Why do people not include A/R when selling a business? When we buy businesses sellers don't seem to understand that we want the A/R because we based the price off of 12 months; without the A/R we’re only getting 11 months. Do you see this as a common problem?
This is a great question! I don’t necessarily see this as a common problem as much as it is a common occurrence. The philosophy behind not including A/R is that the seller delivers the business “free and clear” taking the A/R and paying off the liabilities. In smaller businesses the seller almost always retains the A/R. The impact of this is:
On smaller businesses, because this is the norm (right or wrong), you will be hard pressed to convince any seller or intermediary otherwise. The flip-side of the points noted above is that if A/R was included:
Since almost all small business sales are transacted as asset and not stock sales, buyers typically do not want to assume any liabilities. In larger transactions, buyers generally require the sellers to leave the business with an acceptable net working capital position. However, this is definitely not the norm in smaller transactions.
Having said all this, in my experience, when a buyer is paying a fair price for the business and really pushes this A/R and net working capital issue, they almost always get some concessions from the seller. The main point is that you are buying an “ongoing” entity and so it has to be turned over and be in a position to sustain current activity, and adequate working capital is an integral part of fulfilling that requirement.
|Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely
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|Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.|