BVX Knowledge Base
BVX Knowledge Base
M&A University

Accounts Receivables (A/R)

See Inputs and Balance Sheet for general instructions.

•   Enter A/R required to generate the Final Adj. EBITDA.

•   Ideally one should enter normalized net A/R required to support the sales.  Actual A/R on the balance sheet may require adjustment if the amount of A/R is influenced by tax/earnings motivations, or if A/R level fluctuates due to order size, uneven shipments, seasonality, etc. Professional help may be required.

•   Future A/R: BVX calculates future A/R in proportion to sales unless Advanced Features are used. Changes in A/R impact cash flow calculations.

•   A/R should always be part of the valuation, even if they are not part of the transaction. If A/R are excluded from the purchase, buyer will have to fund them post-acquisition. This will increase his cash infusion in the business, reduce his ROE, and may even create a post-acquisition cash crunch.
Note: Often A/R are not included in the transaction. BVX recommends including A/R in the valuation even if the buyer is not buying or getting them at closing. Doing so will assure the buyer that future working capital needs have been funded. Excluding A/R from valuation will overvalue the business. Such exclusion implies growth does not need additional working capital. Including A/R in value calculation does not mean buyer has to or will purchase A/R. After determining the Enterprise Value of the business, the net to the seller can be reduced by the A/R not purchased by the buyer.

•   For businesses using cash basis accounting, A/R should be included in value determination. A business should be valued as if it is using accrual accounting.

•   Include all A/R. Do not reduce A/R by past due or the ones bank will consider ineligible. Total A/R, including past due and ineligibles, impacts Cash Flow of the business. In this situation, reduce the Advance Rate in Revolver: % of A/R, rather than reducing amount of A/R. Example: Total A/R are 100, eligible A/R are 90, and advance rate is 80% of eligible A/R, meaning bank would loan 72. In this situation, enter 100 in the A/R (rather than 90), and enter 72% (rather than 80%) for the Advance Rate in the Revolver: % of A/R.