We are set to close on the sale of our manufacturing business in about three weeks. There are several factory production orders that are currently in transit, some on trucks, some on ships, and I'm trying to figure out how to handle them during closing. Do these get treated as inventory that transfers to the buyer? Or do we need to negotiate a separate arrangement for goods that haven't arrived yet? Our buyer is being reasonable but wants clarity on who bears the risk if something is damaged or delayed. Any practical advice from folks who've been through this?
Closing logistics
How to handle factory production orders that are currently in transit during closing
Are the goods shipped FOB origin or FOB destination? That changes who technically owns them in transit and who has risk of loss. Get your purchase agreements and bills of lading in front of the buyer's counsel.
We had a similar situation last year. The purchase agreement had a clause that in-transit inventory would be valued at landed cost and included in the working capital adjustment. It got messy because two shipments arrived late and the buyer tried to discount them. My advice: agree on a valuation method now, not later.
Thanks Rusty—I'll dig out the shipping terms. Plainsight, did you end up using an escrow holdback for the in-transit goods, or did you just true up after closing?
We did a post-closing true-up based on actual receipts. Took about 45 days. It worked but required decent recordkeeping on our side.
I'd be more worried about the customer side. If those production orders are already sold to your customers, the buyer may want to step into those contracts. Make sure the assignment of customer contracts is addressed in the APA.
Not a lawyer but I've bought two small factories. The cleanest approach I've seen is a separate transition services agreement covering fulfillment of in-transit orders for a defined period. The buyer pays you a service fee and you finish delivering. Removes ambiguity.
That TSA approach can work, but watch the indemnification language. If a shipment gets damaged and you're still the shipper of record, you could be holding the bag
Kestrel, did that TSA include the buyer taking title at a specific point, or did you retain title until delivery?
Retained title until delivery in our case. Buyer didn't love it but accepted because the volumes were small. If your in-transit orders are large, they may push back.
Honestly this is why we pushed our closing date back by two weeks to let the in-transit stuff clear. Might not be possible for you but worth asking.
We considered delaying cose too. Our lender wouldn't budge on the date. In hindsight it would have saved us some headaches.
What does your CPA say about revenue recognition on those orders? If they're not recognized until delivery, the buyer's working capital calculation could swing significantly
Also check whether any of the in-transit goods are custom or made-to-order. Those are harder to value and the buyer may argue they're not sellable if the customer cancels
A couple of them are custom. I'll flag that with the buyer and our accountant before we finalize the APA language. Appreciate all the input.
One more thing—make sure your insurance covers goods in transit through the closing date, or that the buyer's policy picks up immediately. A gap there is a real risk.