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 Multiples often decline as growth slows down – investors won’t pay 50x revenue for a mature manufacturer, but they might for a tech startup The Terminal Multiple must also imply a reasonable Terminal Growth Rate… yes, you can calculate the Growth Rate implied by a Terminal Multiple 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)