Your Balance Sheet Is Also a Contract

A balance sheet can show a receivable. It cannot tell you whether the customer has a valid reason not to pay.

It can show equipment. It cannot tell you what the lender will require to release its lien.

It can show cash. It cannot tell you whether the owner is allowed to take it home.

For a buyer, the question is more demanding than whether the numbers are accurate. Will the rights behind those numbers support the business after closing?

The balance sheet is not literally a contract. But reading it without the contracts can produce a very confident misunderstanding of what is being bought.

Follow the receivable

Consider a hypothetical asset acquisition. The seller's receivables schedule includes a $300,000 invoice. The buyer expects to collect it after closing and use the cash to pay suppliers.

During diligence, the buyer finds that the customer disputed $90,000 because part of the work remains unaccepted. The contract permits the customer to withhold that portion until the issue is resolved. Assume those rights are enforceable and the objection is genuine.

The schedule contains one number. The documents reveal two different things: an amount expected to be collected and an amount that depends on further performance or a settlement.

That distinction can survive an assignment. California Commercial Code section 9404 generally subjects an assignee's rights to specified underlying contract defenses and claims, with exceptions. Purchasing a receivable does not automatically eliminate the customer's defense. California Commercial Code § 9404

The buyer now has choices. Exclude the disputed amount. Negotiate a reserve or a collection-based payment. Require the seller to complete the remaining work before closing. Accept the exposure at a price that reflects it.

Those choices do different jobs. A price reduction can compensate for uncertainty, but it does not finish the customer's project. Leaving collection with the seller may protect the buyer financially while complicating the customer relationship. Keeping the receivable may preserve continuity but require the buyer to fund the remaining work.

The useful question is therefore: who controls the work needed to collect it, who pays for that work, and who bears the shortfall?

The accounting treatment needs review too. If the same $90,000 has already reduced closing working capital, a second adjustment elsewhere could count the exposure twice. Counsel and the financial advisers need one agreed treatment of the same problem.

Follow the equipment to the release

Suppose the same business uses equipment included in the sale. The asset register identifies it, but the financing documents show that it also secures the seller's debt.

A line on the books is not evidence that the buyer will receive an unencumbered asset. California's attachment rule looks to value, rights in collateral, and an appropriate agreement or other qualifying arrangement. Attachment, perfection, and priority remain distinct inquiries. California Commercial Code § 9203

The closing response should connect the purchase funds, payoff instructions, and required releases. If the lender expects payment from sale proceeds, the seller cannot promise those same proceeds elsewhere without reconciling the funds flow.

Identifying a lien is a finding. Arranging an acceptable release is part of delivering what the buyer agreed to purchase.

Cash does not supply its own permission

An owner may look at a profitable quarter and decide the business can afford a distribution. The loan agreement may ask a different question.

A public Presidio credit agreement illustrates the distinction: specified owner payments depend on negotiated financial tests and other conditions. This is an example of contractual restrictions, not a universal standard or evidence of the borrower's current compliance. Presidio credit agreement, §§ 8.01(f), 9.04

For the hypothetical buyer, the post-closing cash model must reflect the actual financing documents. Cash in the bank, cash needed to operate, and cash permitted to leave the company can be three different amounts.

Paying a lower purchase price does not itself solve a restriction on later distributions. The buyer must understand those restrictions before relying on distributions to meet personal or holding-company obligations.

Make the findings meet

Reported item	Documents to connect	Decision before closing
Receivable	Customer contract, acceptance record, dispute correspondence	Who completes the work and bears the collection risk?
Equipment	Title, financing documents, lien evidence, payoff and release terms	What must happen to deliver the promised rights?
Cash and debt	Loan definitions, payment conditions, closing funds flow	What can remain, be paid out, or be distributed later?

A useful review assigns a person and a resolution to each material finding. A reserve without an agreed calculation remains a negotiation. A release without a delivery mechanism remains a closing risk.

Working-capital adjustments address a related pricing question, explored in You bought the business. What's left to run it?. The broader discipline is to make the financial review and legal review arrive at the same understanding of what changes hands.

The buyer needs more than a defensible number. The buyer needs the business rights that make the number worth paying for.

For a pending acquisition or financing, discuss the documents behind the financial statements with Tolbert Legal.

Educational information only; not legal, tax, accounting, financing or investment advice. Examples are fictional. Rights and consequences depend on the actual documents and facts.