The terminal multiple method
Originally published: 07/09/2020 07:10
Publication number: ELQ-44797-1
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The terminal multiple method

Terminal Value: Terminal Multiple Method in Microsoft Excel.

Description
Calculating Terminal Value Using Exit Multiple.

The exit multiple assumes that the market multiple basis is a fair method of valuing a business. The value of the business is obtained by multiplying financial metrics such as EBITDA or EBIT by a factor that is common to comparable companies that were recently acquired. An appropriate range of multiples can be generated by looking at recent comparable acquisitions in the public market.

The multiple obtained is then multiplied by the projected EBIT or EBITDA in year N (final year of projection period) to give the future value at the end of year N. The future value (also known as terminal value) is then discounted by a factor equal to the number of years in the projection period.

The value obtained is then added to the present value of the free cash flows to obtain the implied enterprise value. For cyclical businesses where earnings fluctuate according to variations in the economy, we use the average EBITDA or EBIT during the course of the specific cyclical rather than the amount in year N in the projection period.

This means that an industry multiple is applied rather than applying a current multiple to take into account the cyclical variations of earnings. If analysts used a current multiple, the valuation would be affected by economic cycles.

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Further information

The terminal multiple method inherently assumes that the business will be valued at the end of the projection period


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