Our automated service business often bills clients in milestones, leaving large amounts of work-in-progress on our balance sheet at any given time. How do we negotiate the treatment of this work-in-progress in the net working capital peg to ensure we are paid for value created before close?

Question

Tyler Smith · Accepted Answer

Work-in-progress, or WIP, is a frequent battleground in transaction negotiations because buyers want to classify it as an illiquid asset with zero immediate value, while you have already sunk real operational costs into creating it. To protect your cash at close, you must establish a clear valuation and conversion methodology for WIP within your net working capital calculation. First, use your weekly scorecard history to prove your historical conversion rate of WIP to billed accounts receivable. Show the buyer that your automated milestones are met predictably and that write-offs are virtually non-existent. Second, negotiate a contract provision that values WIP at its percentage of completion, multiplied by the contract price, rather than just your raw cost. This ensures you capture your built-in profit margin for the work performed up to the closing date. Third, structure a post-close reconciliation mechanism. Agree that any WIP transferred at close that is successfully billed and collected within ninety days post-close will be paid to you dollar-for-dollar as an adjustment to the purchase price. By backing up your WIP metrics with your historical operating data, you prevent the buyer from getting free labor and high-margin billing on your dime.