Buying a Business: How are Payables and Receivables Handled in the Sale?

What is a common practice for dealing with accounts payable and receivable when purchasing a business?

In most small business transfer transactions the seller will retain the cash and receivables. They will pay off the bills and other outstanding payables and deliver the business "free and clear" to the buyer.

In larger purchases, the buyer should consider acquiring the receivables to provide themselves with immediate working capital. Ample working capital is of utmost importance for successfully running the business after the acquisition. As an added benefit, acquiring the receivables allows the buyer to begin dealing directly with his most important relationships - his customers.

Assuming the payables is also something to consider -- for the following reasons.

1) By assuming the responsibility for the payables, you immediately begin forming your own relationship with another key element of the company -- the suppliers, vendors, and other service providers. It puts you, the new owner, in control of dealing with these important contacts instead of the former owner.

2) The purchase price you pay the owner is reduced by the amount of accounts payable that you assume. Then you, as the new owner, pay the invoices as they become due. Not only would you keep more money in your pocket at closing -- you would essentially have 30 to 60 days of interest free financing for the payables.

3) As the receivables start coming in, you will be able to use that capital to pay the invoices as they come due.