In the working capital negotiations, the buyer wants to exclude any accounts receivable older than ninety days from the closing peg but retain the rights to collect on those old invoices post-close. How do we structure a post-closing collection agreement to reclaim this cash?

Question

Tyler Smith · Accepted Answer

Buyers often try to exclude aged accounts receivable from the working capital peg to lower the purchase price, while still expecting to collect on those invoices post-close. This is an unfair double-dip. If the buyer is not paying for those assets at closing, they have no right to keep the cash when the customer pays. To resolve this, you must structure a clear post-closing collection agreement. First, explicitly exclude all accounts receivable older than ninety days from the final Net Working Capital calculation. Second, include a covenant in the purchase agreement that designates the buyer as your collection agent for these specific files for a set period, such as one hundred and eighty days post-close. The buyer must agree to apply any payments received from those specific clients to the oldest outstanding invoices first. Specify a nominal administration fee, perhaps five to ten percent of the collected amount, to incentivize the buyer's accounting team to pursue the collections. Any funds collected must be remitted to you on a monthly basis. Bring this issue to your weekly Level 10 Meeting™ and use IDS® to establish your bottom-line terms before drafting the final purchase agreement.