Buying a small company in Japan: what due diligence is essential before signing an SPA?

Thank you for reaching out with your concerns. Acquiring a 100% stake in a local trading company is a significant decision, and it's crucial to ensure that all potential risks—such as hidden debts, employee issues, and contract transferability—are carefully addressed before moving forward. Here are the key checks and documents you should insist on before signing or paying a deposit:

1. Due Diligence on Financials: Request a comprehensive review of the company’s financial statements for the past 3-5 years, including balance sheets, profit and loss statements, and cash flow statements. This will help identify any hidden debts or liabilities, such as outstanding loans, unpaid taxes, or pending legal issues. You should also ask for a report from an independent auditor, if available, to validate the financial health of the business.

2. Debts and Liabilities: Ensure that you receive a detailed list of all the company’s outstanding debts, loans, guarantees, and contingent liabilities. This should include any off-balance-sheet items or agreements that could impact the company’s financial position after the acquisition.

3. Tax Compliance and Liabilities: Request documentation confirming that the company is up to date with tax filings, including corporate income tax, VAT (if applicable), and employee-related taxes. Any outstanding tax liabilities could become your responsibility post-acquisition.

4. Employee Contracts and Benefits: Ensure you review all employee contracts, including their terms of employment, salaries, benefits, and pension obligations. You’ll want to check for any union agreements, severance packages, or employment-related disputes that could create issues after the acquisition. It's also essential to confirm whether any employees have non-compete clauses or other restrictions that could affect the business post-sale.

5. Supplier and Customer Contracts: Review all key supplier and customer agreements to ensure they are transferable to you as the new owner. Some contracts may include change-of-control clauses that allow counterparties to terminate agreements or renegotiate terms upon the acquisition. If any contracts cannot be transferred or pose risks, it’s essential to know this upfront.

6. Legal Compliance and Licenses: Verify that the company has all necessary business licenses, permits, and regulatory approvals required to operate legally in Japan. This includes confirming compliance with local industry regulations, data protection laws, and other legal requirements specific to the trading sector.

7. Intellectual Property and Assets: Ensure that all intellectual property (IP) rights, trademarks, patents, and any other critical assets are fully owned by the company and will be transferred as part of the deal. Request documentation of IP ownership and the status of any IP registrations or filings.

8. Litigation and Claims: Request a disclosure of any ongoing or potential litigation, claims, or legal disputes involving the company. This includes employee-related claims, contractual disputes, or regulatory investigations that could affect the value or reputation of the company post-acquisition.

9. Contractual Warranties and Representations: Insist on including robust warranties and representations from the seller, stating that all information provided during the transaction is accurate and complete. This can provide legal protection if hidden liabilities or issues emerge after the acquisition.

10. Post-Transaction Support: It may be wise to include clauses for post-acquisition support, such as transition assistance from the seller, particularly regarding key employees, operational processes, and customer relationships. This can help smooth the integration process and minimize disruption.

By ensuring these checks and obtaining the relevant documents, you can mitigate the risks associated with hidden debts, employee issues, and contract transferability. It's also highly recommended to engage with legal and financial advisors familiar with Japanese business law to assist with the due diligence process and help negotiate the terms of the deal.

Sincerely,
Ascendance International Consulting