Due Diligence

Debt Due Diligence

Learn to uncover all of a business's obligations, not just balance-sheet loans but leases, guarantees, deferred revenue, unpaid taxes, and contingent debts, that reduce what it's really worth.

  • Intermediate
  • 11 min total
  • 13 chapters

What decision this helps you make: What a business really owes, all in, and how those obligations change the price and the risk.

What this topic is

Debt due diligence uncovers the full set of a business's obligations, beyond disclosed loans, including leases, personal guarantees, deferred revenue owed, unpaid taxes, vendor and payroll obligations, and contingent debts, and examines their terms.

Why it matters

What a business owes reduces what it's really worth, and some obligations hide off the balance sheet. Undisclosed obligations either lower the price or, depending on structure, become the buyer's problem, which is why enterprise value is converted to equity value by subtracting net debt.

Who should learn it

Anyone buying, lending to, or valuing a business.

What you will understand

  • Understand debt diligence: uncovering all obligations, not just loans
  • See what hides off the balance sheet
  • Check the terms: covenants, maturity, change-of-control acceleration
  • Know why obligations reduce the price (net debt)

Prerequisites

Common misconception

"The balance sheet shows the debt, so I know what the business owes." The balance sheet shows the disclosed debt, but obligations hide off it: operating leases, personal guarantees, deferred revenue the business still owes as future service, unpaid taxes, vendor and payroll arrears, and contingent debts. A business can look profitable while weighed down by obligations invisible on a casual read. Uncover all of them, because they reduce what it's worth, and some can become yours.