Terminal Value

TV = Final Year UFCF × (1 + g) / (WACC - g). The terminal growth rate (g) should not exceed long-term GDP growth (2–3%) because no company can grow faster than the economy indefinitely. If your terminal growth rate implies the company will be larger than the global economy in 100 years, it's too high. This method is theoretically elegant but highly sensitive to small changes in g. A 0.5% increase in g can change the terminal value by 20–30%, so always sensitivity-test this assumption.

TV = Terminal Year EBITDA × Exit EV/EBITDA Multiple. The exit multiple is typically set equal to the current trading multiple of comparable companies. This method is more commonly used in practice because it's grounded in observable market data and easier to defend in a presentation. The implicit growth rate can be back-solved to ensure it's reasonable: g = WACC - (Final Year UFCF × (1 + g) / TV). If the implied growth rate exceeds GDP growth, the exit multiple may be too aggressive.

Best practice is to calculate terminal value using both methods and ensure they produce similar results. If the perpetuity growth method gives TV of $2B and the exit multiple method gives $3B, investigate why. The discrepancy usually means your assumptions are inconsistent — either the growth rate is too low, the exit multiple is too high, or margins are diverging. Presenting both methods in a pitch book demonstrates analytical rigor and gives the reader a valuation range.

To reduce reliance on terminal value, extend the projection period (10+ years brings the terminal value contribution closer to 50–60%). Ensure the final projected year represents a 'steady state' — stable margins, normalized CapEx, and growth at or near GDP. Some analysts use a three-stage DCF: high growth (5–7 years), transition (3–5 years), and terminal value. This better captures the deceleration of high-growth companies and reduces the impact of terminal value assumptions.