The Minimum Financial Numbers for an Individual M&A Buyer — What to Check in the Statements

#The Question This Article Answers

For an individual buying a company with limited time and no accounting background: which numbers in the financial statements absolutely must be checked?

The short answer: six values, pulled from roughly twelve line items across the balance sheet and P&L. You do not need to decode every account. This article maps each of the six values to the exact line items they come from and shows the arithmetic.

I have sold businesses (EXIT) three times, sitting on the seller's side of due diligence, and later built a financial DD tool for small M&A. When I narrowed many candidate metrics down to these six for the tool's engine, the criterion was simple: does it directly drive the purchase price or post-deal cash flow? Drop any of the six and you either misprice the deal or run out of cash after closing.

#Documents to Gather — Statements Alone Are Not Enough

Before pulling numbers, line up the materials:

1. Three years of financial statements (balance sheet and P&L)
2. Account breakdown schedules (kanjo-kamoku uchiwake meisaisho) for three years — the schedules attached to the corporate tax return; director compensation, lender names, and major customers appear only here
3. Three years of corporate tax returns — for reconciliation
4. Loan repayment schedules

Individual buyers most often miss the breakdown schedules. The BS/PL only carry aggregates, so "how much does the owner pay themselves" and "who are the lenders" live in the schedules. Put them on your document request list.

#1. Normalized EBITDA — Start from Operating Profit, Apply Three Adjustments

Line items: operating profit from the P&L, depreciation from the SG&A breakdown (or cost report), and director compensation from the account schedules.

EBITDA = operating profit + depreciation
Normalized EBITDA = EBITDA
  ± director compensation adjustment (reset to what you'd pay a successor)
  + add-back of private expenses (non-business entertainment, vehicles, etc.)
  - removal of one-off gains (subsidies, asset sale gains, etc.)

Small-company books are usually arranged around tax minimization, so reported operating profit typically understates true earning power. What you want to know is how much will be left after you take over — so price the deal on the normalized figure, not the reported one.

The largest adjustment is usually director compensation. Check the current owner's pay in the schedules and adjust by the gap against what a successor would actually cost.

#2. Net Interest-Bearing Debt — Borrowings Minus Cash

Line items: cash and deposits, short-term borrowings, long-term borrowings from the balance sheet, with per-lender balances confirmed in the borrowings schedule.

Net debt = (short-term + long-term borrowings) - cash and deposits

It matters in negotiation through the relation: enterprise value minus net debt equals equity value. The same business commands a lower share price when it carries heavier debt.

In small deals, director loans (money the owner personally lent to the company) often hide inside borrowings. Whether they get waived or assumed by the buyer moves the final price substantially — always confirm their existence in the schedules.

#3. CCC — Measuring the Risk of Profitable Insolvency in Days

Line items: receivables (incl. notes), inventory, payables (incl. notes) from the balance sheet; revenue and cost of sales from the P&L.

Receivable days = receivables ÷ revenue × 365
Inventory days = inventory ÷ cost of sales × 365
Payable days   = payables ÷ cost of sales × 365
CCC = receivable days + inventory days - payable days

CCC is the number of days between paying suppliers and collecting cash from sales. A long CCC means cash runs thin even while the P&L shows profit, forcing a working-capital injection right after closing. It feeds not the price itself but the answer to "how much cash should I have ready after the deal."

#4. Current Ratio — Can the Next Year Be Paid For?

Only two totals needed: current assets ÷ current liabilities from the balance sheet.

Below 100% means the year's obligations exceed the assets convertible within the year. Levels vary enormously by industry, so never judge in isolation — read together with benchmarks.

#5. Equity Ratio — Stamina in a Single Percentage

Total net assets ÷ total assets from the balance sheet.

Lower means heavier debt dependence and less resilience to revenue dips. Negative-equity targets circulate routinely in the small M&A market; that alone doesn't mean walk away, but it does mean a near-zero share price plus a credible recovery story.

#6. Operating Margin — Meaningful Only Against Peers

Operating profit ÷ revenue, recomputed on the normalized figure.

This is the one number that says nothing standalone. A 5% margin is solid for a wholesaler and weak for a software company. Compare against the industry median in public statistics such as METI's Local Benchmark or MOF corporate statistics.

#Verify Before You Compute

Before any metric, check whether the handed numbers deserve trust at all: reconcile the statements against the tax return, and confirm cash against bank books and balance certificates. The full verification and benchmarking process is covered in the pillar guide to small M&A financial DD.

One more rule: fix your thresholds before opening the statements. The more you want the deal, the kinder you become to its numbers. Writing "equity ratio below half the industry median → deep-dive" on paper first changes the quality of your judgment.

#Read Three Periods — a Single Year Can Wear Makeup

Check every metric across three periods, not just the latest. A single year moves freely with compensation changes and one-off gains; dressing up a three-year trend simultaneously is much harder. Statements that improve sharply only in the final year deserve a place on your question list as possible pre-sale makeup.

#Summary

• Six values minimum: normalized EBITDA, net debt, CCC, current ratio, equity ratio, operating margin
• Get the account breakdown schedules along with the BS/PL — director pay and director loans appear only there
• Never price on reported profit; normalize first
• Set thresholds first, read three periods, compare against benchmarks

I built DD Tool to automate exactly this: enter the statement figures and it computes the six metrics, applies five-level risk ratings, and compares against industry benchmarks — in your browser, with no financial data ever transmitted. Try the free version →