M&A Acquisition Prices: Why Buyers Lose Out When Sticking to the '5x Market Rate' Despite Rising Interest Rates

You are considering acquiring another company for the first time, perhaps for business succession or to create synergies. The materials you received from the brokerage firm say: 'The EBITDA of your target is 100 million yen. The market rate is 5 times, so the enterprise value is 500 million yen.' It sounds pleasant and easy to understand. But then you start to wonder: 'When was that 5x rate actually the market standard?'

The multiples used in SME M&A vary by industry, but they generally hover around 3 to 5 times EBITDA. Data from surveys commissioned by the Small and Medium Enterprise Agency also shows a national average in the 5x range. This is where the broker's claim of a '5x market rate' comes from. The problem is that the interest rates from when this multiple became standard and the interest rates of today are completely different.

The Bank of Japan's policy interest rate was raised to 0.75% at the end of 2025. This is the highest level in 30 years. Much of the market is already beginning to price in further rate hikes. Is it really okay to carry over the '5x market rate'—a figure ingrained during the era when zero interest rates were the norm—into a world where interest rates exist? I feel this is the point most easily overlooked right now.

Why do interest rates affect acquisition prices? This is where WACC (Weighted Average Cost of Capital) comes in. It is the average cost of the capital a company raises from both bank loans and shareholders. In DCF (Discounted Cash Flow) valuation, the future money the target company is expected to generate is 'discounted' by this WACC to determine its current value.

Here is the crux of the matter: WACC includes both the cost of debt and the return expected by shareholders. And the return expected by shareholders is built up starting from the risk-free rate—in other words, the yield on government bonds. Therefore, when policy rates or long-term interest rates rise, both the cost of borrowing and the expected return for shareholders rise in tandem. The entire WACC is pushed upward.

And when the discount rate rises, the 'current value' of future money decreases. In one simulation, the same cash flow could be valued at 1 billion yen or 200 million yen depending on whether the discount rate is 10% or 50%. This is an extreme example, but I think it conveys the frightening extent to which the discount rate can shift a valuation.

This is a problem of 'fixed assumptions' rather than just interest rates, isn't it? 💡

In other words, it's like this: The '5x market rate' is not an absolute value that fell from the sky. It was a figure that barely held up under the assumption of low interest rates and a low WACC. The assumptions have changed, yet people are still clinging to the old conclusion of a 5x multiple. I believe this is the most dangerous form of overpaying during a period of rising interest rates.

Conversely, a business owner who can check this for themselves is strong. When told 'it's the market rate,' you can reply, 'Did you recalculate that market rate using current interest rates?' Just saying that changes the entire landscape at the negotiating table.

First, try calculating your own company's WACC by hand just once ☕

Step 1: Write down your company's current borrowing rate and the approximate ratio of debt to equity. For a company with 500 million yen in sales, if your borrowing cost is 2%, shareholder expected return is 11%, and your capital structure is 60% equity and 40% debt, your WACC is roughly in the 7% range. Just having this 'personal figure' gives you a yardstick to judge whether the other party's offer is high or low.

Step 2: Re-examine how many years it will take to recover the profits of the target company you are considering acquiring, based on current interest rate assumptions. A 5x multiple is a calculation for recovery in 5 years, but with interest rates added, the actual recovery will take longer. Grasp the sense of the recovery period extending beyond your intuition using actual numbers.

Step 3: When you receive estimates from brokers or financial institutions, always ask, 'What discount rate are you using for this calculation?' If they cannot answer, or if they are using the same low figures from the past, the valuation may be based on outdated assumptions.

You don't need to produce a perfect WACC. An eye that can question assumptions is far more valuable than first-class precision. Now that interest rates have moved, it is actually an opportunity for buyers. Only those who can check their assumptions can acquire good companies at a fair price. Please place your company on that side of the table 🙌

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Thank you for reading this far.

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