Work In Progress Explained

Many businesses have big jobs and long projects that will have been started prior to the closing of their business sale, but the work won’t be finished until after the closing. So, how do we deal with that in the business sale process? No two businesses are exactly alike, so Work In Progress will look different for each unique situation, but we can at least give you an idea of what to expect, based on our experience in this area. Let us explain how it typically works… 


Why Work In Progress Needs To Be Addressed

Depending on the business, a job might get started before the business sale closing, but it won’t be finished until after closing. This scenario happens frequently in the construction industry for example, but it could even include businesses that simply have pre-paid service contracts. It wouldn’t be fair for the seller to retain deposits or pre-paid monies if the buyer will be responsible for carrying out the work or delivering the service. So, it’s important for buyer and seller to identify exactly which jobs will be in progress, and then examine all of the details of those jobs, so they will be on the same page of who is doing which work and what credits and debits will be assigned to whom, based on the details. It’s also important that the customer or client experience during the job stay consistent, and that they are considered and well taken care of.

 

What Happens

If there will be Work In Progress to address, then we will add a section to the purchase contract stating that buyer and seller agree to create a workflow prior to closing that outlines the jobs in progress, who will be completing which parts of the work, who will purchase the supplies/inventory needed, and how they will divide up any deposits or credits among them, based on the percentage of work done etc. Even details such as pulling permits and the closing out of said permits should be planned and accounted for. Work In Progress negotiations sometimes even result in the seller staying on with the company after closing as an employee to finish out certain jobs, and in those cases, normally an Employment Contract would be drawn up between the two parties, to outline the details, terms, and responsibilities of the seller’s new role. Once buyer and seller have come to an agreement on the credits and debits due to each party, then we would normally make an adjustment to the final purchase price, either up or down, depending on what has been agreed. 

 

When Work In Progress Is Sorted Out

Sometimes, certain aspects of Work In Progress can be negotiated and agreed upon at the time of offer acceptance, like pro-rations of any pre-paid service contracts. However, most of the Work In Progress items will need to be addressed and sorted much closer to the closing date. Many times sellers don’t know which jobs will still be in progress until right before closing, so usually buyer and seller sit down together to hammer out the details of Work In Progress about a week or so before closing. We can’t typically wait much longer, because if any adjustments need to be made to the purchase price, then it needs to be done in a timely manner to make sure that all of the closing documents are correct, or if there is a lender involved, they will need to make sure that all of their paperwork is accurate too. Loan docs and closing docs need to be complete and ready to go at least a few days prior to closing so that they can be reviewed by everyone involved in the sale. In the case of a mail away or remote closing, the closing package will need to go out to all parties to sign well in advance of closing, because they will need to be mailed back to the closing attorney by the closing date. 

 

Plan and Prepare To Work Together

As a buyer, if you have concerns in advance for Work In Progress issues, talk to your business broker about them. Often times we can address those concerns with the seller to make sure everyone is on the same page before going under contract. As a seller, if you can foresee any complications or issues with Work In Progress, then it is important to let your business broker know ASAP, so that they can relay those items to the buyer. Most often all Work In Progress concerns are able to be easily ironed out, and it just takes compromise and flexibility from both buyer and seller to work together to solve anything that does arise. Work In Progress is a normal part of the business sales process and it’s something that is in the best interest of both parties to make sure that all decisions made regarding Work In Progress are fair and reasonable to all concerned.