Cleaning up AR before an acquisition: what buyers actually look at

After a surge in deal activity in 2025, CFO.com is tracking what they're calling a "split M&A market" in 2026—robust activity in certain tech segments alongside significant caution in others. For software company founders and CFOs who are preparing for or entering a transaction, one area that consistently surprises sellers is how closely acquirers examine accounts receivable during diligence.

AR is not a boring line item in a tech acquisition. It's a real-time signal of revenue quality, customer health, and finance discipline—and buyers know how to read it. Here's what they look at, what they discount, and how to present your AR book in a way that doesn't cost you points on valuation.

What acquirers look for first

Age distribution of the book. The first thing a buyer's diligence team does is age the receivables: what percentage is current (0–30 days), what's in 31–60, 61–90, and what's 90+. A book where more than 15% of outstanding AR is over 90 days raises immediate questions. Not because 90+ days is always bad—but because it prompts the buyer to ask: why is it there, has collection been attempted, and what's the realistic recovery rate on those balances?

Concentration risk. If 40% of your outstanding AR is from three customers, a buyer will assess each of those customers independently. A $2M receivable from a healthy, paying enterprise customer is worth $2M. A $2M receivable from a startup that raised its last round 24 months ago and has missed your last two invoices is worth something meaningfully lower—and the buyer will price it that way.

Disputed invoices. Any invoice that is formally disputed at the time of diligence will be scrutinized. The buyer wants to know: what's the dispute about, what's your documentation, and what's the realistic outcome? Disputes that are clearly defensible (you have the contract, the usage logs, and a solid legal position) are fine. Disputes where your position is weak, or where you've been in back-and-forth for 8 months without resolution, will be discounted heavily or excluded from the purchase price calculation entirely.

Historical bad debt rate. Buyers will ask for your last 3 years of bad debt write-offs as a percentage of revenue. A consistent rate below 1% is strong. A rate that's been creeping up—from 0.8% to 1.4% to 2.1%—will generate follow-up questions about what's driving it and whether the trend is accelerating.

Collection policies and escalation history. A sophisticated buyer will ask: what does your AR process actually look like? When does a past-due invoice get escalated internally? Do you use external collection agencies? At what trigger point? Companies with documented, consistent AR processes are viewed more favorably than those who manage collections reactively. A seller who says "we have a written placement policy—accounts go to our agency at 90 days past due" presents better than one who says "we kind of evaluate it case by case."

What gets discounted or excluded

In the purchase price mechanics of most tech acquisitions, AR is included in the working capital calculation. Buyers and sellers negotiate a working capital target, and AR that doesn't meet quality thresholds gets excluded or haircut:

• Accounts over 120 days old are often excluded entirely from the working capital peg unless the buyer can verify recovery is likely.
• Disputed invoices are typically excluded from the peg or subject to a specific escrow holdback.
• Receivables from customers with known financial stress—recently announced layoffs, missed renewal conversations, or public distress signals—will be individually assessed and often discounted 30–70%.
• Intercompany receivables, related-party balances, or customer credit balances that net against AR will be scrutinized for accuracy.

What to do 90–180 days before a transaction

If you're preparing a company for sale, the AR cleanup window starts 3–6 months before you expect to enter a formal process. Here's what moves the needle:

Recover or write off aged accounts—don't leave them floating. An account that's 18 months old and has had no collection activity is not an asset—it's a liability in diligence. Either place it with a collection agency and pursue recovery (which can happen quickly when properly escalated), or write it off and clean your balance sheet. "Pending" accounts in your AR book signal to a buyer that your finance team doesn't make decisions.

Resolve disputes before diligence, not during. An active dispute that's been running for 6 months is unlikely to be resolved in the 60 days of a diligence process. Buyers treat that as an unresolved liability. If you have defensible disputes, escalate them now—through legal channels or a collection agency—so they're either resolved or in active enforcement by the time diligence begins.

Document your collection process formally. A written AR policy with defined escalation triggers, external agency relationships, and historical performance data presents well. It demonstrates that your receivables are managed, not monitored passively.

Separate strategic patience from collection delay. Some sellers avoid escalating accounts from important customers because they don't want to damage a relationship before a buyer sees the customer base. This is understandable—but it's also transparent to a sophisticated buyer. A clean, actively collected AR book is more valuable than one where aging accounts were left in place to avoid uncomfortable escalations. Buyers discount what they see; they price uncertainty at full value.

The valuation math

In a typical SaaS acquisition at a 6–8x ARR multiple, the working capital adjustment from AR quality can move the purchase price by $1–5M on a $50M deal. That's not a rounding error—it's real money that comes back to the seller (or doesn't) based on decisions made in the 6 months before close.

The companies that come through AR diligence cleanly are the ones that treated collections as a discipline during normal operations—not as a cleanup project before a transaction.