When selling your practice, managing Work-In-Progress (WIP) effectively is crucial. WIP includes unfinished work that has not yet been invoiced, and how it is handled can significantly impact the sale.

Option 1: Transfer the WIP

Under this approach, all recoverable Work in Progress (WIP) at the time of settlement is transferred to the buyer, who assumes full responsibility for:

• Completing the work
• Invoicing clients for services rendered
• Collecting payments
• Remitting the agreed-upon value of the WIP back to the seller

This method ensures that the seller receives compensation for the work that has been performed but not yet billed. However, since the buyer is responsible for completing the work before billing, this arrangement requires a well-defined agreement between both parties.

How the WIP Transfer Works

1. Identify and Assess WIP at Settlement Date

Before the transfer can occur, both the seller and the buyer must conduct a thorough review of outstanding WIP. This review should categorize WIP based on:

• Work completed but not yet invoiced
• Work partially completed that requires further effort
• Recurring work that will continue under the new ownership

2. Establish Terms of Payment and Collection

Since the buyer will be responsible for collecting payments from clients, both parties must agree on:

• The timeline for remitting payments to the seller
• The percentage of collected fees that will be passed back to the seller
• Adjustments for potential client disputes, discounts, or write-offs

3. Handling Write-Offs and Disputes

Not all WIP is recoverable. Some clients may dispute invoices, delay payments, or refuse to pay. The agreement should address:

• How bad debt or uncollectible WIP will be handled
• Whether the seller still receives compensation if a client defaults on payment
• How partial payments will be distributed between the buyer and seller

4. Setting a Timeframe for Remittance

The agreement should specify:

• The payment frequency (e.g., monthly, quarterly)
• The deadline for full WIP settlement
• The method of remittance (e.g., bank transfer, escrow account)

Pros and Cons of WIP Transfer

Best Practices for Managing WIP Transfer

• Clearly define terms in the sales agreement
• Conduct due diligence on the buyer
• Use a secure payment tracking system
• Negotiate a minimum payment guarantee
• Maintain client communication to ensure smooth payment transitions

Is WIP Transfer the Right Choice?

Transferring WIP is often the preferred option for practice sales because it allows sellers to receive full value for their outstanding work while reducing the buyer’s upfront financial burden. However, this method requires careful planning, clear contractual agreements, and ongoing collaboration between both parties.

Option 2: Sell the WIP Upfront

Under this approach, the buyer agrees to purchase all recoverable Work in Progress (WIP) at the time of settlement, providing the seller with an immediate payout rather than waiting for the WIP to be collected over time.

For many sellers, this method is attractive because it eliminates the risks and complexities associated with tracking, billing, and reconciling WIP post-sale. However, the buyer may apply a discount to the WIP value to account for potential write-offs or uncollectible amounts.

How Selling WIP Upfront Works

1. Valuing the WIP

Before the sale, both parties must conduct a valuation of outstanding WIP to determine its worth. The valuation should consider:

• Work completed but not yet invoiced
• Partially completed work that will need additional effort
• Likelihood of full recovery from clients

2. Negotiating the WIP Sale Price

The buyer will often apply a discount to the WIP to account for potential issues such as:

• Client disputes or objections to invoices
• Bad debt risks if payments are delayed or not received
• Potential adjustments needed after completion of the work

3. Structuring the WIP Payment

Once the WIP value is determined, the parties must agree on how the payment will be made:

• Full upfront payment: Buyer pays 100% of the agreed WIP value at settlement.
• Staggered payments: Buyer pays in installments over an agreed period.
• Holdback clauses: A portion of the payment is withheld until the buyer confirms WIP collection.

4. Due Diligence by the Buyer

Because the buyer is taking on the financial responsibility of collecting WIP, they will often conduct due diligence to:

• Review past collection history
• Assess client payment behavior
• Evaluate any risks related to disputed invoices

Pros and Cons of Selling WIP Upfront

Best Practices for Selling WIP Upfront

• Conduct a fair valuation of your WIP
• Negotiate a reasonable discount rate with the buyer
• Clarify payment terms in the sales contract
• Provide clear documentation of all outstanding WIP
• Work with a financial advisor to ensure a smooth transaction

Is Selling WIP Upfront the Right Choice?

Selling WIP upfront is often a preferred option for sellers who want to minimize post-sale involvement and gain an immediate financial return. However, it is important to carefully assess the discount applied by the buyer and negotiate favorable terms.

FAQs: Handling Work-In-Progress When Selling