Accounts Receivable in M&A: Price the Evidence, Not the Aging Report

An accounts receivable aging report looks authoritative. Every customer has a name, every invoice has a date, and every balance sits neatly inside a current, 30-day, 60-day, 90-day, or older bucket.

On a recent deal, most of the balance had already been sitting there since the prior year-end report. Some invoices were eight to twelve months old. And when we asked the seller about it directly, she told us she had already collected a portion of those balances herself. The payments had never been properly recorded or applied against the corresponding invoices.

The aging report wasn't just old. It was wrong.

That's the problem with treating an aging report as evidence instead of an assertion. It tells you what the accounting system says customers owe. It doesn't establish that the invoices are valid, the balances are accurate, or the money will ever show up in the bank. That distinction is easy to skip past in a deal moving fast toward closing, and it's exactly where buyers get burned.

An Invoice Is Not Cash

Say a target company reports a $10,000 receivable. What's it actually worth?

The answer could be $10,000. It could also be $5,000. It could be nothing. The face value depends on questions the aging report can't answer by itself:

• Was the underlying work completed?
• Was the customer billed correctly?
• Does the customer dispute the charge?
• Has a credit been promised but never entered?
• Has the customer already paid?
• Is the customer still operating?
• Has anyone actually tried to collect the balance?
• How long does this customer normally take to pay?

The reported number is a starting point, not a conclusion. Under Topic 326, expected credit loss estimates generally incorporate relevant available information, including historical loss experience, delinquency, current conditions, and reasonable and supportable forecasts. For an eligible entity that makes the applicable elections under ASU 2025-05, subsequent collections may also be considered when estimating expected credit losses on qualifying current receivables and contract assets.

For an acquisition, the practical version of that question is simpler: How much of this balance turns into cash for the buyer?

The Aging Report Is an Assertion, Not Evidence

An aging report is an output of the accounting system. Its accuracy depends entirely on the quality of what went into that system, and on whether payments, credits, write-offs, and disputes were recorded correctly.

A clean-looking report can still hide:

• Duplicate invoices
• Invoices for incomplete work
• Balances that should have been written off
• Unapplied customer payments
• Unrecorded credits
• Disputed charges
• Amounts billed to inactive or insolvent customers
• Receivables that were already collected

Treat the report as a management assertion to be tested, not as independent evidence. Because that's what it is.

Three Separate Questions

A good A/R review doesn't collapse into one question. It separates validity, accuracy, and collectability, and tests each one on its own terms.

Is the Receivable Valid?

From a diligence perspective, a receivable should tie to documented goods or services delivered under the applicable contract, engagement terms, purchase order, or established course of dealing. Any material question about legal enforceability should be addressed with transaction counsel. You should be able to connect the balance to real documentation: An executed contract or engagement letter, a customer purchase order, an invoice, evidence the work was completed, time records or delivery documentation, or correspondence acknowledging the amount owed.

An invoice the accounting system spit out doesn't, on its own, prove the customer owes anything.

Is the Recorded Balance Accurate?

A valid invoice can still carry the wrong balance. The customer may have made a partial payment. A credit may have been approved and never entered. Cash may have been received and applied to the wrong invoice, or never applied at all.

A basic roll-forward should reconcile:

When it doesn't reconcile, find out why before you rely on the number.

Is the Receivable Collectible?

A receivable can be valid and accurately recorded and still be a bad bet. Collectability depends on more than age. It also depends on the customer's financial condition, the history of the relationship, whether there's a dispute, the seller's prior collection efforts, customer concentration, contractual payment terms, and the target's own collection track record.

A 120-day balance from a government agency and a 120-day balance from a struggling small business carry very different risk. The aging bucket is a useful signal. It isn't the whole analysis.

How to Actually Test It

Reconcile the Aging to the General Ledger

Confirm the detailed customer aging agrees with the A/R balance on the financial statements. Explain any difference before you rely on the report. Watch for manual journal entries posted straight to A/R, negative customer balances, unapplied cash, stale reconciling items, unexplained miscellaneous customers, and balances that shift when you rerun the report.

