Cash free/debt free transaction. How to treat the late invoices?

November 11, 2022

by a searcher from Simon Fraser University in Ontario, Canada

In the scenario of a cash free/debt free transaction, the sellers will keep the cash, the debt, the AR and the AP. For the AR, they will make sure they will invoice everything before closing, as that is in their interest. How are the APs typically treated? Let's say the target company is working with a sub-trade, and they get invoiced after closing, but for work that they performed before closing? Who's responsible to pay that invoice, the seller or the buyer?

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Reply by a searcher
from University of Maryland at College Park in Havre De Grace, MD 21078, USA

I know your question focused on AP, but remember that AR can be purchased at a discount if you are willing and able to do the collections. While many owners will want the recent aging, they are likely willing to sell the 180+ day aging for pennies on the dollar as that is what a collection company will pay for it. This will allow you to open a line of communication with the debtor as well. They could continue to be a customer with new payment terms and you could always forgive their debt $ for $ with prepaid orders. They can put it on a card instead of using you as a bank. If you paid 1o cents on the dollar for the AR, this would be like providing a 10% discount on a prepaid order, which some companies offer as standard terms. Most importantly, you kept a customer.

Reply by a searcher
from California State Polytechnic University in San Diego, CA, USA

I highly recommend a NWC peg. It takes into account any funny accounting business and makes sure the company has working capital to function as normal. You set the average NWC amount, that's included in the sale, then at the close of the transaction if AR is higher than normal or the seller decides not to pay any AP, NWC is adjusted and so it the purchase price. One thing to keep in mind, careful with the language of the NWC because sometimes the language lawyers put in are opposite of proper accounting (US GAAP or IFRS...or even tax sometimes).

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