Buying Book Debts

[kevr6384]

Hi All,

We are closing a deal to buy out a competitor and had agreed a capped value on physical stock at completion.

They have now asked that we buy their book debts from them which is something we wanted to avoid.

How would you value these ?

Say the monies owed were £2000 would we buy them at say 25% 30% 50% etc ?

Any advice greatly appreciated.

Thanks

 

[Phil B]

I would strongly advise that you only “purchase” the book debts on a collection basis, so you effectively collect the debts and pay them the full amount less your admin charges. This will also give you a good steer on the quality of the customer base and allow you to ascertain if they have been offering overly generous settlement terms.

Failing this and if they want a figure ask an Invoice Discounter/Factoring company for a quote – will give you a good understanding of the “value” of the debts

As a last resort cherry pick which ones you will buy and include a claw back.

 

[kevr6384]

Thanks Phil B,

What would you say is a reasonable admin charge ?

Say 25% of the amount collected ?

Kev

 

[GRDCredit]

Interesting one.

When I have been involved in buying companies before (not for myself but for employers) it has worked on the basis of we will give you 100% of the valur of your debtor book but any debt that remains outstanding after an agreed period, say, 6 months, is considered uncollectable and 'turned back' to the seller. In addition any credit notes that are required are turned back to the vendor.

Clearly this required part of the purchase price to be held by the solicitor (escrow?) in case money needed to be clawed back.

However, this applied to mutli million pound companies.

It is really tricky to offer a percentage as a one off lump sum, how long is that piece of string? What, for example, is to stop the vendor raising an invoice prior to acquisition for £100k, you pay them, £75k for it and end up having to credit the invoice? Bit extreme of course but you get the principal.

Could you consider looking at an aged debt list and saying anything over 90 days old has no value, 60 days plus is worth x, 30 days plus is worth y and current is worth 100%?

Alternatively there are some people on here - e.g. Maxine, Geoff T and at least one other who would - for a fee I'm afraid - be able to offer a review of the aged list and give you a professional assessment of what is and is not collectable.

 

[Phil B]

Generally I would consider a 15% charge with a minimum fee, say £35.00.

GRD raise a valid point re the age of the debts - I would say anything over 60 days is not up for consideration.

Claw backs are only valid if you know the vendor can pay.

 

[Geoff T]

Just to add to the above - and GRD is, goes without saying, getting my vote p)

To make the most of that, you'd need a proper idea of exactly who owes what, and how old.

So my advice would be to get a system-generated debtor report, NOT an excel (change it how we like) spreadsheet!

 

[RichardW]

kevr6384,

It doesn't really make sense them wanting to sell you the book debts unless they fear there is an issue with the collectability of the debts post completion of the deal. Especially since you are continuing to provide the service that they were once doing, why wouldn't the customer pay.

You should only be able claim / negotiate a very small discount on the face value of the debts since they should all be collectable in less than 3 months, the net present value is quite close to the face amount. That of course does not take into account the individual circumstances of the sale and assumes that they are all 'good' debts, although why you would want to buy other debts is beyond me (and probably you!).

I would advise against asking a factor or a discounter for a quote as at the value you have quoted they will perform very little due dilligence thus giving you a very poor idea of the true value of the book. If the values are higher the process will take a little longer and may involve you giving a commitment fee to the factor (although not always). In any event the factor does not have the same agenda as you so may well come to a different conclusion. I'll also declare an interest here by saying I arrange facilities and act as broker for companies seeking invoice finance lines and I'm by no means talking negatively of factors. However using their due dilligence to value an asset for you sounds a bit like using a hammer to put a screw in. No offence Phil B.

Phil B's advice is very sound on offering to collect the debts for a fee, you won't be taking on the risk of the vendors credit decisions and the vendor should get their money assuming you chase correctly and they have sold properly. Although a fee of 25% sounds huge, 1% or 2% is probably more in the ball park. Treating the book debts in this manner is also fairly common commercial practice in asset purchases, which is what it sounds like you are doing.

