What are some best practices for estimating terminal value in DCF valuation with negative growth rate?

If the asset is not expected to retain much value beyond the projected period, the scrap value can be used as a conservative estimate for the terminal value.

It is true that in practice it is very rare, if never, for negative growth to exist at a company level, i.e. it means that the company would be steadily dying and nobody is doing anything about it. However, the case is different on project/process level. As time goes on many projects have drops in the received CFs. Assessing the terminal value can be done in several ways. Using all methods when assessing a project simultaneously is advisable. 1. To the rescue comes the perpetual growth formula. Negative growth rate increases the discount % and provides the terminal val. Subtracting two perpetuities provide gives the result at certain point. 2. excel table, simply reduce the CFs and discount. 3. set a predet. terminal value and interpolate

We often default to the Gordon Growth Model for calculating terminal value, but when you're working with negative growth, it might be better to switch gears. Take industries like coal mining or traditional retail—these sectors are facing long-term decline. In these cases, it makes more sense to use the liquidation approach, where you estimate what the company’s assets would be worth if it wound down operations. For example, coal companies are likely to see less demand as the world shifts toward renewables, so their long-term terminal value might be better reflected by the value of their assets at the end of their lifecycle.

True. It is important to note that a multistage discount CF model is optimal. Choosing the discount percentage is tricky or not depending on the way one goes about it. Personally I prefer to use the industry average one-side top trimmed around 10% rate of return. Multiple scenarios of no less than 2 SD. The main adjustment stems from the CF projections. Companies are highly dependent on their growth cycles as the main cut off point is the legally achievable market share that a business may have. Depending on the required analysis it is important to consider taxes, as well as to get rid of non-market related factors (e.g. subsidies, one-off events, etc.)

Just because a company is experiencing negative growth doesn’t mean it’s going to collapse overnight. Think about Kodak—even after the digital camera revolution, it didn’t implode right away. The decline was gradual. Similarly, for many legacy businesses, it's important to use a negative growth rate that reflects a slow, steady decline rather than a sharp drop-off. It’s a balancing act—you don’t want to be overly optimistic, but you don’t want to paint too dire a picture either.

With uncertainty, run scenarios: best, worst, and moderate outcomes. For instance, cross-check your DCF results with market multiples like EV/EBITDA to ensure they’re in line with market reality. If it looks off, revisit your assumptions.

I disagree. While there are hypothetical instances where the negative growth rate might be so low it's relatively immaterial, in practice you'd be best served by projecting farther out as run-off value. Perpetual negative growth is likely going to lead to several complexities such as fixed cost delevering and will ultimately likely result in either bankruptcy or liquidation depending upon the cause.

Capital structure plays a huge role when you’re looking at companies in decline. Companies with heavy debt burdens may struggle, which could lead to bankruptcy or restructuring. When calculating terminal value, it’s crucial to factor the company’s ability to service its debt under a negative growth scenario. Exit opportunities are another important consideration. Just because a company is in decline doesn’t mean it’s worthless—there could still be strategic buyers interested in acquiring it. For instance, in case of tech companies facing obsolescence, larger competitors might acquire them for their intellectual property or customer base. Keep an eye on macro trends—negative growth can be temporary/driven by long-term industry shifts.