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What Impact Do Accounts Receivables Have On The Multiple Used?

The Question

If only multiples of earnings are used for valuation, a business that has a large accounts receivable portfolio (reasonably aged) may be valued the same as one which has collected most of its outstanding accounts and paid out a dividend to the owner.

The Answer

The key to comparing the two businesses in your example is:

What assets and advantages does the second company have that allows it to collect it's account receivable more quickly and reliably than the first company.

Does the second company have superior policies and procedures in place? Does it provide superior customer service and therefore have happier customers? Perhaps their client base is more financially secure and capable of consistently paying on time.

When a buyer purchases a business, they are doing so in order to enjoy the future benefits of owning the company (salary, perks, equity etc.). The more reliable those future benefits appear and the less risk associated with them, the higher the business will be valued - the higher the multiple it deserves.

It's up to the seller of the second business to show the buyer the exceptional qualities and capabilities of his company - just one of the results of which happens to be exceptionally quick and reliable collection of it's account receivable.

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