How TGG Uncovered $212K in Negative Liabilities That Could Complicate a Construction Company Sale
For construction and specialty-contractor owners considering a future sale, recapitalization, or capital raise, unresolved accounting discrepancies can create problems long before a transaction begins.
During a financial review, TGG Accounting discovered approximately $212,000 in combined negative liability balances across several accounts. These irregularities raised questions about the reliability of the company’s balance sheet and the potential complications they could create during a future quality-of-earnings (QoE) review.
Negative Liabilities Raised Red Flags
Liability accounts ordinarily carry credit balances representing amounts a company owes. When those accounts show negative balances, they effectively act like assets, potentially inflating the company’s current ratio and creating a misleading picture of liquidity.
TGG found negative balances in several accounts, including cafeteria plan/medical, life insurance withheld, holiday/vacation accrual, and accrued income taxes.
The unusual balances suggested that some entries may have been posted as accounting adjustments, or “plugs,” rather than supported by proper monthly reconciliations.
An October Imbalance Pointed to Another Problem
TGG also found an October balance sheet imbalance associated with a bonus-accrual true-up. The discrepancy suggested a possible plug entry rather than a properly reconciled adjustment.
Left unresolved, this type of accounting problem could require extensive documentation and corrective work during a buyer’s quality-of-earnings review, adding unnecessary time and expense to the transaction process.
Weekly Reporting
keeps everyone on the same page
Forecasting
allows for informed decision making
Attention to Detail
guards against pitfalls
Sophisticated Insights
give our clients the cutting edge with investors
Intercompany Reconciliations Present Additional Transaction Risks
TGG’s assessment also raised concerns about intercompany reconciliations, an area that can create significant complications when construction businesses operate through multiple affiliated entities.
When transactions between related companies aren’t reconciled consistently, unexplained balances can accumulate and become difficult to resolve during financial due diligence.
TGG considers unresolved intercompany reconciliations among the most common sources of additional costs and delays in future business transactions. Addressing these concerns early, even years before a planned sale or capital raise, can help reduce costly complications.
Addressing Financial Problems Before a Transaction
TGG’s findings demonstrate how seemingly routine balance sheet entries can reveal accounting problems that might otherwise remain unnoticed until a buyer begins financial due diligence.
Construction company owners can perform an initial check by pulling their trial balance and examining every liability account with a negative balance. Each unusual entry warrants investigation to determine whether it represents a legitimate transaction, an accounting adjustment, or an unresolved reconciliation issue.
A pre-transaction financial readiness review from TGG Accounting can help determine which discrepancies require further investigation and what steps should be taken before a sale, recapitalization, or capital raise.
What TGG’s Consulting CFO Said
“Several liability accounts are carrying negative balances — Cafe Plan/Medical, Life Insurance Withheld, Holiday/Vacation Accrual, Accrued Income Taxes, and others — roughly $212K combined. A negative liability functions like an asset, which is also inflating the current ratio and may point to entries posted as plugs rather than true reconciliations.”
— Charles Cecil, Consulting CFO, TGG Accounting