If the vendor insists on you buying the book debts they shouldn't object to you substantiating them and at the very least I'd ring the customers and ask them to confirm that they intend to pay the full outstanding balance. There also plenty of specialist book debt auditors who could do a more in depth review of historic trends, potential set offs, deductions etc if you think its worth it. Prices vary from £350 to £1500.

I hope that helps and it's not too wordy.

 

[GRDCredit]

kevr6384,

It doesn't really make sense them wanting to sell you the book debts unless they fear there is an issue with the collectability of the debts post completion of the deal. Especially since you are continuing to provide the service that they were once doing, why wouldn't the customer pay.

The opposite view is that I have never been involved in an acquistion where the debts have not been sold! A lot will depend on the reason for selling - there are several reasons (legitimate reasons) why the vendor might want to cut all ties from the business. For example, we bought a business off one chap who knew he had cancer and wanted everything sorted before the inevitable happened.

Phil B's advice is very sound on offering to collect the debts for a fee, you won't be taking on the risk of the vendors credit decisions and the vendor should get their money assuming you chase correctly and they have sold properly. Although a fee of 25% sounds huge, 1% or 2% is probably more in the ball park. Treating the book debts in this manner is also fairly common commercial practice in asset purchases, which is what it sounds like you are doing.

Again my opinion would be somewhere in between 25% (too high) and 1% (too low). In fact it is essential that at the very least you collect in the old debts if you are trading under the old name. Imagine the confusion for your customer paying two cheques out for what, as far as they are concerned, is the same company. Inevitable you would receive cheques which relate to the old debt and if the vendor receives cheques payable to the company he would not be able to do anything with them as you will have control of the bank account.

The other thing we do not know of course is how much you are talking about - £1,000 or £1,000,000?

 

[maxine]

Agree with RichardW that 25% sounds huge and off the top of my head 2-4% might be more realistic but as GRD says depends on the debt portolio and the collectability. Look out for cash allocation issues (where cash applied to oldest invoices when should have been applied to newer and older invoices in dispute). Review disputed invoices levels aswell as the age of the invoice. Look at the original invoice and/or order date rather than a new potentially re-aged invoice. Also perform credit checks on the whole portfolio and build that cost in to the price offered.

Would recommend a sample test (proper sample not cherry picked the ones they want you to look at) and ask for all supporting document such as copy of signed contracts, order forms, delivery notes, diary notes etc. A common trick is to portray that the debt has not been worked very much and therefore should be good value for the price when in fact is has been worked to death!

Also consider what their bad debt provision policy has been and what bad debts have already been provided for as on that basis they would have a nil value within the portfolio.

You may agree to purchase on a sliding scale depending on age with the higher percentage for newer invoices, and lower percentage for older invoices which would probably result in a fairly low percentage across the whole portfolio.

Buying the book debt may be a good opportunity BUT only if you have the collections resource and skills and tools.

If you don't want this hassle then consider pointing your competitor in the direction of someone such as www.godebt.co.uk to get a valuation at least from them.

If the portfolio is quite reasonable to handle then can be a good opportunity to make initial contact with those customers in order to generate more leads and sales so be careful who you put on this as a Rottweiler first impression might not be a smart move

 

[GRDCredit]

so be careful who you put on this as a Rottweiler first impression might not be a smart move

Ah, so not a job for you then Maxine (1001)

 

[toddle2u]

Agree with RichardW that 25% sounds huge

Why would this be? If they don't want to collect it themselves they have to pay for someone doing it for them and for this to happen it has to be on attractive terms to the purchaser. The OP has already stated that buying the debt book was something he wanted to avoid and he should therefore make it unattractive for them to sell the book debt to him i.e offer them 20% for the whole debt book

It would be helpful to know what sort of figures arr involved

 

[yorkshirejames]

Thanks Phil B,

What would you say is a reasonable admin charge ?

Say 25% of the amount collected ?

Kev

In traditional terms, I would say 10%. Obviously there are companies these day who would be happy to take upto 40% - but this is usually where debts are old.

If you can buy these debts for (example) 50% of face value then if they are continuing customers you should be in a good position.