Stock Sale of a Construction Firm & Outstanding AR at Closing
March 04, 2022
by a searcher from Franklin University in Richmond, VA, USA
We are looking at a couple of subtrade construction firms and it seems a stock sale makes more sense than an asset sale to maintain continuity with current employees and contracts.
In a stock sale, is it standard that the seller receives all the outstanding AR once the company collects it? In theory, the seller has paid for the AP associated with the outstanding AR and wants to be compensated for it. How is this typically handled?
If the seller is obligated to the outstanding AR and construction firms typically have contracts in progress at closing, how does a buyer protect themselves from taking over projects that have been possibly overbilled? If progress billing has been frontloaded and the seller receives all the outstanding AR, the buyer could find themselves short of funds to pay for project costs and/or short of anticipated margin.
Thank you for your suggestions and insight in advance.
from Seton Hall University in Morristown, NJ 07960, USA
Smaller companies are not required to use Percentage Completion, although I haven't seen a construction company get bonded without a percentage of completion calc (is it really that small that is doesnt have or need a bonding certificate?Residential construction maybe?)
So again, your point is extremely valid, and in a stock sale I would be scrubbing those payables and maybe even doing a percentage completion analysis to be sure you don't have the issue you described..
In the end, I agree with Konner, what is your true working capital requirement.
from University of Virginia in Richmond, VA, USA
In my case I argued that if I had to buy the stock then I had to also have all the receivables. Later the seller saw that cash would be low in the near future after the proposed sale date and instead agreed to take some of the receivables until the cash came in. During the deal I repeatedly tried to get a sufficient line of credit but wasn’t able to do so.
Point is, the receivables should go with the buyer unless you have a lot of cash going into the deal. The seller knows far more about the working capital needs of the business than you do.