Business Brokering Buy Sell Business – Worldwide Business Brokers

Sell a Business: Handling Payables and Receivables

Sell a Business: Payables and Receivables

Payables and ReceivablesWhen you buy or sell a business, in most cases payables and receivables will be involved. Payables are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Receivables are amounts a company has a right to collect because it sold goods or services on credit to a customer.

By way of example, let’s assume that Company A sells merchandise to Company B on credit. (Perhaps the invoice states that the amount is due in 30 days.) Company A will record a sale and will also record a receivable. Company B will record the purchase (perhaps as inventory) and will also record a payable. On any given date – including the date on which a business is sold – most companies will have some amount of payables and some amount of receivables. So, how are these handled when a business is sold?

The disposition of both payables and receivables is part of the negotiation process when putting together a deal to buy or sell a business. Some small transactions are simple in that both the payables aand receivables are part of the sale; that is, the buyer assumes both the liability of the payables and the asset of the receivables. Other times, the seller holds on to both and is responsible for collecting the receivables and paying the payables. In still other instances, the payables and receivables are split between the buyer and seller. Each can be handled differently and the larger the overall transaction, the more complex the treatment of the payables and receivables can become.

Let’s take a look at payables – what the business owes.


If you’re buying a business, one of the intangible values – a component of “goodwill” – is its reputation among its suppliers. Does it have good credit? Are suppliers willing to provide standard (30-day) terms or are they demanding cash on delivery? If the latter, the business may have structural problems that are beyond the scope of this post or the suppliers are very small and are unable to offer payment terms. If the former, the company is probably buying from relatively strong suppliers and is paying its bills on time. For our discussion, we’ll assume the company enjoys a reputation for timely payments of its bills.

When acquiring a business, the buyers consider several issues when evaluating the payables. A BIG consideration is the buyers’ desire for confidentiality. A smart buyer might want to keep the fact that the company is being or has been sold confidential as a way to make the transition as smooth and invisible as possible (and there are a number of reasons for this). In such cases, the buyer might assume all the payables so as to make sure they are paid on time to keep the vendor relationship steady. One of the benefits of this approach is to minimize the chance that vendors would require the buyers to go through a new credit establishing cycle. However, many vendor credit lines for middle market businesses have clauses requiring certain steps be taken when a change of ownership occurs, thus reducing the possibility of keeping the sale of the business completely confidential.

When a buyer does not care whether the sale is confidential or is unconcerned about the seller paying the payables, the buyer may want to assume none of the payables all of which would then be the responsibility of the seller. The danger in this approach is that the seller does not promptly pay what is owed to vendors that the buyer will continue to use. If the buyer plans to change some vendors, the buyer might leave any payables to those vendors to the seller while assuming the payables owed to vendors the buyer plans to retain.

One way to circumvent the concern that the seller will not promptly pay the vendors that the purchase agreement requires is to stipulate in the agreement that such payments are to be made at the close of escrow by the closing or escrow agent – the attorney or other third party handling the transaction for the parties. This will assure the buyer that the vendors are paid.

One cautionary note if you’re a seller; and this story comes from our personal experience. We were involved in the sale of a multi-million dollar Shakedowndistribution business in which we represented the seller. Because 90% of the suppliers were all very important to the business, the buyer group decided to assume the payables as part of the deal and pay them directly. However, the principal buyer turned out to be completely unprincipled (and a real dirt-bag) and, once the deal was closed, approached the suppliers with a heavy-handed shakedown attempt to get them to discount their invoices by anywhere from 50% to 90% – meaning each would lose money on whatever they were owed. Most of the suppliers were small businesses and not only took this unethical behavior as an insult but simultaneously realized that, 1) something was better than nothing; 2) they wanted to continue selling to the business and; 3) that the cost and time required of taking the buyers to court would be not only high but disruptive to their business, as well. Most grudgingly agreed to discount the debt they were owed.

LoserWe know this because many of the suppliers, most of whom had a solid personal relationship with the seller, directly contacted the seller after the sale to complain about these underhanded methods of the new ownership group. The seller explained that there was little he could do given the terms of the purchase agreement but you can imagine the strain this caused pretty much everyone except the principal (unprincipled) buyer who apparently couldn’t give a rat’s ass how he treated vendors. However, as the saying goes, “payback’s a bitch” and several years later the company, as a result of the principal buyer’s ethical shortcomings and plain incompetence, suffered an epic collapse with a loss of more than $13 million. Karma; ya gotta love it!


Different receivables have different values. “But”, you might say, “if I’m owed $100, the value of that is $100!” Not so fast, Bucko.

The longer you’re owed that $100, the less likely it is that you’ll actually receive it and, therefore, the less valuable it becomes. A smart buyer will analyze a company’s receivables to determine how much is current and how much is past due. The buyer will then analyze the past due receivables to see how much is 30-60 day past due, 60-90 days past due and over 90 days past due. The buyer will then look at the debtors to see what their payment history has been and how significant they are as a customer.

One of the reasons a buyer might want the seller to keep the receivables is that it eliminates any need for the buyer to collect any of them. The buyer starts out fresh with all customers and collects payment only for sales the company makes under the buyer’s ownership. However, many times sellers don’t want the receivables. Not that there is necessarily anything wrong with those receivables but rather that many sellers want a clean break from the business when they sell. They may be retiring or moving. They may be taking on a new challenge with a new business. Or they may simply be exhausted and want to ride off into the sunset without having to worry anymore about the business.

Buyers, on the other hand, are not at all keen to assume the responsibility of collecting receivables for sales the company made under the seller’s ownership. Tracking and collecting receivables takes time and effort, both of which cost money. As such, a buyer will apply a discount to the face value of the receivables right out of the box. Further, a buyer, after analyzing the receivables will likely discount them more based on aging.

What Are Receivables Worth?

For example, the buyer will likely discount the overall receivables total even before analyzing them and will then apply an additional “aging discount” of “X” for receivables over 30 days, “Y” for receivables over 60 days, “Z” for receivables over 90 days and possibly assign no value whatsoever to receivables over 120 days. So, if the target company has $250,000 in receivables, the mere requirement of collecting might impel the buyer to discount the total by 10%-15%. Any account over thirty days will be discounted further and the older these receivables are the more the buyer will discount them. If a significant amount of the receivables are aged more than 60 days, the buyer may value the total amount of receivables at half or less of their face value.

When this topic comes up in the negotiation process, the seller has to consider how much effort it thinks will be required to collect all or some of the receivables in order to determine whether it wants to keep them and start collecting or include them in the sale and let the buyer worry about them. The purchase price of the business is negotiated based on the buyer’s and seller’s decision in this regard.

But, of course, there is an additional approach to handling receivables and that is to “slice and dice” them whereby the buyer assumes some – usually the most current – and the seller retains other – usually the most aged. In such cases, we’ve seen the buyer assume current receivables at 100% – or nearly 100% – of face value. This solution may appeal to the seller insofar as the seller may have an excellent relationship with the vendors and is confident that the debts will be collected. In such a case, the seller is likely to collect significantly more than the buyer would have paid for the receivables.

In short, there are many ways to divvy up and value the payables and receivables of a company that is being sold. The parties to the sale have numerous options, all of which depend to a large degree on the quality of the receivables and the motivation of the parties, particularly the seller. This is an important part of the negotiations and ultimately impacts the price that will be paid for the business. A qualified business broker, particularly an IBBA-Certified Business Intermediary (CBI), can advise you on this whether you are a buyer or seller.

If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!


The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at jo*@Wo*******************.com

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