I'm Selling My Company - What Happens to My Receivables?

Posted by Factor Funding Co. on March 8, 2016

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Selling a business is a major decision for most business owners. It involves a lot of different pieces, each of which must be dealt with before the sale can be finalized. Factoring is one of those pieces.

Factoring can actually make the sale of your business more profitable. You have likely built a stronger portfolio of creditworthy clients because of the factor's requirements. This makes your business more attractive to buyers who want a strong business with a reliable customer base.

If you are factoring your invoices currently, you may be wondering what happens with those receivables.

Receivables and a Business Sale

When a smaller business is sold, a common scenario is for the seller to retain the company cash and open receivables, while paying off the outstanding payables. The goal is to deliver the business free of debt to the buyer. This scenario works in many cases, but is not ideal for all sales of businesses.

There are certain reasons why a buyer would acquire the receivables of a business:

  • It offers the buyer control over collection of those receivables and keeps cash flowing into the business.
  • It makes the buyer immediately start dealing with the company's existing customers.
  • It offers a seller a clean break from the business, and avoids the need for open-ended accounting issues.

Of course, buying a portfolio of unpaid invoices poses a risk to the buyer. And that must be considered in the purchase price. The older the unpaid invoices are, the less likely they will be paid. Extremely late invoices may have to be written off before the purchase goes through.

Selling a Business When Factoring is Involved

If your company has been using factoring as part of your funding model, that is something you need to bring up in the discussion with a potential buyer. The buyer may want to continue the relationship or go with another model entirely. It is a consideration in how you handle invoices during the sale.

One scenario is to stop factoring invoices a few months before you plan to sell. This will allow you to finish your contract with the factor and present a clean slate to the seller. The downside to this is that your cash flows will be hindered during the transition.

Another scenario is to have the factor continue to handle the outstanding receivables for you, during the transition. If the sale is going to one where the seller retains the cash and receivables, while paying off outstanding payables, this may be the best option. The factor can give you the cash to pay off payables at the time of sale and then you get the proceeds as straight cash

A third scenario is that the buyer retains the relationship with the factoring agency. As a part of the business sale, the buyer takes over the contractual relationship with the factor and the seller is free of the business. Now, this scenario only works of the factoring agency's terms make it possible.

A fourth scenario is a combination of the second and third one. The factor retains the relationship with the seller and handle any outstanding invoices from before the sale. Then, the buyer forms a brand new relationship with the factor for invoices issued after the sale. This helps keep a definite separation between the seller and the buyer's interest while offering the funding and flexibility of factoring to both.

If you are contemplating a sale of your business, talk with your factoring representative. He or she can help you understand how that sale will affect your factoring contract and what options are available. May the sale of your business be quick and profitable.

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