When I requested a valuation of our own company's shares, different appraisal reports yielded different amounts. In such a case, what I want to check first, rather than which appraisal report is correct, is the purpose for which each was prepared and what kind of value was calculated. For a company sale, a gift to a successor, or investment from a third party, the starting point for consideration differs even for the same company.

Previously publishedM&A valuationFollowing this, this paper compares the DCF method, the multiple method, and the net asset method using figures. The following figures are hypothetical for explanatory purposes and do not indicate market prices or recommended multiples.

First, align "what kind of value"

The term "corporate value" can have different meanings depending on the document. In this paper, we define the value generated by operating activities as "business value," the sum of this and non-operating assets such as excess cash and idle real estate as "corporate value," and the value obtained by subtracting interest-bearing debt and other liabilities from that as "shareholder value." Shareholder value is the value belonging to all shareholders, assuming a simple company with only common stock.

The basic formula is Business Value + Non-Operating Assets - Interest-Bearing Debt, etc. = Equity Value. In practice, adjustments for minority interests, preferred stock, retirement benefit obligations, etc., also become issues, but they are omitted here. It is important to clarify which items have already been included in the business value to avoid double counting or double deducting. The classification of value isSmall and Medium Enterprise Agency "Financial Issue Resolution"is also shown in.

The multiple method relies on valuation multiples of similar companies.

The market multiple approach is a method that references the valuation multiples of similar companies observable in the market. In the case of the EV/EBITDA multiple, it uses the relationship between enterprise value and EBITDA. EBITDA is a profit metric calculated by adding depreciation and amortization expenses to operating income, but it is not the cash flow that directly subtracts capital expenditures or increases in working capital.

Assuming an adjusted annual EBITDA of 80 million yen and a multiple of 5x, the enterprise value is 400 million yen. If the excess cash is 60 million yen and the interest-bearing debt is 140 million yen, the equity value is as follows:

Assuming there are no treasury shares and 10,000 common shares with identical rights, if you simply treat a business value of 400 million yen as the shareholders' sale proceeds, you will overlook adjustments such as borrowings. On the other hand, since the P/E ratio is a metric that uses the relationship between equity value and earnings, it is inappropriate to deduct the same borrowings again after multiplying by the multiple.

Before looking at multiples, you should examine the growth rate, profit structure, business scale, customer concentration, and capital expenditure burden of the companies being compared. Even when adjusting executive compensation or one-time gains and losses, you must verify whether those expenses will truly change after the acquisition. If you only add back expenses that are convenient for the seller, the basis for comparison becomes weak. How to choose comparable companies and the differences in multiplesExplanatory text of the Small and Medium Enterprise AgencyBut it is also covered.

Using net cash reveals the bridge from enterprise value to equity value.

Net cash is generally the amount calculated by subtracting interest-bearing debt from cash and deposits. If it is negative, it is in a "net debt" state where borrowings exceed cash and deposits. However, whether the cash to be added back in M&A evaluations is the full amount of cash and deposits on the books or excess cash excluding the funds necessary to continue operations is determined according to the business value calculation method and transaction conditions.

In the numerical example of this paper, the adjustment amount is 60 million yen in surplus cash minus 140 million yen in interest-bearing debt, which equals negative 80 million yen. Adding this amount to the business value of 400 million yen results in an equity value of 320 million yen. Since borrowings have already been deducted at the point when net cash is added, interest-bearing debt is not subtracted again thereafter.

Stock value = Business value + Adjusted net cash + Other non-operating assets

Idle real estate, golf club memberships, and non-business vehicles are excluded from net cash and evaluated separately as other non-operating assets. It cannot always be assumed that book values can be added as-is; therefore, it is necessary to check market values, selling expenses, tax burdens, and whether they have already been factored into the business value. When including marketable securities in highly liquid cash equivalents, categories must be aligned to avoid double-counting them as separate assets.

The DCF method discounts future cash flows to present value

In the DCF method, future free cash flows are estimated and converted to present value using a discount rate. The basic concept for calculating business value is operating profit after tax, plus depreciation, minus capital expenditures and increases in working capital. Even if profits are increasing, if large capital expenditures or an increase in accounts receivable are required, the cash available decreases.

For simplicity, let us assume that starting at the end of next year, free cash flow of 30 million yen continues indefinitely, with a growth rate of 0% and a discount rate of 8%. In this case, the enterprise value is 30 million yen divided by 8%, which equals 375 million yen. Using the same 60 million yen in surplus cash and 140 million yen in interest-bearing debt as before, the equity value is 295 million yen, or 29,500 yen per share.

This simplified example makes a strong assumption that annual cash flows will remain stable. A standard DCF individually forecasts several years and then calculates the subsequent terminal value. The terminal value must also be discounted back to the valuation date. The concept isMETI's explanatory materials on corporate value evaluationYou can check with.

Even with the same 30 million yen, if the discount rate is set to 10%, the business value is 300 million yen. There is a difference of 75 million yen compared to the case of 8%. Even when using precise calculation formulas, the results will change if the assumptions for the business plan, discount rate, or terminal value change. Rather than just looking at the DCF amount, we want to see how well the value is maintained even in scenarios such as losing major customers or increasing investment amounts.

The net asset method builds up from assets and liabilities.

The net asset method is based on the difference between assets and liabilities. A distinction is made between the book value net asset method, which uses book values, and the market value net asset method, which takes into account the market value of assets such as land and securities. If market value-based assets are 500 million yen and liabilities are 250 million yen, the simple difference is 250 million yen. Since this difference is already after deducting liabilities, borrowings are not deducted again.

In asset-holding companies, unrealized gains and losses on real estate significantly impact value. On the other hand, for companies that generate profits from human resources, technology, and customer relationships, the balance sheet alone may not adequately represent their earning power. While there is a method of adding an amount equivalent to goodwill to net assets at fair value, the results vary depending on which year's earning power is added and for how many years. Rather than jumping to the conclusion that it is objective just because it is net asset value, check the scope of the investigation into the fair market value of assets and off-balance-sheet liabilities.

Tax evaluation for inheritance and gift, and these are not figures that can be exchanged as they are

In the valuation of unlisted shares for inheritance and gift tax purposes, methods such as the similar industry comparison method, net asset value method, and dividend discount method are used based on the Basic Circular on Property Valuation, depending on the company's scale and the shareholder's position. Specific valuation companies are subject to different treatments.National Tax Agency: Evaluation of Unlisted Sharesis the overview.

The comparable industry method referred to here is not the same calculation as the EV/EBITDA multiple used in M&A. Also, selling shares to relatives or one's own company at the inheritance tax valuation does not mean there will always be no issues regarding income tax or corporate tax. It is necessary to consider the fair market value according to the counterparties of the transaction, trading conditions, and tax items.

When comparing valuation reports, first align the valuation date, rights of the target shares, ownership percentage, and valuation purpose. After that, check the business plan, comparable companies, and adjustments for cash and borrowings. Simply taking a simple average of the results from multiple methods does not result in the correct value. Being able to explain why the amounts differ is useful for both sales negotiations and business succession preparations.