Terminal Value
An estimate of a business's value beyond the explicit projection period (typically 5 to 7 years) in a DCF model. Captures the share of value that comes from the business's ongoing activity after the modelled window.
Definition
Terminal value represents the value of the business beyond the explicit projection period of a DCF model. Since you can’t project cash flows to infinity, you pick a window — typically 5 to 7 years — then collapse everything that comes after into a single number.
In French-language Quebec documentation, you’ll see valeur terminale used for the same concept.
In a typical DCF for an SME, terminal value often represents 50% to 70% of the total calculated value. The business doesn’t stop at the end of the modelled period — and that’s where most of the value lives.
Why terminal value matters in a sale
It’s the most sensitive number in a DCF. A small shift in the assumptions behind it can move the final value by hundreds of thousands of dollars — sometimes more.
Buyers know it: they’ll systematically challenge the assumptions (perpetual growth rate, exit multiple, discount rate). A seller who presents a terminal value without solid justification weakens the entire asking price.
Estimation methods
Two common approaches:
- Exit multiple: apply a sector multiple to EBITDA in the final projected year. Anchored in market reality — but depends on the quality of the comparables.
- Perpetual growth (Gordon growth model): assume cash flows continue to grow at a stable rate (typically 2% to 3% in Quebec) and discount that perpetual stream. More theoretical, more sensitive to the chosen rate.
In practice, both methods are often used to see whether they converge. If they diverge sharply, it’s a signal: one of the assumptions needs a second look before taking the file to market.
What every seller should know
- Terminal value is the most negotiated step in a DCF — every assumption has to be defensible
- An exit multiple above sector comparables will immediately draw the attention of a sharp buyer
- The two methods (exit multiple vs perpetual growth) should give close results — if they don’t, you need to understand the gap before going to market
- It isn’t a precise number: a range justified by solid assumptions beats an arbitrary figure presented as exact