Compare Multiple Aging Reports

Don't stop at the latest month. Pull prior periods, including prior year-end reports, and see whether the same balances are just sliding from one bucket to the next. A receivable that shows up report after report with no meaningful collection activity isn't a new invoice. It's a problem wearing a fresh coat of paint.

Test Subsequent Collections

This is one of the strongest procedures available. Start with the ending A/R report, identify which balances were collected after the measurement date, and trace those receipts to the bank statement, the deposit detail, the customer account, and the specific invoice. That's real evidence. "That customer always pays eventually" is not.

Review Invoices and Customer Support

Sample the largest balances, the oldest balances, recent invoices, related-party balances, customers with recurring credits, customers with unusual payment patterns, and anything management insists is fine despite the age. The point isn't confirming an invoice exists. It's confirming the balance is valid, outstanding, and collectible.

Analyze Credits, Write-offs, and Disputes

Look at credit memos and write-offs on both sides of the measurement date. A seller may sit on credits or bad debt recognition ahead of a sale, sometimes on purpose, sometimes just from weak bookkeeping. Customer correspondence tends to say the quiet part out loud: "We already paid this." "The work was never completed." "Please revise the invoice." "We agreed on a lower amount." Those aren't routine collection delays. They're evidence the recorded balance is wrong.

Examine Unapplied Cash

This deserves its own line of attention. Unapplied cash means a payment was received but not matched to the correct customer or invoice. Depending on how it was recorded, the cash balance may be correct while the customer ledger and aging remain wrong, or the payment may be missing from the accounting records altogether. It gets serious when the seller's system still shows a customer owing money after that customer already paid. Post-close, the buyer ends up calling that customer about an invoice that no longer exists. A bookkeeping failure turns into a client retention problem, fast.

Build an Adjusted, Collectible A/R Schedule

Once the testing is done, classify what you found:

The reserve should reflect the target's actual facts, not an arbitrary haircut applied because an invoice landed in a certain aging bucket. The output is an adjusted schedule showing reported A/R, identified invalid balances, unapplied collections, specific reserves, general reserves, and estimated collectible A/R. That schedule is what makes the negotiation defensible instead of a gut argument.

A/R Risk Doesn't Go Away Just Because There's No Working Capital Peg

A/R shows up most visibly inside a closing net working capital calculation. When the definition of closing net working capital includes A/R, an overstated receivable balance may increase the seller's working capital credit or reduce an otherwise buyer-favorable shortfall. The exact effect depends on the peg, the treatment of reserves, and the accounting principles specified in the purchase agreement.

But the risk exists even without a peg, whenever receivables are transferred to the buyer, purchased separately, relied on to fund post-closing operations, collected by the buyer on the seller's behalf, excluded but tied to transferred client relationships, or used to support management's claims about cash conversion.

No peg doesn't mean no risk. It just means the agreement has to handle it somewhere else.

Ways to Allocate the Collection Risk

There's no single right structure. The right one depends on record quality, the age of the balances, the size of the receivables, and how much collection headache the buyer wants to take on.

Seller retains the historical A/R. The seller keeps the right to collect pre-closing invoices. This simplifies the economics, especially when the old A/R is stale or unreliable, but the agreement still needs rules on who talks to customers, where payments get sent, how misdirected cash gets handled, whether the seller can threaten collection action, how mixed pre- and post-closing payments get allocated, and when the seller has to stop contacting transferred customers. The seller can keep the economic risk and still damage the goodwill the buyer just paid for.

Buyer acquires only eligible receivables. Define what transfers: Under a set number of days old, supported by an invoice, undisputed, owed by an active customer, free of offsets and credits, never written off. Publicly filed receivables-financing agreements illustrate the concept, defining "eligible receivables" and excluding past-due or disputed balances outright, even though those agreements serve a different purpose than an M&A purchase contract.

