Debtors who run their own business know there is always a risk their books will be scrutinized. In order to maintain the façade that they have few to no assets, many find ways to hold back revenue. In some instances, debtors arrange to defer payments from clients and/or vendors until a later period. Or, if the payments have already been received, the debtor will simply fail to record the sum received and will avoid depositing the funds.
Whenever there is an asset search involving a small business or a small business owner, it’s crucial to have a grasp of the industry’s and the company’s practices. In some industries, full payment is expected up front. In others, payment is deferred until a project is complete. Or payments are expected in installments during the course of a contract, either after a certain length of time or when milestones are met.
It’s also important to review the company’s historical practices, ideally through a review of its financial books, as well as invoices and contracts. Questions to ask include, What is a typical payment plan? How often, if ever, does the company stray from that plan? What is the usual length of time between the start of a project and final payment?
Once a pattern is established, the next step is a review of payments for all completed and pending projects to determine which payments are outstanding and how long until those payments are due. If any accounts are past due, have good faith efforts been made to collect? We always advise looking over payments for at least the past one to two years to make sure that prompt efforts have consistently been made to collect on outstanding accounts. A closer look at the companies in arrears is also in order. We’ve seen cases where companies run by the debtor’s family, friends, former colleagues and/or loyal clients are not collected on because there’s an agreement between them and the debtor to defer payment.