TESTING RECEIVABLES ON AN ASSET PURCHASE
When making an asset purchase the accounts receivables is frequently the largest single item affecting the purchase price. A typical audit of the receivables is done to determine if the stated AR is accurately reflected in the financial statements. Over the years we have experienced that AR testing is not just another financial audit or checklist item. In order to have 100% confidence in the receivables and revenue numbers we like to include both operations and management insight into the process.
A great example of this is of a construction company acquisition for which we provided due diligence and AR testing services. We tested AR for the last 24 months, taking into account any unusual concentration of revenue from a single customer and the type of work performed. We went beyond the typical AR testing process and included operations in helping us review job costs, type of work and customer referral sources to determine their validity and probability of collections. The intricate and detailed knowledge of the different type of constructions projects, customers, referral sources and probability of collections was better determined by consulting on-site employees rather than financial analysis of past performance.
Going back historically, typically 24-36 months, and spot checking AR is great, but without context of the industry, competitors and internal forecasts it won't help determine future risk. The purpose of a good accounts receivables audit should be to determine the confidence level of it being collected and amount allocated to bad debt. The purpose of an accounts receivable audit for the purpose of an acquisition should go beyond this and try to also determine the future value of current AR and help forecast sales/revenue.
During an M&A transaction there are hundreds of moving parts and long checklists. Knowing which items require the most focus and a deep understanding of the procedures involved by a experienced team of professionals can save millions of dollars and time!