Exit Multiple Method
IntermediateThe exit multiple method calculates a company's terminal value in a discounted cash flow model by applying a valuation multiple, such as EV/EBITDA, to a financial measure in the final forecast year.
Instead of assuming growth continues forever, the exit multiple method estimates what the business could be sold for at the end of the forecast period, based on how similar companies are currently valued.
For example, if a company's EBITDA in year five is forecast to be 100 million and comparable companies trade at 8 times EBITDA, the terminal value at the end of year five is 800 million. Discounted at 10% a year, that is worth about 497 million today.
The method is popular with practitioners, especially in mergers and acquisitions and private equity, because it reflects how buyers actually price businesses in the market.
Its main weakness is that it brings current market valuations into what should be a long-term, cash-based analysis. If markets are unusually optimistic or pessimistic today, the terminal value will be too. The choice of multiple also requires judgment, since the company may look different in five years from its peers today. Analysts often compare the result with the perpetual growth method to check whether the two give consistent values.
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