18. List and Explain Contingent Liabilities

Full disclosure that builds trust instead of ending negotiations

Problem Statement

Many owners feel quietly confident about their numbers until a buyer’s adviser asks about contingent liabilities. Suddenly questions appear about guarantees, disputes, warranties, earn out promises, unresolved tax matters, make good obligations, staff claims that might surface and personal commitments that sit behind the company. What felt like tidy accounts starts to look like a shadow map of possible costs that no one has written down in one place.

Buyers are not fond of surprises. When they discover contingent liabilities late, they often react by cutting price, demanding heavy warranties or walking away. When you surface them early with a calm explanation, they are more likely to trust you, trust the numbers and keep talking.

What An Owner Might Say

“We have no big liabilities. There are a few things that could bite us if they went the wrong way, although they never have.”

“There was a staff issue last year that might turn into something. Our lawyer said it would probably fizzle out so I have not really thought about it since.”

“We gave a personal guarantee on a lease for a related company. It has never been a problem. I just hope the buyer does not panic when they see it.”

Why It Happens

Contingent liabilities grow from perfectly normal business life. You sign leases, give guarantees to banks, promise warranties to customers, enter supply contracts with penalties, have the odd dispute, face the risk of an employment claim or a tax review. Most of the time nothing dramatic happens, so these possibilities slide to the back of your mind.

Accounts often focus on what has actually occurred, not on what might occur. Unless an issue is clearly probable and measurable, it may not appear as a hard number in the financial statements. Busy owners then assume there is nothing to worry about, even though a buyer will absolutely ask what sits around the edges of the balance sheet.

There can also be a fear that naming contingencies will invite trouble. Some owners worry that if they put a potential issue on paper, buyers will overreact or staff will panic. So they say little, hope that nothing surfaces during due diligence and feel blindsided when a cautious adviser finds something in a file note or old email.

What To Do About It

Treat contingent liabilities as a grown up conversation rather than a confession. Start with a wide sweep. Sit with your accountant, lawyer or adviser and list areas where obligations often hide. Leases, guarantees, banking covenants, long term contracts, performance bonds, warranties, unsettled insurance claims, employment issues, unresolved tax positions, product recalls, customer disputes, environmental obligations, make good clauses on property.

For each area, ask three questions. What could the business be required to pay or do. How likely is that outcome on a simple scale such as low, medium or high. If it did happen, what is the rough size of impact. You are not writing an actuarial report. You are creating a practical map of risk for yourself and for a future buyer.

Document the findings in a short register. Include a plain description, who is involved, key dates, relevant documents, your view of likelihood and any mitigation already in place such as insurance or provisions. Be honest without becoming dramatic. A small low likelihood issue is still worth noting if it shows that you pay attention.

Where a matter is reasonably likely or already in progress, talk with your advisers about whether a provision or note should appear in the accounts. Buyers feel far calmer when financial statements reflect issues clearly, rather than discovering everything in a side document. If you decide not to recognise something formally, record the reasons so you can explain that judgement later.

In some cases it may be wise to resolve issues before you go to market. That could mean settling a dispute, tidying documentation for a guarantee release, closing an old entity, clarifying a tax position or finalising an insurance claim. You may trade a little cash now for a cleaner, less stressful sale later.

How To Keep The Momentum

Once you have created a contingent liability register, keep it alive. Review it at least annually as part of planning, then more often as you move into active exit preparation. Note new contracts, claims or guarantees as they arise and remove items that have been resolved. This rhythm proves that risk management is part of how you run the business, not a last minute exercise to please buyers.

Fold the conversation into governance calmly. When the leadership team discusses strategy, have a short slot where key contingencies are updated in plain language. No dense accounting jargon. Just clear statements of what might happen, how likely it feels and what you are doing about it. This keeps everyone aware without creating a culture of fear.

Work deliberately on insurance and contractual protections. Check that your policies match the actual risks in the register, that limits are sensible and that notifications are made on time. Where contracts allow you to cap liability, limit consequential loss or clarify warranty terms, use those tools. A good mitigation story can make a sizeable contingent item feel far less threatening to a buyer.

As exit approaches, prepare a buyer ready version of the register. Remove clutter, keep the focus on items that would genuinely matter to a new owner and attach key supporting documents. Combine this with a covering note from your accountant or lawyer where appropriate. The aim is to say, in effect, these are the main places where future cost might arise, here is how we see them and here is what we have already done.

Golden Nugget

“Buyers can price known risks. What they truly fear is the feeling that something important is hiding offstage.”

How RegenerationHQ can help

RegenerationHQ works with owners who want buyers to see a steady, trustworthy operation rather than a mystery with hidden hooks. Contingent liabilities are a core part of that picture. Support often begins with a practical workshop where we map your likely exposure areas in everyday language, then turn that into a simple register you can maintain.

From there we help you prioritise which issues to tidy, which to disclose and how to weave the whole story into your broader exit preparation. That might involve coordinating with your accountant on financial statement treatment, with your lawyer on key contracts or with your broker on how information appears in the data room. The result is a sale process where honest disclosure builds trust, negotiations focus on value and you are not left watching deals wobble because of risks you could have named and managed much earlier.

If you want a steady guide beside you while you get ready for one of the biggest decisions of your working life, RegenerationHQ is ready to help you walk that road with clarity and confidence.