Contingent Liabilities represent liabilities which have the possibility of occurring at a future date when some underlying conditions materialise. An example of a contingent liability is a lawsuit which can impose a financial liability on the business being valued if the outcome is not suitable. A contingent liability falls under the broad group of liabilities referred to as off-balance sheet liability. 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. Because of the probability of the liabilities associated with a lawsuit materialising, business valuation analysts typically deduct the full amount of the liabilities associated with a lawsuit from the benefit stream being relied on to derive the fair market value even though such liabilities may not materialise. 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 such as contingent liabilities may be missed in which case the estimated fair market will be overstated.