What Is Terminal Value in a DCF?

Terminal value is the value of all cash flows a business generates after the explicit forecast period in a DCF. Because you cannot forecast every year forever, you estimate a single lump sum at the end of the horizon, then discount it back to today. There are two standard methods: the Gordon growth perpetuity and an exit multiple applied to a terminal year metric.

The two methods

The Gordon growth method treats cash flow as a growing perpetuity: TV = FCF * (1 + g) / (WACC - g), where FCF is the final forecast year free cash flow and g is the long run growth rate.

The exit multiple method applies a market multiple to a terminal year metric, typically TV = EBITDA * EV/EBITDA multiple. It anchors the terminal value to what comparable businesses trade for rather than to a perpetual growth assumption.

Worked example: both methods side by side

Assume year 5 free cash flow of 146, year 5 EBITDA of 300, WACC of 10 percent, terminal growth of 2.5 percent, and an exit multiple of 7 times EBITDA. The two methods should land in a similar range if your assumptions are consistent.

1. Gordon growth: =146*(1+0.025)/(0.10-0.025) returns about 1996.
2. Exit multiple: =300*7 returns 2100.
3. Discount each back to today with the year 5 factor =1/(1.10)^5, which is about 0.621.
4. Present value of the Gordon terminal value is =1996*0.621, about 1239.
5. Present value of the exit multiple terminal value is =2100*0.621, about 1304.

The two methods are within about 5 percent here, which suggests the growth and multiple assumptions are roughly consistent.

Laying it out in Excel

Keep the terminal value calculation transparent so a reviewer can see both methods and pick one or average them.

• Put g, WACC, and the exit multiple in clearly labeled input cells, formatted blue, never typed inside the formula.
• Show both Gordon and exit multiple results so you can cross check the implied multiple against the implied growth.
• Back out the implied exit multiple from the Gordon value, =GordonTV/EBITDA5, to see if it is realistic.
• Report terminal value as a percent of enterprise value so the reader knows how much rests on it.
• Flag any literal growth rate or multiple buried inside a formula so it can be moved to an input cell.

Sanity checks and pitfalls

The Gordon formula breaks down when g approaches WACC, because the denominator WACC - g shrinks toward zero and the value explodes. Keep a comfortable gap; a growth rate above long run nominal GDP is almost always wrong.

Watch for a hardcoded terminal value or a multiple typed straight into the math. Constants hidden inside formulas are easy to forget and impossible to flex in a sensitivity table, so isolate them as named inputs.