An off-balance sheet liability refers to an obligation with financial consequences when existing accounting practices do not require the company to report in its financial statements. Off-balance sheet liabilities can potentially materialise and impose financial liabilities at a future date. An example is a guarantee or undertaking by the business on behalf of third parties. Another example could be a pending court case against the business being valued. Because of the probability of such liabilities materialising, business valuation analysts typically deduct the full amount of the off-balance sheet liabilities from the benefit stream being relied on to derive the fair market value. The existence of off-balance sheet liabilities for a business being valued can be detected through an effective due diligence which is an important step in the business valuation process. In the absence of an effective due diligence, off-balance sheet liabilities may be overlooked in which case the estimated fair market value will be overstated.