Introduction
The Terminal Value represents the value of a business beyond the explicit forecast period and often accounts for a significant portion of the total value in a discounted cash flow (DCF) valuation.
Valutico supports two methods for estimating Terminal Value:
Gordon Growth Model (Perpetual Growth Method)
Exit Multiple Method
Each method relies on different assumptions about how the business is expected to generate value beyond the explicit forecast period.
Gordon Growth Model (Perpetual Growth Method)
The Gordon Growth Model assumes that the business continues operating indefinitely and that its cash flows grow at a constant, sustainable rate after the explicit forecast period.
This approach estimates Terminal Value by capitalizing the terminal year's free cash flow using a perpetual growth rate and discounting to the present using the appropriate discount rate.
The perpetual growth rate should represent the company's expected long-term sustainable growth beyond the explicit forecast period. This rate is conservative and generally aligned with the long-term expected growth of the economy in which the company operates. Selecting an unrealistically high perpetual growth rate can significantly overstate the terminal value.
Exit Multiple Method
The Exit Multiple Method estimates Terminal Value by assuming the business is sold at the end of the explicit forecast period. Rather than projecting cash flows into perpetuity, this approach applies a market-derived valuation multiple to a selected financial metric in the terminal year.
The terminal value is calculated by applying the selected valuation multiple to the chosen financial metric in the terminal year.
For example, if the selected multiple is EV/Sales, it is applied to the terminal year's forecast net sales to calculate the Terminal Value, which is then discounted back to the valuation date using the appropriate discount rate.
The selected exit multiple should be appropriate for the company's industry, business model, growth expectations, profitability, size, and overall risk profile.
Selecting a Terminal Value Method
By default, Valutico uses the Gordon Growth Model to calculate Terminal Value.
To change the Terminal Value method:
Open the Valuation Overview screen.
Click Change Parameters.
Under the DCF section, locate the Terminal Value Method dropdown.
Select either Gordon Growth Model or Exit Multiple.
If Gordon Growth Model is selected, you can review or override the default Perpetual Growth Rate of 2%.
If Exit Multiple is selected, you can choose the multiple type (such as EV/EBITDA, EV/EBIT, or EV/Sales). By default, the selected multiple is calculated as the average of the current year's applied trading multiple and the corresponding transaction multiple. You can review or override this value manually, or use the reset icon to restore the default.
Applicable Valuation Methods and Impact
The Terminal Value method can be configured for the following valuation methods:
DCF WACC Simplified
DCF WACC
DCF APV
Flow to Equity (FTE)
Simplified Flow to Equity (FTE)
Dividend Discount Model (DDM)
Changing the Terminal Value method updates the Valuation Range displayed on the Football Field chart and recalculates the Sensitivity Tables for the above methods.