Many small businesses have large balances of accounts receivable, representing products or services that the company has delivered but has yet to receive payment for.

When it comes time to buy or sell a business, the question arises: who gets the accounts receivable?

On the one hand, the accounts receivable represent revenue that the current owner earned. On the other hand, accounts receivable is part of the working capital needed to operate the business and emptying the business of working capital is unfair to the buyer.

In addition to the topic of who owns the accounts receivable, there is an additional complication as to who collects it?

Common approaches:

Seller owns, seller collects: This is the most favorable approach to the seller. They receive the A/R and collect it. The danger here is that the seller aggressively pursues A/R in a manner that’s not in the business’s best interest (e.g., screaming at customers and threatening lawsuits).
Seller owns, buyer collects: From an economic perspective, this approach isn’t much different from above, however, it reduces the risk that the seller is short-sighted and aggressive in collecting A/R from clients that the buyer likely wants to retain.
Buyer owners, buyer collects: This is the ideal solution for a buyer, where they own the A/R and use it to fund the working capital needs of the business while also retaining responsibility for servicing it.

In my opinion, all buyers should push for approach #2 as a last resort. I’ve even seen instances where buyers have negotiated a nominal fee for collecting the A/R as a means to incentivize them to do so.

As a last word of caution, be wary of A/R aging when negotiating ownership of a certain A/R level. Generally, A/R is split into an aging schedule reflecting how long it is outstanding (e.g., 1-30 days, 31-60 days, 61-90 days, 90+ days). At some point, A/R will be charged off as bad debt.

Buyers will want the most recent A/R as it has a decent chance of getting paid. You want to protect against the scenario that the seller claims all of the good/promptly paid A/R and leaves you with aged accounts receivable that are unlikely to actually be received.

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