How do you compare and reconcile different terminal value methods?

The perpetuity growth method calculates terminal value assuming constant business growth forever, using the formula TV = (FCF * (1 + g)) / (WACC - g). FCF is the last year's free cash flow, g is the perpetual growth rate, and WACC is the weighted average cost of capital. This simple, intuitive method reflects a stable growth state but is sensitive to g and WACC choices. It may not account for changing market conditions or competition, making it best suited for mature, stable businesses in predictable industries. The method's simplicity is its strength, but also its weakness, as it assumes a steady-state that may not reflect real-world complexities.

The exit multiple method calculates terminal value by applying a multiple to a financial metric, assuming business sale at the forecast period's end. The formula is TV = multiple * metric, with metrics like revenue, EBITDA, or EBIT. Multiples are based on comparable companies or transactions. This method incorporates market expectations and potential sale synergies, but may not reflect intrinsic value and can be affected by market fluctuations. It's useful for businesses in acquisition-heavy sectors or those planning exits. The method's market-based approach can provide realistic valuations but may be skewed by short-term market sentiments.

Comparing and reconciling perpetuity growth and exit multiple methods involves using consistent metrics and checking implied growth rates and multiples for each. Significant differences may require adjusting inputs or assumptions. Consider using a range or weighted average of both methods to capture uncertainty. Analyze each method's sensitivity to key variables. Reconciliation might involve adjusting the perpetual growth rate to match market expectations reflected in the exit multiple, or vice versa. The choice often depends on the business's nature, industry trends, and valuation purpose. This balanced approach helps mitigate the weaknesses of each method while leveraging their strengths.

Perpetuity Growth: Ensure it doesn't surpass the global or country growth, avoiding unrealistic projections. Method Reconciliation: Combine valuation methods like Discounted Cash Flow (DCF) and Multiples for a comprehensive and grounded view. Flexible Proposals: Be open to adaptable proposals, allowing adjustments based on different scenarios and assumptions. Market Data Validation: Validate terminal projections using market data, ensuring consistency and realism by comparing with similar transactions. Sensitivity Analysis: Conduct sensitivity analyses to assess the impact of assumption variations, offering a deeper understanding of terminal value uncertainties.

When applying terminal value methods, consider: industry lifecycle impact on growth assumptions, technological disruption potential, regulatory changes influencing cash flows, economic cycle effects on exit multiples, company-specific factors like competitive positioning, capital structure changes, reinvestment rate assumptions, historical performance trends, scenario analysis with different outcomes, and peer benchmarking. These factors can significantly influence calculations and overall valuation accuracy. Remember, terminal value often represents a large portion of total value, so careful consideration of these elements is crucial for a robust and defensible valuation.