This would be the WIP component of inventory at closing. If you are paying for inventory separately then yes, this would be included. More common is to have a working capital peg where purchase price includes average level of working capital (inv+AR-AP) over past 12 months.

Make sure that the seller leaves behind the cash to cover all customer deposits that have been received by the target prior to closing (customary in a cash-free, debt-transaction. WIP is typically an asset that can not be borrowed against.

The easy answer is Yes. But there are a lot of details. a) What do you mean by "capitalized material". I have never heard that. You should pay for the cost of the material in WIP. b) For labor, you should pay for capitalized labor in WIP ...but there are many buts. Is there an accounting change? Has labor rate changed? Is the company including OH rate or not? Are you assuming accrued wages? And, what is there level relative the capitalized labor? Some of these are complex issues for a small company. You have to assess the materiality. If a company switches from no labor capitalization to capitalizing it, the profit would increase and asset value increase. I teach Balance Sheet and Working Capital. Happy to help. Reach out.

It is worth noting that as you progress a transaction you will be guided by your accountant on aspects of accounting for an acquisition. If you want to see the source doc they regularly refer to in Australia it is AASB 3 which is at https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15_COMPfeb18_01-19.pdf

Be cautious on deferred revenue. If your seller two months ago has sold a six-month training package and has received payment from the client then on the settlement you still have the costs associated with delivering the last four months of training. A basic requirement of AASB 3 is to fair value all assets and liabilities acquired in a business combination. This includes inventory. Remember inventory can both rise in value (e.g. wine) and fall in value (e.g. supplier price reductions subsequent to purchase) AASB 3 requires that all assets and liabilities acquired are measured at fair value. This includes WIP and order backlogs. As in the example in respect of inventory, this means that the fair value will include a significant amount of the anticipated gross profit on these contracts, with the subsequent profit recognized on the performance of the contractual obligations only being commensurate with the effort of satisfying the contract and the credit risk associated with the contract. This situation is likely to give rise to material misstatements when buying entities with long term equipment supply, construction, or service contracts. The purchase agreement should also make clear that the seller is responsible for any defects in work performed before closing.

In essence in Working Capital terms your focus is on the current assets 'inventory' and 'accounts receivable' and the current liability 'accounts payable'. Your vendor is typically expected to deliver a normalized level of working capital to support the operations of the business post-closing. Working capital is like the tide it moves cyclically and the first thing in DD to be conscious of is building a clear accurate history of how it has performed. Any model where your purchase price builds in that you can operate the seller’s company with less working capital than the seller seems hard to defend without evidence.

If that revenue attached to those items is to be collected post-acquisition then yes

For discussion, let's separate Work In Process Inventory (between Raw Materials and Finished Goods), which is typically lumped in with Inventory and usually has a target amount included in the price from Work In Process Jobs (like you might find at a construction company). For Work In Process Jobs, it is common for the buyer and seller to prorate the revenue received from the job (and thereby the profit) by the amount of work effort performed (or hard dollar expense incurred) by the buyer and the seller. For example, if a job just started and was 5% complete at closing, the seller would receive 5% of the revenue and the buyer would receive 95%. On the other hand, for a job that was nearly complete, say 90% done, the seller would receive 90% of the revenue when the revenue came in. As ^[redacted]‌ mentions, at closing any deposits that the customer makes are taken into account, along with hard dollar expenses incurred by the seller prior to closing.

Some of these answers aren't great, the simple answer is;

If you are valuing based on capitalised cash/profit (i.e. an actual DCF or a shortcut via an EBITDA multiple) then the WIP is already factored into the valuation (you are already paying for it!) as all businesses require capital (cash tied up in working capital fixed assets etc) to maintain operations. As with all working capital items, the only time a payment is made is to the extent that the net working capital (which includes WIP) is excess of the ''normal'' figure (now there's the subjectivity...) required to maintain, or grow, the cash flows / profits on which your offer is based. i.e. considering seasonality, a growing business etc.

It is extremely common for owner-managers to want (usually off balance sheet) WIP as they don't tend to record it properly (who wants to pay tax on thin air!) so you need to understand the principle here in order to address it when it comes up. Failing that, get advice as you will get eaten alive on this point and it scuppers deals all the time if not dealt with properly.

Signed: from someone who has to explain this to clients, and sellers, all the time

Paying for WIP seems reasonable at face value. I can think of two red flags. One is that production operations can sometimes run large lots to gain efficiency but at the cost of low turns and later obsolescence. So check the turns of WIP by item and don't pay for anything turning less that 4 times a year.. Check projections as well as history in case a parent product has been discontinued. The other possible red flag is if the labor is marked up too high in the capitalization. Usually labor is multiplied by an absorption ratio to capitalize manufacturing overhead. Ask to see this calculation to make sure it's reasonable.

Depends on the type of manufacturing business. In a high inventory turn environment WIP should be a smaller piece of the inventory balance. Finished goods and raw materials are a higher focus for valuation. I look at the entire balance of inventory from an obsolesce perspective. I also check to make sure they aren't over capitalizing labor or OH into the balance. Check trends over time.