How To Discount Accounts Receivable
Common practices for handling AR in business for sale transactions.
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Question:
If you buy a business that includes the Accounts Receivable (A/R) do you discount this amount? If so, are there certain percentages that are common for certain industries?
Answer:
While most small business sales are "asset sales" where the AR generally remains with the seller, when the buyer does take the AR, there are a number of considerations.
The main priority of course is to be certain that the AR is collectible. To that end, it may require you having the ability to offset or reconcile any uncollected amounts and generally, anything past 90 days can be considered uncollectible.
The DSO (Days Sales Outstanding) is generally the guide for any discounts, as opposed to something industry-specific. Naturally, if you can discount the AR across the board it is advantageous for you; however, there must be an equal benefit to the seller or else they will just collect it themselves. Usually I like to work towards a 90 – 100 percent value on current AR (under 30 days), a 20% discount between 31- 89, and then leave anything over 90 days on an "as realized" basis. In other words, if collected, the seller is paid, if not, they are not compensated.
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |