How do I evaluate the accounts receivable of a business I want to acquire?
Request a detailed accounts receivable aging report before anything else. This report breaks down what’s owed by how long the invoice has been outstanding. Current invoices due within 30 days are very different from invoices sitting at 90 or 120 days past due. The older the receivable, the less likely it gets collected.
Analyze the aging buckets carefully. A business showing $150,000 in A/R looks healthy until you see that $60,000 is over 90 days old. At that age, collection rates often drop to 50% or worse depending on the industry. Ask the seller for their historical bad debt write-offs over the past three years. If they’ve been writing off 5% annually but their current books show nothing reserved for bad debt, the A/R is overstated.
Customer concentration is another risk factor. If one customer owes 40% of the total receivables, you’re buying significant risk. That customer could dispute, delay, or default, and your expected asset value drops substantially. Look at the top ten customers by balance and assess whether the receivables are diversified or dependent on a few key accounts.
Verify the largest balances directly with customers when possible. Sellers occasionally inflate A/R by including disputed amounts, personal loans disguised as business receivables, or amounts that customers have no intention of paying. A confirmation call or letter to major debtors can reveal whether those balances are real and undisputed. This verification step is standard in any serious business purchase analysis.
Watch for related party receivables. Money “owed” by the owner, family members, or affiliated entities often never gets collected. These should be excluded from your valuation entirely or treated as owner distributions that reduce the company’s actual asset base.
Calculate a realistic collection value versus the book value. If the aging shows $50,000 current, $30,000 at 30 days, $15,000 at 60 days, and $25,000 at 90+ days, you might value current at 95%, 30-day at 90%, 60-day at 75%, and 90+ at 40%. That $120,000 book value becomes roughly $90,000 of collectible receivables. The exact discount rates depend on the industry and the specific customers involved.
This adjusted value should factor directly into your purchase price negotiations. Overpaying for uncollectible A/R is one of the most common mistakes first-time buyers make. If you’re not confident analyzing these numbers yourself, working with Los Angeles QuickBooks bookkeepers experienced in acquisitions can help you avoid paying for assets that never convert to cash.
LA's Small Business Bookkeeper
The Next Step:
A Short Conversation
Tell us about your business and what you're dealing with. We'll listen, ask a few questions, and give you a clear price for the work.
More Questions
How do I file quarterly payroll tax returns?
You'll file Form 941 with the IRS and DE 9/DE 9C forms with California's EDD after each quarter ends. Deadlines are the last day of the month following the quarter, and late filings trigger penalties from both agencies.
Read answerHow do I track business expenses without losing receipts?
Go digital the moment you get a receipt. Take a photo with your phone or use an expense app right after the purchase. Physical receipts fade, get lost, or pile up, but digital copies stay organized.
Read answerWhat should I look for in a bookkeeper for my law firm?
Look for trust accounting expertise first. A bookkeeper who doesn't understand IOLTA requirements and three-way reconciliations can create State Bar compliance problems that general bookkeepers rarely know how to avoid.
Read answerHow do I analyze the financials of a business I want to buy?
Request three years of tax returns, profit and loss statements, and bank statements. Compare them against each other to verify accuracy, then dig into adjusted earnings claims and look for trends that reveal the true health of the business.
Read answerWhat is seller's discretionary earnings and how is it calculated?
Seller's discretionary earnings represents the total financial benefit available to a single owner-operator of a small business. It's calculated by taking net income and adding back owner salary, personal expenses, and non-cash items.
Read answerHow do I manage cash flow during slow enrollment periods?
Map your seasonal patterns using historical data, then build cash reserves during peak months to cover three to four months of operating expenses. Time major purchases around your cash flow calendar and adjust variable costs like instructor hours to match actual student demand.
Read answer