Can I do small M&A financial DD myself?

Yes, up to the first screening: reconcile three years of statements against tax returns, then compare six metrics — normalized EBITDA, net debt, CCC, current ratio, equity ratio, operating margin — against industry benchmarks. Bring in an accountant only for red-flagged points, tax issues, or suspected off-balance liabilities.

How much does financial DD cost?

A full financial DD by an accountant typically runs ¥500K–1M per deal. For deals in the low millions that rarely pays, so screen candidates yourself first and outsource only the narrowed points on deals that survive.

What documents does financial DD require at minimum?

Three years of financial statements with account breakdowns, three years of corporate tax returns, the latest trial balance, loan repayment schedules, and monthly revenue history. Verify numbers against primary sources before computing any metric.

What should I watch for in small-company financial statements?

Tax-driven profit compression. Director compensation, insurance products, and private expenses typically make reported operating profit smaller than true earning power. Convert to normalized EBITDA before using any number for pricing.

Should I walk away when DD finds problems?

Not immediately. Most risks convert into deal terms: earnouts for earnings uncertainty, representations and warranties for off-balance liabilities, price adjustment clauses for working capital drift. A seller who refuses all such structuring is itself important information.

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Small M&A Financial Due Diligence: The Complete Guide — Six Numbers to Check Before Buying a Company

July 10, 202621 min read

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Small M&A Financial Due Diligence

Hands-on financial due diligence for small M&A — key metrics, verification, cost reality, and converting findings into deal terms

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FAQ

Q. Can I do small M&A financial DD myself?: Yes, up to the first screening: reconcile three years of statements against tax returns, then compare six metrics — normalized EBITDA, net debt, CCC, current ratio, equity ratio, operating margin — against industry benchmarks. Bring in an accountant only for red-flagged points, tax issues, or suspected off-balance liabilities.
Q. How much does financial DD cost?: A full financial DD by an accountant typically runs ¥500K–1M per deal. For deals in the low millions that rarely pays, so screen candidates yourself first and outsource only the narrowed points on deals that survive.
Q. What documents does financial DD require at minimum?: Three years of financial statements with account breakdowns, three years of corporate tax returns, the latest trial balance, loan repayment schedules, and monthly revenue history. Verify numbers against primary sources before computing any metric.
Q. What should I watch for in small-company financial statements?: Tax-driven profit compression. Director compensation, insurance products, and private expenses typically make reported operating profit smaller than true earning power. Convert to normalized EBITDA before using any number for pricing.
Q. Should I walk away when DD finds problems?: Not immediately. Most risks convert into deal terms: earnouts for earnings uncertainty, representations and warranties for off-balance liabilities, price adjustment clauses for working capital drift. A seller who refuses all such structuring is itself important information.

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