Inventory and Accounts Receivable in Due Diligence: What Buyers Often Miss

Inventory and accounts receivable both show up on the balance sheet as assets — numbers that seem straightforward and countable. In practice, they are two of the most commonly overstated line items in a small business acquisition, and two of the easiest to underprice risk on if a buyer doesn't dig past the headline number.

Both matter for the same underlying reason: the balance sheet reports what the seller says these assets are worth, not necessarily what a buyer can actually collect or sell. The gap between the two is where buyers get surprised.

Inventory: what the balance sheet doesn't tell you

An inventory balance of $200,000 tells you the seller's books value the stock at $200,000. It doesn't tell you how much of that inventory is sitting unsold from three years ago, how much is obsolete or damaged, or how much was counted using assumptions that inflate the number.

Aging is the first thing to check

Request an inventory aging report — a breakdown of stock by how long it's been held. Inventory that's been sitting for 12+ months in a business with normal turnover is a red flag. Slow-moving or dead stock often still sits on the books at full value long after it has effectively become worthless.

Valuation method matters

How inventory is valued (FIFO, weighted average, or another method) affects the reported number, especially in periods of changing costs. Ask what method is used and whether it's been applied consistently — a seller who changed valuation methods shortly before a sale process started is worth a closer look.

Physical count vs. book count

Book inventory and actual physical inventory frequently diverge — through shrinkage, miscounts, or units that were written off operationally but never adjusted in the accounting system. A physical count or cycle count sample before closing, even a partial one, can reveal a material gap that a document review alone would miss.

Accounts receivable: collectible on paper isn't collectible in practice

Accounts receivable represents money customers owe the business. The balance on the books assumes all of it will eventually be collected. In reality, some percentage of any AR balance is late, disputed, or simply never coming in — and sellers have limited incentive to write off doubtful receivables before a sale, since doing so lowers the assets on the balance sheet right when they want it to look strong.

Run an AR aging analysis

Break receivables down by how long they've been outstanding: current, 30 days, 60 days, 90+ days. Receivables over 90 days old have a meaningfully lower probability of collection — and the older the balance, the more likely a portion will need to be written off entirely.

AR age	Typical collectibility
Current (0–30 days)	High — treat close to full value
31–60 days	Good, but worth confirming with the customer
61–90 days	Elevated risk — investigate specific accounts
90+ days	Significant risk — often partially or fully uncollectible

Concentration compounds the risk

If a large share of AR sits with one or two customers — particularly the same customers driving revenue concentration — a payment dispute or slow-pay pattern with that account creates a double exposure: a revenue risk and a balance sheet risk at once. Cross-reference the AR aging against the top customer list.

Check for related-party or unusual receivables

Occasionally an AR balance includes amounts owed by the owner personally, an affiliated entity, or a related party — money that isn't a normal trade receivable and may never actually be collected in the ordinary course of business. These should be identified and typically excluded from any working capital calculation.

Why this matters for the purchase price

In deals that use a working capital adjustment — where the purchase price is trued up based on the actual level of net working capital at closing — inventory and AR are usually the two largest components of that calculation. Overstated inventory or receivables inflate the working capital figure the seller is entitled to, effectively increasing the price the buyer pays without the seller having contributed real value.

Even in deals without a formal working capital mechanism, understanding the real, collectible value of these assets changes what the buyer is actually acquiring — and gives grounds to adjust price or structure if the numbers don't hold up.