset of the company. In reality, buyers of businesses will still expect that such a contract be transferred over to them as a part of the business sale. If a customer made a prepaid deposit when signing the contract, then the deposit is considered a liability as unearned revenue on the balance sheet (until the contract is performed at which point the deposit is then considered revenue) When the buyer takes possession of the business, they are credited the amount of the prepaid deposit.
Work in Progress Negotiable in Business Sales
Everything in business sales is negotiable, but both buyers and sellers of businesses should realize that WIP is considered a current asset of the business. As such, it is usually included in a business sale along with all of the other assets of the business unless specifically excluded by the seller. In the sale of many construction or service-related businesses, however, it is often impractical to estimate the amount of work left to be done in relation to the total contractual value of the job. Moreover, individual WIP jobs may be highly dependent on the seller’s personal involvement. For the sake of continuity and practicality, buyers and sellers often negotiate the disposition of the WIP in order to best facilitate a smooth transition after closing.
Example of WIP in Business Sale
- Jim is selling his kitchen and cabinet remodeling company to Bob with the assistance of a professional business broker.
- Jim’s customers are residential customers who pay a 50% deposit when the contract is signed and the balance when the job is completed.
- The company charges the deposits because it almost always has to order and pay for products (such as appliances) prior to starting the job.
- Jim and Bob have agreed on a price for the business but are negotiating terms of the deal in the purchase contract.
- The two parties agree that for any jobs not yet actually begun, any prepaid deposits (minus any costs incurred by Jim for supplies) be credited to Bob, and that the contracts for such jobs be conveyed to Bob.
- For ongoing remodeling jobs with crews already on-site, Bob proposes that such WIP jobs be transferred to him as a part of the sale.
- Bob wants the deposits for such WIP jobs to be credited to him and Bob wants to collect the balance owed by customers upon the completion of the WIP jobs (with a credit to Jim for his costs associated with partially completing said jobs).
- Jim thinks it over but realizes that this proposal is not practical or advisable under the circumstances.
- Jim knows that the construction crews (many of whom are subcontractors) will not want to deal with a new owner in the middle of completing a remodeling job (for which they are used to Jim’s supervision).
- Jim also realizes that some customers may be upset if they now have to essentially pay Bob for remodeling work that Jim started.
- Lastly, Jim wants to be fair and warranty the work for jobs that he already started.
- The business broker coordinates a meeting where Jim and Bob can openly and honestly assess the situation.
- Bob agrees that dividing up and handing over the WIP jobs is simply impractical and not worth the risks.
- As a concession for not including the WIP jobs in the sale, Jim agrees to seller-finance part of the purchase price.
- Further, Jim will credit Bob at closing for the estimated costs of completing the WIP jobs.
Seller’s Role Important for ‘Work in Progress’
For larger construction and service related companies where the owner is more removed from the day to day operations, the transfer of ‘Work in Progress’ jobs to the buyer is more seamless. When the seller is largely absentee and not personally involved in servicing and supervising jobs, the transfer of partially completed jobs to the buyer is less likely to cause disruption to the business. The customers and employees of the business will not be dependent on the seller’s personal involvement for the completion of WIP jobs. This generally results in a higher business valuation as all the assets of the business (including WIP jobs) may be conveyed without disruption to the buyer.
When selling a business, it is important to understand that ‘Work in Progress’ – whether a partially completed ongoing job or a partially completed good – is considered an asset of the business which is typically conveyed to the buyer unless otherwise noted. Many smaller construction or service related businesses may find it impractical or risky to convey WIP jobs to the buyer, in which case the buyer and seller may negotiate a fair resolution with the assistance of a professional business broker.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.