Last week, Ali the Accountant sent in a question, “When buying or selling a practice, can you please advise how you split up the work in progress (WIP)? I would presume it is done based on time spent and not billed before the sales and how much time is spent on the file after the sale can you please confirm?”
It is going to depend greatly on the timing of the sale, the amount of WIP, the nature of the WIP and the two parties in the transaction.
- For timing example, if the selling practice has high quantity of individual tax extension work, closing a sale on October 1 vs October 20 would result in a very significant difference in WIP.
- For amount of WIP example, are we talking about hundreds of hours of WIP or less than a hundred hours? If the amount is not too significant and will not take to long to complete it might make the most sense to let the seller finish the WIP and collect the fees.
- As to the nature of the work, is it a short term project or a long term project that is 80% complete. If the seller has completed a significant portion of the work, they are going to have strength of collection for the entire job, plus they will be more efficient in completing it.
- The key is for the two parties to identify the WIP on a case by case basis, evaluate the type of work and nature of the project, and then determine the best way to finish the work and collect any outstanding and new fees due. It has to be a discussion point and agreed upon.
I have worked on transactions where the seller stays on to transition and complete and collect on the WIP and I have worked on transactions where the seller let’s the buyer collect on the portion of the WIP the seller completed prior to the sale. It all just depends on the situation and other factors of the transaction. I would recommend you attend our Buying webinar or our Selling webinar to learn more.
Let us know what other questions you have.