How are accounts receivable handled in an acquisition?
By Adam Friend | Senior Vice President of Business Development
In most business acquisitions, the purchase price includes the working capital of the business, which includes all outstanding accounts receivable and accounts payable of the business. “But wait! Those are my sales and my receivables,” we often hear. It’s important at the outset of the process, when you are negotiating the key economic terms of the deal, to understand how working capital will be treated in the sale, and whether the ultimate proceeds are sufficient for you to sell.
Buyers view accounts receivable similarly to the way that the buyer of a manufacturer would view the equipment, warehouse and product inventory when acquiring that business – those are investments that the owner has made in order to generate the EBITDA that the business valuation is based on. If the seller keeps those investments, then the buyer would have to spend that money to replace them and support the business’ ability to generate cash flow.
Implicit in the purchase multiple applied to EBITDA is an assumption about how the working capital will be treated, which is usually that it comes along with the business for no additional proceeds. If the seller demands additional payment for the A/R, or wants to keep the A/R, then the purchase price is typically adjusted downward dollar for dollar, so the seller is not better off financially by keeping them. And then they are stuck having to collect as well, so in all of our acquisitions, we assume that we will be getting the A/R as part of the purchase.
Always ask up front how A/R will be treated so you have a clear understanding of the proceeds you will end up with after the sale.