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M&A Seller: Accounts Receivable

“What can you possibly do to improve receivables in prep-for-sale?”  Manage the portfolio better… improve processes … train personnel … enforce procedures… aggressively follow procedures…

Any potential buyer will be reviewing two facets of accounts receivable:

  • Current balances – age and quality; concentrations; anomalies
  • Procedures:

          o Quality of procedures
         o Compliance with procedures

Once the existing balances are assessed, a buyer will review sales and accounts receivable procedures, since it is possible to have a quality portfolio, due only to good luck and not high quality procedures.

Managing the current balances will include understanding business risks in the portfolio. Ideally, there will be no exceptional or unnecessary concentration in high-risk accounts.  If there are large balances, they should be limited to key accounts that have excellent credit worthiness.  The aging should reflect few overdue balances, but if there are any, the accounts should reflect systematic, and thorough collection efforts.  Unusual balance attributes (e.g. collection of a foreign currency receivable…) should have a specific collection plan that is reasonable, and diligently followed.

Buyers will examine policies and procedures related to granting credit, sales operations, and routine collection procedures.  For example, are there minimum order sizes… does the company require credit cards for small orders … does the company require credit applications for open account … letters of credit for export sales … are there specific levels of credit authority … are there periodic reviews of the aging and overdue account balances etc.

During this portion of the review, the buyer will also consider the accounts receivable and credit organization structure, the quality of personnel (and how they are managed…), and training.

Each of these factors will help the potential buyer to understand the quality of credit management.  Once the procedures are understood, they will determine compliance with the procedures, since the best policies and procedures are of little value if they are not in effect

As the buyer completes the assessment, they will also determine how long the processes have been in effect.  If the procedures have been in effect for 30 days, there will be little credibility in your system of controls.  If, however, the credit and collection procedures have been in effect – and properly implemented with a high quality organization for more than a year – their risks will be minimal.

And lastly the buyer will assess how the procedures and their application will blend with the buyer’s processes.  Each point of assessment will be scaled to reflect the acquisition goals, and planned end state – fully integrated, leave as an independent operating unit or a blend of the two.

Plan ahead, and good luck in prep for sale….