Published on 30/05/2019 by Mike Guyomar Business Broker @ Baton Advisory

Selling your business assets? Debtors do matter

Three important reasons to tidy up your debtor's ledger

Many vendors are hesitant to provide their debtor's ledger to potential purchasers. Vendors need to be more understanding of purchasers to increase the chance of a sale completing.

There are two options for structuring a business sale, an 'asset' sale or a 'share' sale. In Australia, most small business sales are 'asset' sales, where the assets of the business are sold rather than the shares. The assets of a business normally include goodwill, plant & equipment and stock. The debtors (customers who owe the business money) are generally excluded from the sale.

Because of this, vendors are often reluctant to provide information to a potential purchaser regarding their debtors as they are not being sold with the business. Some view a request to see the Balance Sheet as intrusive and unnecessary. However, your debtors are an important consideration for a potential purchaser for three key reasons.

1.The purchaser needs to calculate their working capital

The purchaser needs to know not only how much they need to buy the business but also how much they will need to run the business. And if they don't ask this at the outset they certainly will once they've spoken to their bank. For this reason, a potential purchaser will want to consider your debtors to determine how much working capital they will need to operate the business.

2.Debtors reflect income sustainability

Many purchasers will request the debtor's ledger to assess the risks involved in purchase. Lots of old debtors indicate potential problems with goods or services and raise questions as to whether past customers will return.

A well organised debtor's ledger indicates good relationships with satisfied customers and strong and reliable cashflow. It also indicates competent management and administrative processes. If you have nothing to hide, be proud of your debtor management.

3.You might sell your debtors

In some circumstances, a purchaser may be interested in buying your debtors (and taking over the bank account that receives customer payments) to help reduce disruption to customers. Many vendors also see this as an attractive option as it offers a way to escape the time and effort required to chase up debtors following the sale of your business and can mean payment for debtors immediately.

Key tips

  • tidy your debtors' ledger up by collecting overdue debtors
  • write off unrecoverable bad debts
  • use credit checks as part of your business process
  • speak to a good broker to learn more about how to best present your business for sale

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Mike Guyomar - Business Broker @ Baton Advisory

Mary is the founder of AnyBusiness.com.au. She has a degree in Business from Monash University and been helping showcase businesses for sale for over 10 years. In the course of running her own business and working daily with business owners and brokers she has developed a keen sense of the Australian market for businesses for sale and shares her knowledge on this blog and others such as female.com.au

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