valuation-inputscalculatedCritical

Terminal Value

Value of all cash flows beyond the explicit forecast period.

terminal_valueAlso: TV

Definition

Terminal Value represents the present value of all future cash flows beyond the explicit forecast period, assuming the business continues as a going concern. It often constitutes 60-80% of total enterprise value in a DCF, making it one of the most critical and sensitive inputs.

Why It Matters

Terminal Value captures the "steady state" value of the business. Because it typically represents the majority of enterprise value, small changes in assumptions (growth rate, exit multiple) have outsized impact on valuation.

Formula

= FCF_n × (1 + g) / (WACC - g)

Gordon Growth Model: Final year FCF grown at perpetual rate, divided by (WACC minus growth rate).

Mathematical Notation

TV = \frac{FCF_n \times (1 + g)}{WACC - g}

Alternative Approaches

Exit Multiple Method= EBITDA_n × Exit_Multiple

Using comparable company multiples for terminal value

Typical Ranges

startup

Use exit multiple (10x–15x EBITDA)

growth

Gordon Growth with 3%–4% terminal rate

mature

Gordon Growth with 2%–3% terminal rate

Best Practices

Terminal growth rate should not exceed long-term GDP growth (2-3%). Cross-check Gordon Growth result with exit multiple method. If results diverge significantly, reassess assumptions.

Common Mistakes

✕Terminal growth rate exceeding WACC (creates infinite value)
✕Terminal growth exceeding GDP growth long-term
✕Not normalizing final year FCF for one-time items
✕Forgetting to discount terminal value back to present

Pro Tips

✓Always cross-check Gordon Growth with exit multiple method
✓Terminal value should be 60-80% of enterprise value - question if outside range
✓Consider fade period before terminal year for high-growth companies

Dependencies

Inputs (This variable depends on)

Free Cash Flow Weighted Average Cost of Capital

Audit & Governance

Risk Level

Critical

Approval Required

director

Sensitivity

confidential

Track Changes

Yes

Learning Path

beginner

Terminal Value answers: "What is the business worth after our forecast ends?" It's often the biggest number in the model, so treat it carefully.

intermediate

Use both Gordon Growth and Exit Multiple methods. If they differ by more than 20%, investigate why. The "right" answer is usually somewhere in between.

advanced

Consider a "fade period" for high-growth companies where growth gradually declines to terminal rate over 5-10 years rather than dropping immediately.

expert

For complex situations, consider probability-weighted terminal scenarios or Monte Carlo simulation on terminal assumptions.

Used in Models

This variable is a key driver in the following financial models:

Standard DCF Model

valuation

Related Variables in valuation-inputs

Weighted Average Cost of Capital

Blended cost of debt and equity financing, weighted by capital structure.

Cost of Equity

Required rate of return demanded by equity investors.

Enterprise Value

Total value of a company's operations, independent of capital structure.