Accounts Receivables after the Deal Closes
In traditional business brokerage deals, the form of the transaction is usually an asset sale. In in a majority of these asset sales, the business changes hands where Cash, Accounts Receivables, and Accounts Payable are not transferred to the Buyer. There are exceptions to this rule, but this a very common approach in deal structure. And of course, Seller’s prefer to keep the cash in their business bank accounts and the Accounts Receivables you’ve worked hard to create.
Because Accounts Receivables (ARs) usually remain with the Seller, there is the practical matter of collecting those ARs once the transaction has been completed.
From a logistical standpoint,
Most Sellers will keep their corporate entity (Whether a C Corp, S Corp, or LLC) intact for some amount of time, while winding down the usefulness of the corporate entity. And during this wind down period, Sellers can still deposit incoming checks (from outstanding ARs) into the corporate bank account. It’s important to plan for the ability to still process inbound AR checks even after your business has been effectively sold.
From a process standpoint,
There is sometimes confusion between Buyers and Sellers regarding incoming checks, particularly if the fictitious business name (aka DBA) remains unchanged from Seller to Buyer. For example, if the Seller’s DBA was Johnson Distribution Services and the Buyer continues to operate under that name, it can be confusing when inbound checks arrive. This is because a portion of those inbound checks may belong to the Seller and represent anticipated AR receipts, while other incoming checks rightfully belong to the Buyer.
To avoid such confusion,
There are two approaches for a Seller to consider:
- Change the mailing address for ARs. A Seller can simply contact each customer for which a receivable is due, and instruct the customer to send payment on the particular invoice(s) in question to the new mailing address. Such approach isolates the anticipated AR customer checks, thus avoiding the potential confusion described above.
- Provide Buyer with a list of anticipated ARs. A Seller can also provide a list of all anticipated AR payments to the Buyer. In turn, the Buyer can watch for those particular checks to arrive and simply forward those checks to the Seller. This approach works well when there are a small number of expected ARs anticipated, and where there is trust and respect between the Buyer and Seller.
Setting up a plan and process around anticipated ARs after the close of escrow is a simple yet important step, in order to make sure that Seller-owned receivables find their way to the Seller’s bank account.
Jordan Zweigoron is a Senior Advisor with Sunbelt Business Brokers. He can be reached at (408) 436-1900 or at [email protected]. Or connect with Jordan on LinkedIn.
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