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When performing a business valuation, assets or liabilities that are not reported on a company’s balance sheet can be just as important as those that are reported.

Since contingent liabilities such as pending litigation, potential environmental issues or contingent guarantees are not always recorded on a company’s books, the fair value of a company can be easily skewed when these off-balance sheet items are not taken into account. Whether likely to become an actual liability or not, a contingent liability could have an effect on the price a potential buyer would be willing to pay to purchase a company.

In order to better reflect contingent liabilities in the fair value of a company, appraisers should consider all relevant facts and circumstances related to the situation by inquiring with management, performing due diligence and performing such other procedures deemed necessary to make an educated estimate of value.

Valuing contingent liabilities can be a difficult process and discretion should be taken when considering the effects that they will have on a company’s fair value.

For more information, please contact Joel Rosenthal at jrosenthal@schneiderdowns.com or Tom Claassen at tclaassen@schneiderdowns.com.

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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