financial due diligence
Illustration of Financial Due Diligence
01 B/S | Examine the Actual Net Asset Position
10,000
4,000
6,000
8,000
5,000
3,000
Unrealized losses of 2,000 + off-balance-sheet liabilities of 1,000 identified.
Net assets fall from 6,000 to 3,000.
02 P/L | Verify Adjusted EBITDA
2,000
4,000
3,000
The seller claims that underlying earning capacity is higher.
Verify the basis of adjustments for the buyer and correct excessive add-backs.
Unit: JPY 10,000. A hypothetical example for illustration. The balance sheet omits tax effects and other items. The income statement illustration shows EBITDA only. It depicts a case where review reduces the seller's proposed adjusted EBITDA. Adjusted net assets or earnings do not automatically determine the acquisition price.
What is EBITDA?: Earnings Before Interest, Taxes, Depreciation and Amortization. Broadly, this is operating profit plus depreciation and amortization. Adjusted EBITDA reflects adjustments for non-recurring items, post-acquisition operating conditions, and other factors; the adjustment items and calculation methods must be reviewed.
The balance sheet diagram is adapted from Kenji Yanagisawa's “10 Checkpoints for Successful M&A”.
Do the net assets in the financial statements reflect assets that can actually be collected or converted to cash? Can the seller's reported earnings be achieved after acquisition? Financial due diligence checks the figures needed for an acquisition decision and the evidence behind them.
Yanagisawa Research Institute Co., Ltd. conducts financial reviews primarily for acquiring funds and operating companies, generally covering the latest five fiscal years. We agree on a scope suited to the objectives and budget, then prepare, explain, and deliver the report.
Connecting the accounts with post-acquisition reality
Reviewing assets and liabilities
We examine doubtful receivables, slow-moving inventory, unrealized asset losses, unrecorded liabilities, and contingent liabilities. We compare documents with explanations and identify necessary net asset adjustments.
Quality of Earnings Review (Optional)
We review adjusted profit and loss statements prepared by sellers or M&A brokers, focusing particularly on adjustments that increase earnings. We verify whether executive compensation and one-off costs can actually be reduced, or whether those costs will remain necessary after acquisition.
Assessing normalized earnings is not simply a matter of adding historical expenses back to profit. We examine whether adjustments are appropriate in light of post-acquisition management and necessary operating costs. For EBITDA presented using operating profit, depreciation, and other items, we also review the calculation assumptions and adjustments.
Supporting the decision to buy, walk away, or change the terms
Findings have led to decisions not to acquire, lower purchase prices, and revised contract terms. To proceed with an understanding of risk, it is important to distinguish what has been verified from what remains unconfirmed.
We document and explain verified findings, adjustments, supporting grounds, and outstanding issues in a report. This provides a basis for assessing price and contractual terms.
We Define the Necessary Scope and Work Promptly
We do not apply the same review to every assignment. Requests such as focusing on particular items or limiting review to items above a specified amount guide our advance agreement on the review period, scope, and materiality thresholds.
As little as one week after all required materials are received and the review scope is finalized.We propose a feasible schedule based on the target company's size, document readiness, and the additional checks required.
- Inquiry and Initial Consultation — We ask about the transaction, objectives, deadline, and budget.
- Agreeing the scope and quotation — We clarify what will be reviewed and what falls outside the scope.
- Document review, questions, and analysis — We reconcile financial statements with supporting materials and verify relevant matters.
- Report Presentation and Delivery — We explain the findings and unresolved issues.
Coordinated Financial and Tax Review
Financial due diligence is provided by Yanagisawa Research Institute Co., Ltd. Where tax review is needed, we work with our network member firm, Yanagisawa International Tax & Accounting, to provide tax due diligence, including a review of tax returns.
Drawing on the experience of our principal, tax accountant Kenji Yanagisawa, we clarify financial adjustments and tax issues, combining the reviews each assignment requires.
We Also Handle Sell-Side Reviews, Restructuring, and Bankruptcy Matters
We provide sell-side due diligence to organize financial information and identify issues before a sale. We also undertake financial investigations in restructuring and bankruptcy cases, including assignments from lawyers and bankruptcy trustees, and calculate repayment rates in restructuring cases. Contact us to discuss a scope appropriate to the purpose and procedure.
Our approach to M&A and related information are also available inCompany Sale Price.com ↗.
Related reading:Are profitable companies and companies people want to buy the same thing?
Our experience
- Import Wholesale (Greater Tokyo)
- Web services (Tokyo metropolitan area)
- Manufacturing (Greater Tokyo)
- Franchise Retail (Greater Tokyo)
- Services (Tokyo metropolitan area)
- Recycling (Kinki Region)
- Food processing (Shikoku)
- Food and Beverage (Kyushu Region)
Indicative Fees
| Initial consultation | Free |
|---|---|
| Simplified Financial Due Diligence | From JPY 500,000 (JPY 550,000 including tax) Where the review is limited by items, monetary thresholds, or other criteria |
| financial due diligence | From JPY 1,500,000 (JPY 1,650,000 including tax) |
| Tax due diligence (additional) | From JPY 200,000 per fiscal year (JPY 220,000 including tax) From JPY 1,000,000 for five fiscal years (JPY 1,100,000 including tax) |
| Normalized earnings review (additional) | Individual quotation based on the scope of review |
| Calculation of Recovery Rates in Restructuring Cases | From JPY 500,000 (JPY 550,000 including tax) |
Fees are stated primarily excluding tax, with tax-inclusive amounts also shown. We provide a quotation before starting based on the company's size, review period, scope, volume of materials, and other factors.
Tell us about your financial due diligence needs.
Start with an Email Inquiry
Tell us about the company and transaction, your desired review scope, and schedule. We will explain the services and fees.
Submitting an inquiry alone does not incur a fee.