It’s likely that the business you are looking to buy will have customers who owe that business money for services already rendered or goods already purchased. The money that customers still owe the business is called “Accounts Receivable” or A/R.
Smaller businesses with A/R usually give their customers 30 days to pay once the goods or services have been delivered.
In most small business sales (where the selling price is less than $500,000) the seller typically keeps these accounts receivable.
From the buyers perspective this may seem like an unfair situation. After all, the selling price is usually based on the yearly performance of the business. But if you don’t get to collect the existing A/R, than in the first year you will only receive 11 months of revenue.
Here is the thing you need to keep in mind. In most small business sales, the seller delivers the business to the buyer “free and clear”. This means that, while you are not entitled to collect the A/R, you are not responsible for the debts or liabilities of the business either.
Just as the business will have accounts receivable that they have yet to collect, they will almost always have accounts payable – expenses they have incurred but have yet to pay.
How to Buy a Business
The key benefit to selling the business “free and clear” is simplicity. If you insist on including the A/R in the sale price you will have to negotiate the value of those accounts with the seller.
After all, you are not going to pay full face value for those accounts receivable. While most businesses give 30 days for customers to pay, almost every business will have some A/R that are 60, even 90, days old. So in addition to all the other details you and the seller must agree upon, you will have to agree on the value of those 60 and 90 day old (past due) accounts.
Then, you will have to invest the time and effort to collect those past due accounts.
Also, if you want to receive the benefits of the account receivable, you will have to assume the liability for accounts payable.
So, if you find a business that you really want to buy, your best chance of negotiating a deal with the owner is to simplify by removing any discussion of account receivable and accounts payable. Let the seller collect the proceeds from existing sales and let him worry about paying all the existing bills.
