How is AR handled at closing?

April 25, 2023

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Florida, USA

Is AR considered included as part of "cash free / debt free" and therefore goes with the seller at closing? For reference I am relatively new to this and working a deal with about $10M AR on the balance sheet and am trying to determine if this is treated just like cash on the balance sheet and is owed to the seller or if it remains with the business after closing???

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Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

It could be handled in any fashion the parties agree to. And it might depend on special circumstances, the accounting used for revenue recognition (thus A/R), etc. But normally in the lower middle market a transaction purchase price on a total enterprise value basis assuming a cash-free, debt-free balance sheet means that working capital assets, of which A/R is one, and working capital liabilities are transferred to the buyer. This net working capital is part of the value of the business and treated just like other assets being acquired. In other words, included in the purchase price unless otherwise stated.

Hopefully you'll get a lot of useful input from those in the Searchfunder community who have great expertise in this area. Some here teach courses and lead seminars on this subject. But in any case $10 million is a pretty hefty number so it likely makes sense to involve an experienced advisor and transaction counsel before considering discussion of valuation and terms with the seller.

Reply by a searcher
from Rutgers, The State University of New Jersey in Tampa, FL, USA

The management of accounts receivable (AR) can vary in several ways, depending on how it is specified in the purchase agreement. However, in a cash-free/debt-free deal, any outstanding amount in AR that is owed to the company on the day of closing would typically be considered the seller's revenue. In case there are any open invoices where some money has already been collected, but the rest is yet to be earned (such as a statement of work), the money earned would belong to the seller, and the rest would go to the buyer. Usually, we structure the deal such that Newco, the company, collects the revenue, pays the payables, and reconciles with the seller monthly until a zero balance is reached. This way, if there is a collection issue, it’s the issue of the seller and not the buyer.

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