Apply a specific reserve or discount. Take the full ledger, value it below face amount, and base the discount on identified risk rather than a blanket assumption that every invoice is worth the same.

Use a holdback or escrow. Withhold part of the purchase price until the receivables are collected or validated. Gives you somewhere to recover from if actual collections come in short.

Use a collection true-up. Compare actual collections to the assumed collectible value after a defined window, and adjust deferred consideration, escrow, or another purchase price component for the shortfall.

Require repurchase of ineligible receivables. The seller buys back any receivable that breaches the agreed representations. Already paid, subject to an undisclosed dispute, or unsupported by the records, for example.

What the Purchase Agreement Should Nail Down

These are commercial diligence considerations. Transaction counsel should draft the operative language.

When A/R is material, the agreement needs clear answers to:

1. Is historical A/R included or excluded?
2. What makes a receivable eligible?
3. Is A/R valued at face amount or net collectible value?
4. How are reserves calculated?
5. Who owns cash collected after the cutoff date?
6. How does a misdirected payment get handled?
7. Who can contact customers about old invoices?
8. Who controls disputes, credits, and settlement decisions?
9. What happens if a balance was already paid?
10. Is there a holdback, true-up, indemnity, or repurchase remedy?
11. How long does the collection period stay open?
12. Who eats the legal and administrative cost of collecting?

Settle these before closing. Not after the first customer says, "I already paid that."

What Sellers Should Do Before Going to Market

A seller can head off most of this friction before diligence even starts. At a minimum: Reconcile the aging to the general ledger, apply all unapplied cash, investigate negative balances, issue outstanding credits, write off invalid receivables, document disputed invoices, collect what's collectible while you still can, keep support on file for large invoices, and run a consistent collection process.

Writing off an invalid receivable doesn't create the loss. The loss already happened. The write-off just stops you from presenting a fictional asset to a buyer who's going to find it anyway.

The Bottom Line

Accounts receivable sits at the intersection of accounting, cash flow, purchase price, and customer relationships. A weak review asks what the aging report totals. A strong one asks whether the invoices are valid, whether the balances are accurate, what's been collected since the report date, which amounts are genuinely collectible, how much should be reserved, and who owns the risk if the cash never shows up.

Frequently Asked Questions

Should accounts receivable transfer at face value in an acquisition?

Not automatically. An aging report shows what the accounting system says customers owe, not what a buyer will actually collect. A/R should be verified invoice by invoice, traced to subsequent cash collections, and reserved for stale or disputed balances before it is priced into a deal.

What is the difference between a valid, accurate, and collectible receivable?

A valid receivable ties to documented goods or services delivered under the applicable contract, engagement terms, purchase order, or established course of dealing. An accurate receivable has the correct outstanding balance after all payments and credits are applied. A collectible receivable is one a buyer can reasonably expect to turn into cash, based on the customer's financial condition, dispute history, and payment pattern. A receivable can fail any one of these tests even if it passes the other two.

How do buyers test accounts receivable during due diligence?

Buyers reconcile the aging report to the general ledger, compare aging reports across multiple periods to see if balances are simply aging in place, trace subsequent collections to bank deposits, review supporting documentation for a sample of invoices, analyze credit memos and write-offs, and check for unapplied cash that may mean a customer already paid.

Does accounts receivable risk exist without a working capital peg?

Yes. A working capital peg is where overstated A/R shows up most visibly, but the collection risk exists whenever receivables transfer to the buyer, get collected on the seller's behalf, or support management's claims about cash conversion. The absence of a peg does not eliminate the risk. It just means the purchase agreement has to address it elsewhere.

How can a purchase agreement allocate accounts receivable collection risk?

Common structures include letting the seller retain and collect historical A/R, limiting the buyer's purchase to eligible receivables meeting defined criteria, applying a specific reserve or discount to the ledger, using a holdback or escrow tied to actual collections, running a post-closing true-up against assumed collectible value, or requiring the seller to repurchase receivables that breach agreed representations.