Spike in AR before close?

July 10, 2025

by a searcher in Toronto, ON, Canada

I am in the closing process on a deal in the construction trades and we had a working capital peg set based on LTM at the time of LOI. The business has since seen AR spike, with only limited increase in AP and inventory. The business is growing but AR seems to be increasing in an outsized way. If anyone has dealt with this, I'd appreciate any tips. I don't want to be on the hook for a significant incremental payment to the seller if I can avoid it.

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Reply by a searcher
from Ohio University in Chicago, IL, USA

I am working on a commercial construction deal right where we are working through this exact topic. Sellers believe there will be a higher than normal AR balance. We are working on the NWC peg now and the LOI does state that any NWC higher/lower than the peg will cause a purchase price adjustment. I agree with other comments, you need to understand the AR aging and their billing behavior over TTM. I will be looking at completed work AR vs. WIP AR at close to determine any increase in NWC to the peg that should be paid out to the owners. I am also going to look at growth and backlog post close to see if the average NWC over TTM is realistic going forward or I need more. My expectation is that this will be a negotiation topic and I am trying to set seller expectations early in the process. At the end of the day, you need NWC to run the business. If the sellers killed it leading up to close and you have good AR coming in the door, I don't believe paying sellers out for any increases above the peg is a bad thing. Happy to share notes anytime.

Reply by a professional
from University of Central Florida in Chicago, IL, USA

Ask for the AR aging report and the billing schedules by project. You need to validate whether the increase in AR corresponds with actual, completed work. Look for pre-billed/invoiced projects not yet earned, which would mean revenue is overstated. There may also be some change orders that have not been approved. If the increase look unjustified, push for a normalization or adjustment in the final purchase price.

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