Key Insight
Most buyers focus on the income statement (how profitable?) and ignore the balance sheet (how healthy?). The balance sheet reveals hidden liabilities, working capital dynamics, and asset quality that the P&L will never show.
The Balance Sheet Equation
Assets = Liabilities + Owner's Equity
Current assets: Cash, accounts receivable, inventory, prepaid expenses — assets expected to convert to cash within 12 months
Long-term assets: Equipment, vehicles, real property, intangibles — assets with useful lives beyond 12 months
Current liabilities: Accounts payable, accrued expenses, deferred revenue, current portion of long-term debt — obligations due within 12 months
Long-term liabilities: SBA loans, equipment loans, other debt due beyond 12 months
Owner's equity: Assets minus liabilities — the owner's residual claim
What to Look for in Due Diligence
Unusual asset balances: Large receivables from related parties (loans to owners disguised as receivables), inventory that hasn't turned in years, prepaid expenses that seem oversized
Hidden liabilities: Accrued expenses that seem understated, deferred revenue not on the balance sheet, contingent liabilities not disclosed
Debt: Total debt load that wasn't disclosed in the CIM; equipment loans that restrict asset transfer; lines of credit that must be repaid at closing
Owner's draws: Consistent negative equity in a profitable business indicates the owner has been drawing more than the business earns — which is fine tax planning but signals what to expect post-close
Free Prescore — No Credit Card Required
Apply this to a real deal in minutes. No account, no commitment.