A dairy business is for sale at 10x the seller's adjusted EBITDA. Build the buyer's quality of earnings view of the add-backs.

The buyer's EBITDA is about Rs 118 crore, not Rs 144 crore, a Rs 26 crore gap worth Rs 260 crore at 10x. Accept the salary and litigation add-backs if the evidence holds. Reject the restructuring, which recurs every year. Then make two adjustments the seller left out: remove the Rs 15 crore subsidy that ends next year and the Rs 5 crore inventory gain. The test for every line: will this cost recur, and will this income?

One question, asked twice. Will this cost recur under the new owner, and will this income? A family budgeting next year leaves out the one-time wedding but keeps the school fees, and also drops the bonus that will not come again. A quality of earningsA diligence review that restates reported profit to the level a buyer can expect to recur under its ownership. review applies that test to every line, in both directions: costs that will not recur come out, and income that will not recur comes out too. Sellers present the first kind and rarely the second.

The promoter's excess salary survives, provided the buyer will genuinely replace the promoter with a chief executive at market pay; if the promoter stays at the same salary, it does not. The litigation survives if diligence shows no pattern of similar claims. The restructuring does not survive: Rs 6 crore in each of four years is the cost of how this business is run, whatever the label. So the seller's Rs 24 crore of add-backs becomes Rs 18 crore.

Two items run the other way. The Rs 15 crore state subsidy is real cash today and zero from next year, so a buyer paying for future earnings removes it. The Rs 5 crore inventory revaluation gain is an accounting gain that produced no cash and will not repeat. Removing both takes Rs 20 crore out of EBITDA, more than the seller's restructuring add-back put in.

At the seller's 10x, the difference is Rs 260 crore of price: Rs 1,440 crore on the seller's numbers against Rs 1,180 crore on the buyer's. The buyer does not need to argue about the multiple at all; the whole gap is in the earnings the multiple is applied to. In practice the subsidy is often the easiest point to win, because its end date is in writing, and the restructuring the hardest, because the seller will argue that this year really was the last. Ask for the board papers behind each year's charge.