Question the Other Day…• “How do you pick the Terminal Multiple to use in a DCF

when you’re calculating Terminal Value?”

• Common Answer: Look at the multiples for the company’s set of comparable public companies, and use something in that range

• Real Answer: More complicated than that…

3 Main Problems with Comps 1. Multiples often decline as growth slows down –

investors won’t pay 50x revenue for a mature manufacturer, but they might for a tech startup

2. The Terminal Multiple must also imply a reasonable Terminal Growth Rate… yes, you can calculate the Growth Rate implied by a Terminal Multiple

3. It’s more about the range of values, not a specific multiple from the set

The Implied Growth Rate• Terminal Value =

Final Year FCF * (1 + FCF Growth Rate)

(Discount Rate – FCF Growth Rate)• Terminal Value * (Discount Rate – FCF Growth Rate) =

Final Year FCF * (1 + FCF Growth Rate)

• Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate =

Final Year FCF + Final Year FCF * FCF Growth Rate

The Implied Growth Rate• Terminal Value * Discount Rate – Terminal Value * FCF

Growth Rate =

Final Year FCF + Final Year FCF * FCF Growth Rate

• Terminal Value * Discount Rate – Terminal Value * FCF Growth Rate – Final Year FCF – Final Year FCF * FCF Growth Rate = 0

• – Terminal Value * FCF Growth Rate – Final Year FCF * FCF Growth Rate = – Terminal Value * Discount Rate + Final Year FCF

The Implied Growth Rate• – Terminal Value * FCF Growth Rate – Final Year FCF *

FCF Growth Rate = – Terminal Value * Discount Rate + Final Year FCF

• FCF Growth Rate * (–Terminal Value – Final Year FCF) = – Terminal Value * Discount Rate + Final Year FCF

• FCF Growth Rate * (Terminal Value + Final Year FCF) = Terminal Value * Discount Rate – Final Year FCF

The Implied Growth Rate• FCF Growth Rate * (Terminal Value + Final Year FCF) =

Terminal Value * Discount Rate – Final Year FCF

• FCF Growth Rate =

(Terminal Value * Discount Rate – Final Year FCF)

(Terminal Value + Final Year FCF)