Terminal Values, Terminal Value Multiples, and Terminal Value DCFs
Terminal values typically represent the largest portion of the enterprise value in discounted cash flow (DCF) valuations. Topic 38 explores the definition of terminal values and presents methods of determination.
The reader is encouraged to take the time to read the text in conjunction with the referenced Appendices to gain the appropriate level of understanding of the subject matter discussed in the narrative. Appendices are either presented at the end of this Topic or are available for review and download on the companion Web site noted at the end of this Topic.
TERMINAL VALUE DEFINITION
- Terminal values represent that portion of the enterprise value of the entity existing beyond period T (the period in which the acquired capabilities existing at the closing should achieve above-average returns). The terminal value amount is conceptually equivalent to the present value as at the end of period T of the residual free cash flow into perpetuity following period T.
OVERSTATING TERMINAL VALUES IS A DEAL VALUATION RISK
- Terminal values and therefore deal values run the risk of overstatement when the terminal value at the end of period T is based on an exit multiple of earnings before interest, tax, depreciation, and amortization (EBITDA), earnings before interest and tax (EBIT), or free cash flow (FCF) that is equal to comparable full deal value transaction or trading multiples.
- Terminal value multiple equivalents ...