During the LOI negotiations, the buyer is insisting that we leave all outstanding accounts receivable in the business as part of the working capital peg, but they want to exclude any past-due invoices over ninety days. How do we structure a cash-against-collection mechanism to protect our cash value without taking a massive write-down on our aging receivables?

Question

Tyler Smith · Accepted Answer

During the net working capital negotiations, buyers often try to cherry-pick assets. They will argue that any accounts receivable over ninety days old are uncollectible and should be excluded from the working capital peg, while still expecting to keep those accounts to collect them post-close. This structure deprives you of your true balance sheet value.

You should reject this approach and propose a cash-against-collection mechanism instead. Under this structure, any receivable aged over ninety days is excluded from the closing working capital calculation and assigned a zero value at close. However, the purchase agreement must state that if the buyer collects any portion of these past-due invoices within twelve months post-close, they must remit those funds directly to you.

Alternatively, you can retain the right to collect those historical debts yourself after the transaction closes, provided your collection efforts do not damage the buyer's client relationships.

To prevent this issue from arising, use your weekly Level 10 Meetings to review your aging receivables report. Task your finance seat with aggressively collecting outstanding balances before you go to market. Keeping your balance sheet clean reduces the buyer's leverage during the working capital reconciliation process.