Hi Reader

Working Capital. WIP. Warranties.

I've seen these three deal points derail more negotiations than anything else.

Master them, and you’ll be in the top 10% of searchers—closing better deals that actually get done. Ignore them, and you’re inviting disaster. Deals can crumble post-LOI, wasting time and money.

This issue is part two of a three-part series on these “3 Ws.” Today’s topic: Work-In-Progress (WIP).

Last issue was about Working Capital, and here's a link to read it if you missed out: https://resources.freedomthroughacquisition.com/Issue-31​

WIP: Hidden Goldmine or Deal-Killing Obstacle

In project-based businesses, WIP consists of:

1. Contracts signed but not started (the pipeline).
2. Projects in progress but unfinished.

WIP can be worth millions. That’s why it’s a goldmine—and a potential deal killer.

Miss out on WIP rights, and you’ve bought a business minus its most valuable future cash flows. Mishandle WIP, and a seller’s after-tax proceeds could be crushed.

What Sellers Think

Deals can sour fast if WIP isn’t addressed early. Sellers often have strong views:

• “I worked hard to land these deals. I should share in the profits!”​
  (True—but you’re paying for the business, including the pipeline.)
• “WIP? We don’t track it. It’s all mixed with A/R.”​
  (A red flag. Poor bookkeeping makes structuring messy.)

Structuring WIP

WIP handling depends on the business. If you can, gather these details pre-LOI. If not, use placeholder LOI language and iron it out ASAP.

Key questions to ask:

1. What’s the typical project lifecycle?
2. Do customers pay deposits? If so, when and how much?
3. Are there progress payments or just deposits/final bills?
4. How long do projects take?
5. How much WIP exists in each category (pipeline vs. in-progress)?

Don’t Punt WIP Decisions

Tempted to delay WIP structuring until agreements are drafted? Don’t.

Even if you need placeholder LOI terms, start working with the seller immediately to gather info and negotiate a structure.

Why? Like NWC, WIP issues can derail deals late in the game. The stakes are too high—time, money, and resources—to leave this unresolved.

Sample WIP Structures

Here are three common approaches, from most Buyer-friendly to most Seller-friendly:

1. Best for: Simple businesses with short projects and small WIP pipelines.
   • All deposits go to you at closing.
   • You finish the work.
   • You bill customers and keep 100%.
2. Buy 100% of WIP (Seller reimbursed for costs).
   • Deposits (minus seller’s direct costs) go to you at closing.
   • You complete the work.
   • You bill customers and keep 100%.
3. Profit Split on WIP (Seller shares profits).
   • Profits are allocated based on predefined rules (e.g., project stages).
   • A true-up calculation determines the seller’s share at closing.
   • You finish the work and keep remaining profits.

These aren’t the only options, but they’re straightforward and widely used.

WIP Best Practices

1. Ask questions during pre-LOI diligence to understand customer cycles and WIP pipelines.
2. Address WIP in the LOI—either in detail or with placeholders if information is limited.
3. Require a WIP report at closing, subject to your approval.
4. Include reps and warranties on the report’s accuracy.

By tackling WIP early and strategically, you protect your deal’s value and ensure it closes smoothly.

What’s your approach to WIP?

WIP is just one of the critical '3 Ws' that can derail your deal if mishandled. But with preparation and clear structuring, you’ll have the edge.

Next week, we’ll dive into the final W: Warranties. Stay tuned, and let me know your biggest challenges with WIP in the meantime!

Happy Deal Hunting!

- Eric

Eric Hsu, Publisher

Freedom Through Acquisition Newsletter

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