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Trust me, the receivables are collectable!

—RMZ

Acme Co intends to buy all the assets of Strategic Acquisition Co. (“SA”).  When analyzing the purchase price and risks of acquiring SA, Acme will take into consideration the Accounts Receivable of SA.  SA will argue that its AR is highly collectible and should be valued dollar for dollar, while Acme will argue that there is significant risk involved in the collectability of the AR and it shouldn’t have to shoulder the burden of any bad AR.  Whether there is a single large, high risk receivable, or a multitude of smaller receivables that, in the aggregate, could become material if not collected, the parties may want to work out a solution to move the determination of the value of the receivables in question to a later date instead of projecting their value now and setting it in stone.  Using a single receivable as an example, if the parties can’t reasonably agree on a valuation of the receivable when determining the purchase price that satisfies SA as to the value of the receivable and Acme as to the assumption of risk in connection with the receivable, (a) Acme and SA could agree to leave the receivable with SA to collect and leave it out of the purchase price, disregard the receivable in the purchase price and include an obligation of Acme to pay any collected amounts to SA or (b) include the receivable in the purchase price and include an obligation of SA to repurchase the receivable at a repurchase price equal to the amount allocated to the receivable in the purchase price (or some other agreed upon price) if the receivable isn’t collected within a certain period of time.  The payment obligation of Acme or the repurchase obligation of SA could be merely contractual or be secured with an escrow or holdback.  If the receivable remains with SA, Acme will want to include protections on how that receivable may be collected to protect its interest in the business as an ongoing concern and if Acme is required to collect the receivable, SA will want to ensure that Acme diligently pursues collection of the receivable.  In this manner, if the parties can’t reasonably agree upon a price for receivables at the time of contracting for the asset purchase, they can still come to an arrangement to conclude the transaction and fairly address both parties concerns with the receivables.

The information in this article is for informational purposes only and does not constitute formal, legal advice.  Consult with one of the attorneys from Roberts McGivney Zagotta LLC for advice about your particular circumstance.