Receivables excluded, bought at face or bought at collectible value: the cash each structure costs the buyer, and the shortfall that arrives in the second payroll.
Usually not: in most small business asset purchases the seller keeps the cash and the accounts receivable and collects them after closing. That is not a saving for the buyer, who must then pay a full collection cycle of costs before the first customer pays. On an illustrative business with 3,000,000 of revenue and 45 days' sales outstanding, that cash need is 174,658, or 9.7 per cent of a 1,800,000 price. Buying the receivables instead is worth it only at their collectible value, 349,750 here, not their face value of 370,000.
Worked in full in Buying a Small Business by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Listings rarely say which way the price is quoted. "1,800,000, receivables excluded" and "2,149,750, receivables included at collectible value" are the same deal. Comparing one with the other as if they were not is how buyers end up short of cash in the second month of ownership.
| Input | Value |
|---|---|
| Annual revenue | 3,000,000 |
| Annual cash costs (payroll, suppliers, rent) | 2,550,000 |
| Days' sales outstanding (DSO) | 45 |
| Days of cash costs paid in arrears (DPO, suppliers and payroll) | 20 |
| Purchase price, receivables and payables excluded | 1,800,000 |
| Age | Face value | Expected collection | Collectible | Haircut |
|---|---|---|---|---|
| Current (0 to 30 days) | 250,000 | 99% | 247,500 | 2,500 |
| 31 to 60 days | 85,000 | 95% | 80,750 | 4,250 |
| 61 to 90 days | 22,000 | 80% | 17,600 | 4,400 |
| Over 90 days | 13,000 | 30% | 3,900 | 9,100 |
| Total | 370,000 | 349,750 | 20,250 |
Step 1: daily figures. Revenue is 8,219 a day and cash costs 6,986 a day. The ledger of 370,000 is 45.0 days of sales, consistent with the DSO.
Step 2: the cash need if receivables are excluded. From the first day the buyer pays wages and suppliers, but customers pay only after 45 days. Supplier credit and wages paid in arrears mean the last 20 days of costs are still unpaid, an average across all cash costs.
Costs before first collection = 6,986 × 45 = 314,384
Less costs not yet paid = 6,986 × 20 = 139,726
Cash need = 174,658, or 9.7% of the price
In Excel: =CashCosts/365*(DSO-DPO). Note that the balance sheet figure, receivables less payables, is larger at 230,137, because the receivables also contain 55,479 of profit that has not yet arrived in cash. Plan the funding on costs, not on the balance sheet.
Step 3: compare the three structures. Cash position of the buyer at closing and 45 days later, when collections start to match costs.
| Structure | At closing | Old ledger collected | At day 45 |
|---|---|---|---|
| A. Receivables excluded | −1,800,000 | 0 | −1,974,658 |
| B. Bought at face value | −2,170,000 | 349,750 | −1,994,908 |
| C. Bought at collectible value | −2,149,750 | 349,750 | −1,974,658 |
Structures A and C end in the same place, 1,974,658 out of pocket, because receivables bought at what they will collect are returned in cash within the cycle. The choice between them is about timing and financing: C needs 349,750 more at closing and gives the buyer the old ledger's collections to pay the first weeks of costs; A needs 174,658 to be found as the weeks go by. Structure B is the only one that costs money: paying face value for the ledger loses the 20,250 that will never be collected, the largest part of it, 9,100, on invoices over 90 days.
Either way, the 174,658 is part of the deal. A buyer who budgets only the price and the closing costs will meet it as a shortfall in the second payroll. It belongs in the sources and uses, funded by equity, a working capital line in the acquisition loan, or a revolving facility in place before closing.
| DSO | Cash need | Share of price |
|---|---|---|
| 30 days | 69,863 | 3.9% |
| 45 days | 174,658 | 9.7% |
| 60 days | 279,452 | 15.5% |
| 75 days | 384,247 | 21.3% |
Each 15 days of slower collection adds about 105,000 to the cash need. Check the DSO from the ledger at closing, not from the broker's summary: a business whose customers have drifted from 45 to 60 days needs 279,452, not 174,658.
The haircuts in the ageing table are illustrative. Set them from the business's own history of write-offs by bucket, and protect the old ledger with a true-up: if the buyer buys it and collects less than the agreed value within, say, 120 days, the seller refunds the difference.
The same question for stock is worked in is inventory included in the purchase price, and where the working capital line sits in the total cash a buyer needs is shown in how much cash you need to buy a business with an SBA loan.
Expect receivables to be excluded, and fund the collection cycle: 174,658 here. If the seller offers the ledger, buy it at collectible value by ageing bucket, 349,750, never at face. The free workbooks for this book carry the price and the working capital through sources and uses on two complete deals.
In an asset purchase the seller normally keeps them unless the agreement says otherwise, and collects them after closing. In a share purchase they transfer with the company and the price is usually adjusted for working capital. In the illustrative asset deal the seller keeps a ledger that will collect 349,750.
At least the costs you pay before your own customers pay, less the costs not yet paid. On the illustrative business, 45 days of cash costs, 314,384, less 20 days of costs paid in arrears, 139,726, leaves 174,658 to fund, or 9.7 per cent of the price. At 60 days' DSO it is 279,452.
Only at collectible value, priced bucket by bucket. The illustrative ledger has 370,000 of face value but should collect 349,750; bought at that price, it is returned in cash within the cycle and funds the first weeks of costs. Bought at face, it costs the buyer 20,250.
This article is one calculation from Buying a Small Business. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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