How to structure deposits collected by owner with new owner completing work
March 13, 2023
by a searcher in Tampa, FL, USA
Hello everyone! I am looking for any insight on how to structure a piece of the contract we are currently writing up. We are not sure how to handle sales/deposits for those sales under existing ownership that will be completed under our new ownership. This is for HVAC installations. Any insight would be appreciated!
Thanks
from Washington University in St. Louis in Chicago, IL, USA
(1) all collections prior to the closing date are the property of the seller. A/R is one of the assets being acquired and therefore all collections as of and after the closing date are the property of the buyer.
(2) Revenue from all work completed prior to the closing date belongs to the seller regardless if collected or not. Revenue for work completed as of the closing date going forward belongs to the buyer.
On a pragmatic basis, one question is whether it is easier to track revenue by service date or collection date - basically cash vs accrual accounting. It sounds like there will be work in progress as of the collection date - so realistically option (1) is probably cleaner. Is there a high degree of prepaid accounts? If the seller keeps A/R - does the buyer (you) have sufficient cash to sustain the business until work can be delivered, billed, and collected?
Whichever direction you go, you of course need to factor this into the working capital calculations. Tagging ^redacted who is an expert in working capital calculations.
in Tyler, TX, USA
My suggestion if possible:
1. Explain "earned" vs. "unearned" revenue and proper revenue and COGS recognition to seller (i.e., if you do the install, you should get the revenues AND be responsible for the associated costs).
2. If possible, go PO by PO and tally up (a) all deposits for work not yet completed and (b) all expenses paid for work not yet completed [my guess is this is components or HVAC systems]. Then take the difference of the two.
3. Structure the difference as either a purchase price reduction or have the seller leave cash on the B/S equal to that difference.
Happy to discuss further if helpful.