Due Diligence:
When acquiring a company, one of the most important assets you acquire is their customer base. It is critical to understand the financial health of those customers, particularly if any represent a large percentage of the overall business.
A trade credit insurer, with its vast information resources, can help you understand the risk ratings of the acquisition target’s top customers and what size credit limits can be supported on each.
You may not be aware that one of the target’s key customers is on the brink of bankruptcy. Better to find this out before finalizing an acquisition that assumes continued revenues from this customer.
Including the Receivables Asset in the Acquisition:
Traditionally, receivables are excluded from the acquisition. Invoices dated prior to the acquisition are paid to old co., invoices after to new co. This creates a couple major dilemmas:
- Collections. The seller no longer has a business. If customers are having cash flow issues, what motivation do they have to pay old co.? They are not around anymore and burning that bridge has little perceived consequences. The seller may realize some unanticipated bad debt as they ease into retirement.
- Administrative. Your customers will invariably screw up and send payments to old co. that should go to new co. and vice-versa. Of all the headaches that accompany a merger/acquisition, this is one that can be avoided.
A credit insurer can review the existing AR of the target and insure it against nonpayment for the acquiring company. As an example, acquisition is 12/1, insurer writes a policy to insure sales dated 11/1 and forward. Advantages of this strategy include:
- Acquiring co. can buy AR at a discount: Perhaps at $0.98 on the $1. It knows it will collect either via normal collections or via insurance. Making 2% just for having to wait the ~30 days to collect the AR is a great opportunity.
- Seller has no collection burden: Seller can cash out immediately and enjoy retirement, no uncertainty about looming bad debts.
- Administrative: Seamless for customers and accounting teams. No longer having to juggle two AP remittances.
- Consistent AR Culture: All companies are at different points along the risk spectrum when it comes to extending credit. The credit insurance policy serves as the foundation for the credit management strategy and ensures your new staff and old staff are operating under the same rules for extending terms.
So how to get started?
Talk with an experienced credit insurance broker who can help you navigate this the right way. How old is the AR? How much backdating makes sense?
Your familiarity with the acquisition target’s customer base is the determining factor on when to start the process. If extremely familiar, it can be handled 2-3 weeks prior to acquisition. If not so familiar, you may want to start sooner so you can truly understand what you are buying.