Question: I am in the process of purchasing an answering service that has some ninety-day past-due accounts. The seller feels that these accounts have the same value as the current accounts. What is your feeling about purchasing past-due accounts?
Answer: The value of an account decreases the longer it is past due. The main reason is that the seller fails to address the risk that a buyer assumes in acquiring past-due accounts. Any buyer should be concerned about the longevity of past-due accounts. Not only are such clients more likely to terminate service (either voluntarily or involuntarily), but the buyer’s collection efforts could increase this likelihood. Normally the buyer wants to be in a position to start building goodwill with the new clients to offset any apprehension they may have about being “bought” by a new owner. Building goodwill is expensive and time-consuming. To have to do this on top of trying to collect balances that are severely past due would be counterproductive to the buyer’s efforts and could lead to more service terminations.
In general business practices, clients that are more than ninety days past due are not considered real accounts and are given a zero value for accounting purposes. Based on industry standards, I would say that any answering service customer that is past due by more than ninety days has a very low value, perhaps a fraction of the value of a current account. While it may still have some value, the only fair way to purchase an account this stale is on retention. The more stale the account, the longer the retention period should be for that account. Remember, any account that is over ninety days past due or does not pay at all is a waste of time and money for both buyer and seller.
[Portions of this article are from Doug Parent from Echo Communications in Santa Barbara, California.]