Debtors and WIP When Buying an Accounting Practice: What Should You Ask?
Updated: Sep 30
Debtors and work in progress can sit outside the headline fee multiple yet materially affect the cash required at settlement and the economics of the transition.
Accounting practices often carry billed amounts that have not yet been collected and work that has been performed but not yet billed. Stage 2 is the right time to understand whether those balances are significant and how the vendor proposes to deal with them.
Accounting practice debtors and WIP can affect both the cash required at settlement and the economics of the transition.
You do not need to settle every completion adjustment yet. You do need enough information to stop debtors and WIP (Work In Progress) from remaining invisible until late in the transaction.
Accounting practice debtors and WIP: the short answer
Request the current debtor balance and a useful ageing analysis.
Ask about historical bad debts, write-offs and unusual collection issues.
Request the current WIP balance and ageing or other information showing how long work has remained unbilled.
Understand the firm's billing cycle and how WIP converts into invoices.
Clarify whether debtors and WIP are expected to be included in the sale, retained by the vendor or dealt with through another arrangement.
What are debtors?
Debtors, or accounts receivable, are fees that have already been billed but have not yet been collected. The total balance is useful, but the ageing often tells the buyer much more.
A large current balance may be part of normal billing. A large old balance may deserve explanation about collectability, disputes or write-off practices.
Ask for a debtor ageing
A debtor ageing typically groups unpaid invoices by how long they have been outstanding. The exact bands can vary, but the purpose is to see whether the balance is mostly recent or contains substantial old amounts.
At Stage 2, identify material aged balances and ask how the practice normally manages collections.
Historical write-offs provide context
Ask whether the practice has a history of significant bad debts, fee disputes or regular write-offs. That can help the buyer interpret whether the current debtor ledger is unusual or consistent with normal experience.
This is an information question, not a conclusion about the final price.
What is work in progress (WIP)?
WIP generally represents work performed but not yet billed. The accounting treatment and practice-management reporting can differ, so the buyer should understand how the vendor defines and measures it.
A headline WIP figure is difficult to assess without knowing its age, billing cycle and whether old balances are likely to be billed in full.
Ask how WIP turns into invoices
Some practices bill progressively, while others complete substantial work before invoicing. Ask how often clients are billed, what triggers billing and whether particular service lines build larger WIP balances.
That helps the buyer understand normal working-capital timing rather than viewing WIP as a standalone number.
Clarify whether debtors and WIP are inside or outside the deal
The vendor may intend to retain debtors, sell them to the buyer, collect them after settlement or use another arrangement. WIP may be included in the price, paid separately or adjusted according to agreed rules.
The legal and tax treatment should be documented with appropriate advisers. Stage 2 simply needs the proposed commercial position to be clear.
Questions to ask before going further
What is the current debtor balance and how is it aged?
What bad debts or write-offs have occurred historically?
What is the current WIP balance and how is it aged or measured?
How often does the practice bill clients and how quickly does WIP convert to invoices?
How does the vendor propose to treat debtors and WIP in the sale?
Frequently asked questions
Are debtors always included in the purchase price?
No assumption should be made. Their treatment varies by transaction and should be clarified and documented.
Is all WIP worth its recorded balance?
Not necessarily. The buyer should understand how WIP is measured, its age, billing practices and whether any amounts may be difficult to bill or collect.
Do debtors and WIP affect finance?
They can affect the total cash requirement and working-capital position, but detailed lender assessment belongs later. Stage 2 should make sure the balances and proposed treatment are understood.
Illustrative decision scenario
A practice has $180,000 of debtors and $140,000 of WIP. The ageing shows most debtors are current, but $45,000 has been outstanding for more than 90 days and a portion of WIP is more than six months old.
The buyer now knows which balances need explanation before assuming they are fully recoverable or treating them as straightforward additions to the purchase. This example is illustrative only.
A practical Stage 2 debtors and WIP schedule
Keep the debtor ageing, WIP report, write-off history and billing-policy notes together. Add one line stating the vendor's proposed treatment of each balance in the sale.
That creates a clear base for later commercial, accounting, legal and finance discussions.
Which adviser covers which issue?
An accountant or transaction adviser can help interpret collectability, WIP quality and working-capital effects. A lawyer can document how balances are treated in the sale agreement. A tax adviser may be needed for transaction-specific tax consequences. A finance broker can later explain how additional cash requirements affect the funding pathway.
The buyer remains responsible for deciding whether the balances and proposed treatment are acceptable.
What should you look at next?
Stage 2 is about turning the sale opportunity into a structured information set, one category at a time.
Conclusion
Stage 2 does not require every due-diligence question to be answered. It requires enough reliable information to understand the operating reality, identify material gaps and decide how the acquisition should progress.
Return to Stage 2 — Initial Information for the complete information-gathering sequence.
Considering an Accounting Practice Acquisition?
Discuss how the information available, proposed acquisition and funding pathway could be assessed as the transaction progresses.
General information only. This article does not constitute financial, credit, legal, tax, accounting, compliance or valuation advice. Finance is subject to lender approval, eligibility criteria, terms, fees and conditions. Consider obtaining independent professional advice for your circumstances before acting.
