Reps & Warranties: Accounts Receivable
Essential Question:
Will a Buyer be able to collect any outstanding AR?
In Brief:
Are your accounts receivable enforceable?
How much is 30-, 60-, or 90-days?
Do you have any bad debt reserves?
Category: Continued Diligence & Fact-Finding; Risk Allocation
What is it?
Typical AR reps include: 1) that they are legitimate; 2) that the amounts are agreed upon; and 3) that the amounts will be collectible within some standard time frame.
When does it matter?
The Accounts Receivable portion of the balance sheet indicates the strength of a company’s incoming cash flow and provides the Business with some assurance that it will be able to pay future debts. It is an essential component of the working capital calculation, which is often directly tied to the valuation of the Business. Therefore, it has a significant impact on the final Purchase Price. Additionally, if a company has sold its Accounts Receivable to another company (called a “factoring relationship”), that can have a substantial negative effect on a company’s value.
What to look out for?
Work with your attorney to ensure that anything represented around collectability is actually within your control.
