Understanding the Difference Between Current and Long-Term Liabilities

Aberdeen Advisors M&A: Business evaluation

When you’re looking to buy or sell a business in Florida, current and long-term liabilities are two crucial factors you need to look at. But before you can look at them in a way that will benefit your financial planning efforts, you need to understand what they are and how each of them differs. Here’s a quick guide to help you do just that.

Current Liabilities

A current liability is formally defined as any amount of money a business owner must pay to a creditor within 12 months of the balance sheet date. The balance sheet will also include current assets such as cash and accounts receivable, which should outweigh short-term liabilities like payroll and notes payable.

When that happens, a company is considered to be in good financial standing and will likely meet all of its cash flow requirements. Above all else, it’s important for a business owner to be aware of these liabilities at all times, especially when selling a business. Considering that at any given time there are approximately 15 prospective buyers for each business on the market, it’s wise to keep a running record of these things.

Long-Term Liabilities

Where current liabilities are those financial commitments that must be satisfied within 12 months of the balance sheet date, long-term liabilities are those that extend beyond that 12-month period. These numbers are especially important to report to your sell side advisory or business broker. Additionally, there are two different types of long-term liabilities:

Financing Liabilities

These liabilities typically include debt issued to a sole investor, bonds payable, and convertible bonds. So if your company has taken out a loan from an investor or bank, it would be considered a financing liability.

Operating Liabilities

Operating liabilities, on the other hand, deal more with services rendered. For instance, a contract to pay rent for a specified period of time beyond 12 months would be considered an operating liability.

No matter the business you’re trying to sell, it’s important that you report these numbers to your sell side advisory team. They’re critical in determining the current value of your business as well as its potential future financial standing.