Valuation
Terminal Value
Also known as: TV, Continuing Value
Terminal value is the estimated worth of a business beyond the explicit forecast period of a DCF, often making up the majority of the total valuation.
Terminal value captures everything a business is worth after the detailed forecast window of a discounted cash flow ends. Since no one can model every year forever, analysts forecast cash flows explicitly for five to ten years and then use a terminal value to represent all the years that follow.
Two common methods
- Perpetuity growth. Assumes free cash flow grows at a steady modest rate forever, then capitalizes it.
- Exit multiple. Applies a valuation multiple, such as EV/EBITDA, to the final forecast year, mirroring how the business might be sold.
Terminal value frequently accounts for 60 percent or more of a DCF’s total value, so the assumptions behind it deserve careful scrutiny.