"For this industry, it's 5 times the profit." When thinking about selling a company, you sometimes hear explanations like this. The calculation is simple and makes it easy to get a rough idea. However, if it remains vague what is called profit and what price is being calculated, even the same 5 times will result in completely different amounts.

Is it net income, operating income, or profit adding back depreciation? Is it the value of the company's entire business, or the value of the shares being sold by the shareholders?Before asking about the multiple, aligning the numerator and the denominator is the starting point of valuation.

EBITDA is different from both operating income and cash flow.

EBITDA, used in M&A, is a metric for evaluating profit by excluding the effects of interest, taxes, and depreciation. It is used to smooth out differences in borrowings and equipment depreciation and to compare the earning power of businesses.

In small and medium-sized M&A, valuations are sometimes calculated simply as "operating profit + depreciation."Reference materials regarding valuation in the Medium and Small Enterprise M&A GuidelinesThis method is also shown in; however, the strict definition of EBITDA and the simplified calculation used in practice do not always match.Explanation of the US SECFurthermore, it distinguishes between EBITDA starting from net income and metrics with independently adjusted items.

Therefore, the evaluation table records which profit from the financial statements the calculation starts from, and which expenses or revenues were added or subtracted. Next is a hypothetical example starting from a simplified calculation that uses operating profit.

This 10 million yen in labor costs is not the total compensation for the successor, but the net increase factoring in the reduction of the former president's compensation. We will ensure we do not deduct expenses already included in the financial results a second time.

If expenses that occur in some form every year are continuously written back under the guise of "one-time expenses for this period only," profits will be overstated. Conversely, in a company where the president has taken a low salary while also handling sales and management, failing to account for replacement costs after their retirement will lead to misjudging the sustainability of profits.

Another thing to keep in mind is that EBITDA is not cash that can be used directly for debt repayment or dividends. Cash is required for machinery renewals, increases in accounts receivable and inventory, and tax payments. Adding back depreciation does not make the cost of equipment replacement disappear.

Bridging from enterprise value to equity value

EV/EBITDA is a multiple calculated by dividing enterprise value (EV) by EBITDA. Here, we treat EV as a measure of the business’s earning power. This value does not belong solely to shareholders; it is also necessary to consider the relationship with creditors who have lent funds to the company.

The basic concept is to add surplus cash and other items to the business value, subtract interest-bearing debt and other items, and arrive at the total value of the equity. The reference material also shows the formula: "Equity Value = EBITDA × Multiple − Net Interest-Bearing Debt." Net interest-bearing debt is the amount obtained by subtracting cash and deposits from interest-bearing debt.

Using the previously mentioned valuation profit of 36 million yen, let us look at the scenario where it is valued at 5x. The 5x figure is an assumption for explanation purposes and does not represent a market quote.

In this tentative example, we assume there are no other adjustment items. In practice, the level of necessary working capital, the extent to which cash is included, and whether to include liability-like items other than borrowings must be aligned in both the valuation and the agreement. If deposits necessary for the business are treated as surplus funds, a cash shortage may occur immediately after the acquisition.

Using the same hypothetical example, if the multiple is set to 4x, the stock value is 114 million yen; if it’s 6x, it’s 186 million yen.A difference of one multiple results in a difference of 36 million yen. However, before delving into the discussion of multiples, we must verify whether the underlying profit of 36 million yen is reasonable. Even if the multiple looks impressive, if it is applied to a profit that excludes necessary expenses, the foundation of the valuation is flawed.

The calculation here—which involves subtracting the entire “net assets” from the acquisition price and then dividing the remainder by operating income—differs from the EV/EBITDA ratio.This is because net assets include not only cash but also assets such as equipment and inventory used in the business. Do not base your calculations solely on a headline such as “Acquisition Price”; instead, verify whether the transaction involves all or only a portion of the shares, as well as the total transaction size, including any debt.

How did you interpret the “adjusted profit” following the 447 million yen acquisition?

In June 2024, fonfun announced the acquisition of all shares in selfree, which operates a cloud telephone system.The acquisition cost of the equity interest is 447 million yen, and the total including advisory fees and other expenses is 479 million yen.It is. Since it is a limited liability company (GK), what you are purchasing is equity, not shares.Acquisition disclosure dated June 19, 2024, pp. 2–3

The same document separately shows an operating income of 41 million yen for the fiscal year ended June 2023 and a reference value for adjusted EBITDA of 89 million yen. The adjustments include executive compensation and rent that are not expected to occur after the acquisition. There can be this much of a difference between the profit recorded in the past and the profit restructured by the buyer assuming the post-acquisition period.

However, the expectation that "costs will disappear" is not a confirmed fact. It is necessary to confirm who will take over the duties of the retiring executives and whether there will be any costs associated with relocation or cancellation. Furthermore, simply dividing the equity value by adjusted EBITDA does not yield an enterprise value multiple adjusted for cash and debt.

Rather than using the figures from publicly available data to determine the market price by a single multiplier,Clues to confirm which profit was used and what was added backserves as

properly use multiples, DCF, and net asset value

Each evaluation method has different questions. Instead of treating a single calculation result as the only correct answer, it is important to see what the amount depends on.

The DCF method is a way of converting future cash flows into present value by taking time and risk into account. While it can reflect growth plans, making the plans overly optimistic will also increase the valuation. The net asset method is useful for checking held assets, but it does not necessarily capture the future earning power generated by people and brands on its own.

Assuming the same multiple just because they are in the same industry is also too crude. A company whose customers are diversified versus a company whose sales depend heavily on a single client. A company that has finished upgrading its equipment versus a company that will soon need major capital investment for upgrades. Even with the same profit, the risks assumed by the buyer are different.

The valuation shows a value based on certain assumptions. The final price is determined through negotiations that include the buyer-specific business plan, competitive landscape, payment terms, and allocation of responsibilities. To protect your desired amount, rather than merely arguing over "what multiple is the market rate," explaining profit reproducibility and who generates that profit through which mechanism will deepen the substance of the negotiation.