How do you communicate and justify your terminal growth rate assumptions in DCF to stakeholders and clients?

1 Explain your methodology

The first step is to explain how you derived your terminal growth rate, whether you used a single-stage or a multi-stage model, and what inputs and sources you used. For example, you can use the perpetual growth model, which assumes a constant growth rate based on the weighted average cost of capital (WACC) and the return on invested capital (ROIC). Alternatively, you can use the exit multiple method, which applies a multiple to the terminal year's cash flow based on comparable companies or transactions. You should also provide evidence and references for your assumptions, such as historical growth rates, industry reports, analyst forecasts, or academic studies.

4 Address common questions and objections

In the fourth step, you should anticipate and address any questions or objections stakeholders or clients may have about your terminal growth rate assumptions. Such queries may include: how realistic is your terminal growth rate and is it sustainable in the long run? How does it compare to the company's or industry's historical growth rate? Additionally, how does your terminal growth rate relate to the company's growth drivers, such as revenue, margins, capital expenditure, or working capital? You should be able to answer these questions and objections by providing clear and logical explanations supported by data and evidence. It is important to recognize the limitations and uncertainties of your assumptions and avoid being overly optimistic or pessimistic.

5 Use visual aids and storytelling

The fifth step is to use visual aids and storytelling to communicate and justify your terminal growth rate assumptions in DCF to stakeholders and clients. Visual aids, such as graphs, charts, tables, or diagrams, can help you illustrate your assumptions, comparisons, sensitivities, and scenarios in a simple and engaging way. Storytelling, such as using narratives, analogies, examples, or anecdotes, can help you connect your assumptions with the company's strategy, vision, goals, or challenges, and make them more compelling and memorable. You should also use clear and concise language, avoid jargon and technical terms, and tailor your message to your audience's level of knowledge and interest.

6 Seek feedback and consensus

The sixth and final step is to seek feedback and consensus from your stakeholders and clients on your terminal growth rate assumptions in DCF. You should invite them to share their opinions, questions, concerns, or suggestions, and listen to them attentively and respectfully. You should also be open to constructive criticism, alternative views, or new information, and be willing to revise or update your assumptions if necessary. You should also try to find common ground, align your objectives, and reach a mutual agreement on the terminal growth rate assumptions that best reflect the value of the company.