Protecting and Collecting Receivables when Buying a Business

When investigating a business, an initial consideration should be reviewing its receivables. You want to see how much money is owed and from whom you need to collect the outstanding funds.

Once you've reviewed the situation you can determine the creditworthiness of the clients or customers.

For example, if most of the outstanding receivables are from large companies with good track records for paying their bills, you may be comfortable taking on these receivables. Conversely, if you are looking at large sums of money owed by unstable businesses or new clients, you may not want to risk it.

In the course of buying the business, you may decide to protect yourself by asking the seller to guarantee that all receivables will be paid. This protects the business against outstanding obligations and eliminates the headaches of trying to collect. Yet even guarantees must be examined closely. For example, you might ask for the seller to guarantee receivables payment to a certain amount, a certain percentage, or only for specific customers.

The seller is not likely to guarantee 100 percent of the receivables, which means you will still need to collect at least some of the outstanding debt. This will include collecting the accounts receivable due on the same 30-, 60- or 90-day terms as invoiced. Review the company's current billing policy and determine if it meets your cash flow needs. If you think the accounts receivable policy should be changed, it will be necessary to sit down with everyone involved in the billing and collections process to establish more favorable terms. Then present the new terms to your clients with each new sale.

If the seller agrees to stay on to aid with the transition, he or she can guide collecting on the current accounts receivables. The relationship established between the seller and regular clients can help facilitate the process.

Depending on the nature of the business and the credit history of its customers, you will determine whether or not to alert customers to a change in ownership. A customer may see such a change as an opportunity to let a bill slide, assuming that you will be too busy to notice. For that reason, many business buyers make no mention of the transition until all accounts are up to date.

In some instances, as a new owner you may present a revised payment schedule or even offer incentives to prompt customers to pay quickly. This all depends on the nature of the situation and the amount of money concerned. However, it is always in your best interest to make a steady, increasingly firm effort to collect what is due to you, if you have not asked for a guarantee from the seller.