Terminal value is calculated one of two ways: the Gordon Growth Model (also called perpetuity growth method) assumes cash flows grow at a constant rate forever — TV = FCF_n+1 / (WACC − g). The exit multiple method assumes the business is sold at the end of the forecast period at a multiple of EBITDA or FCF derived from comparable transactions. In practice, both methods are run and the results compared.
The terminal growth rate (g) is the most sensitive variable. For established businesses in stable sectors in France and Switzerland, a long-run growth rate of 2–3% is typical — roughly in line with nominal GDP growth. Using a higher rate (e.g., 4–5%) to justify a higher valuation is common in optimistic buyer presentations but will be challenged: any growth rate materially above the economy's long-run rate implies the business eventually becomes the entire economy.
The exit multiple method grounds terminal value in market evidence rather than pure theory. By applying a current sector multiple (e.g., 9× EBITDA for business services) to the normalized EBITDA at the end of year 5, it effectively links the DCF terminal value to what real buyers would pay. This makes it more intuitive and less susceptible to gaming — and is increasingly the preferred approach in mid-market deal advisory.
Comparing the two methods
Year 5 FCF: €2.5m. WACC: 11%. Perpetuity method at 3% growth: TV = 2.5m × 1.03 / (0.11 − 0.03) = €32.2m. Exit multiple method at 9× EBITDA of €3m: TV = €27m. PV of terminal values: perpetuity = €19.1m; exit multiple = €16m. The €3m gap between methods becomes the negotiating conversation.
Frequently asked questions
Why does terminal value represent such a large share of DCF value?
Because a profitable, going-concern business is expected to generate cash flows indefinitely. The 5-year explicit forecast captures only a fraction of total lifetime value; the terminal value captures the rest. This is mathematically correct but creates model risk — small assumption changes have large dollar impacts.
What terminal growth rate should be used for a French SME?
For established SMEs in mature sectors, 2.0–2.5% is defensible and consistent with France's long-run nominal GDP growth. For businesses in structurally growing sectors (tech-enabled services, healthcare), 2.5–3.5% may be supportable with market evidence. Rates above 4% are difficult to defend in formal valuations without specific justification.
How does the exit multiple method reduce valuation uncertainty?
By anchoring terminal value to observed market transaction multiples rather than a perpetuity formula, the exit multiple method reflects what a real buyer would pay at exit. This makes it more intuitive for non-financial owners, more credible in negotiation, and less susceptible to assumptions manipulation.