Working capital transition in a asset purchase
February 13, 2021
by a searcher from Harvard University - Harvard Business School in San Jose, CA, USA
The seller will keep the AR and AP while I will keep the inventory and customer deposit. What is the common process to handle this if we do not want the customers to get confused? What is the most efficient way for the seller and I to work on this together? We have $24M annual sales and so this is not a small operation.
from The University of Chicago in Chicago, IL, USA
2. You need to control all customer relationships. While the seller may kept the economic benefit of all AR recorded as of closing - you need to be the one to control the collections. AR Oldco and Newco money should go to you or be under your scrutiny, and then you decide the legitimate split. Should be no quarrel here - it's all fair and legitimate. What if the customer does not specify what the payment is for? Is it old money or is it new money?
3. Regarding #2 above, cut-off and AR recognition policies need to be scrutinized. Make sure the seller is only taking the money for the products they sold or the things they have done.
4. All Oldco AP needs to be paid off at closing by the seller. If they refuse, you need a list with specific dates of intended payment - all to your satisfaction and subject to your confirmation. How the seller treats the vendors who remain post-closing is very important. When things get rough, it will be this family of vendors who are or who are not your friend. Many states also have bulk sales laws that buyers need to be aware of (i.e. either seller notifies its vendors of sale prior to closing or buyer can be held responsible for seller's unmet obligations).
5. What about utility deposits (other), credit card processing, ACH / wire processes - both customers (incoming) and suppliers (outgoing), etc. It is not as simple as they keep the old bank account and now you have a new one.
6. Each one of your suppliers will set your new entity up with a new customer a/c#. What does this entail? Do you have to share info. or make applications for credit? This process takes time; need to make sure your stocks on hand are covered by functioning supply channels.
General - you have a lower middle market acquisition (read: attractive) structured like the sale of a what is referred to as a "main street" business (e.g. laundromat). Your transactions terms should include normal working capital measurement and settlement. With the mechanism you have, only you can loose. The Seller knows all of the things you do not know. What's the EV / terms?
from The University of Chicago in Chicago, IL, USA
a) You are very likely overpaying if you let seller keep A/R, A/P and assume customer deposits (I presume seller is keeping cash). If value has been adjusted for this, make sure you can fund WC post-closing. [A customer could ask you to fix a problem of past before giving you new business. And, a vendor can ask you to pay off previous invoices before shipping new raw material.]
b) You should control customer relationship, even if seller is keeping A/R. You collect and pay the seller.
c) If seller keeps A/P and does not pay, vendors have legal rights to the inventory that you think you paid for.
d) You should get a matching asset for the customer deposit liability.
e) Consider assuming A/R & A/P, and adjusting price if needed. Then protect yourself through R&W in APA for quality/quantity of A/R, A/P.
f) Asset purchase or Stock purchase is irrelevant.
g) Customers will get confused if they get calls for seller for old A/R and from you on new A/R. Vendors will hold up your shipment if seller does not pay them. Best solution is you control the relationships.
h) By letting seller keep A/P, you are giving up interest-free vendor financing.