Discounting and value
Exit-multiple terminal value
Value the terminal year with a market multiple and reconcile it with Gordon growth.
Learning objectives
- Calculate a terminal value with an EV/EBITDA exit multiple
- Calculate the perpetual growth rate an exit multiple implies
- Calculate the exit multiple a Gordon growth terminal value implies
Instead of assuming growth forever, many practitioners estimate the terminal value as the price the business could be sold for at the end of the forecast: final-year EBITDA × an EV/EBITDA multiple, typically based on where comparable companies trade.
Because EBITDA belongs to all capital providers, an EV/EBITDA multiple gives an enterprise value — consistent with the rest of the DCF. The result is a value at the end of year n, discounted n years like any other year-n amount.
TVₙ = EBITDAₙ × (EV/EBITDA)ₑₓᵢₜ
- EBITDAₙ
- EBITDA of the final forecast year (a trailing multiple is applied to trailing EBITDA)
- (EV/EBITDA)ₑₓᵢₜ
- an EV multiple for a mature business, usually from trading comparables
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