AR purchase structure

February 08, 2023

by a searcher from United States Naval Academy in Johnson City, TN, USA

What structures have you seen for purchasing AR? What is common? What are some considerations for deviating from the norm? Seller has 1.5x monthly revenue in AR with 40% over 90 days. PA has AR staying with the seller, but I'm concerned about the business' reputation if he starts going hard after customers to get his money with all the extra time on his hands post close. Also, the possibility of his attention post close being on getting paid and not on a successful transition post close is concerning. Thanks!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I think you need to look at this from several angles. First, you need to figure out what your working capital requirement is in the deal. Usually a certain amount of working capital is staying in the company, which can come in the form of A/R. If the seller is keeping the A/R then you need to be sure they payoff the corresponding A/P. I have seen structures where some of the A/R goes to the seller post close but the buyer is responsible still for collecting that A/R. That prevents any confusion of who needs to pay what. But you do need to check the collectability of the A/R. If you are just paying for that A/R usually we will see some sort of discount applied to the A/R (most sellers are okay with a small 10% to 20% discount just for not having to worry about the hassle of collecting it) and in some cases a rep and warranty the seller carries back if it is no collectable. Just be sure if you are paying for the A/R and using debt to do so that the cash flow of the business is there to support that additional debt service. Ultimately you can only pay so much for the business so the price either includes the A/R or does not but should be a lower price for the business without it. Happy to discuss in more detail your specific situation and look at numbers and provide feedback. You can ping me here or at redacted Good luck.

Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

Curious what multiple you are paying when you are not buying the A/R. I typically structure my offers so that A/R is purchased by the buyer and included in the multiple I offer. Without including A/R in your purchase, the cashflow your offer is based on will be lower than expected in year 1. To prevent concerns on the seller accelerating collections, prior to the close, it is typical to have a working capital peg so that any level of working capital above or below the peg adjusts the purchase price on a dollar for dollar basis. The last thing I would add is that especially important with aging receivables is being able to avoid any non-collectables. I approach this by adding a term to be able to sell any uncollected A/R back to the seller after 90 days (at cost). I understand the A/R can be a tough point to negotiate with sellers and has derailed several offers personally but when you are paying a multiple on cashflow, that needs to include everything required to sustain the cashflow in the future.

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