6.3·7 min read

Exit Multiple Method & Cross-Checks

Value the terminal year at a market multiple of EBITDA, then cross-check it against the implied growth rate - and vice versa.

By the end you can

✓Apply the exit multiple terminal value formula
✓Compute the implied exit multiple from a perpetuity TV
✓Compute the implied growth rate from an exit-multiple TV

The sidesteps perpetual-growth guesswork by asking: if we sold the business in the terminal year, what would a buyer pay? That price is a multiple of terminal , based on where comparable companies trade.

\text{TV} = \text{Terminal EBITDA} \times \text{Exit Multiple}

Terminal EBITDA = EBITDA in the final projection year. The multiple comes from comparable-company trading levels.

Use each method to check the other

The two methods are most powerful together. From a perpetuity-growth you can back out the implied exit multiple; from an exit-multiple you can back out the implied growth rate. If either implied number looks crazy versus peers, your assumptions need work.

\text{Implied Exit Multiple} = \dfrac{\text{TV}_{\text{perpetuity}}}{\text{Terminal EBITDA}} \qquad\qquad \text{Implied } g = \dfrac{\text{TV}_{\text{exit}}\times \text{WACC} - \text{FCF}_t}{\text{TV}_{\text{exit}} + \text{FCF}_t}

Worked example · Cross-checking the two methods

Given

•From 6.2: perpetuity-growth = $7,357mm (FCF_t =$ 500mm, 10%, g 3%)
•Terminal : $800mm
•Comparable companies trade around 9x

Solution

1.Implied exit multiple from the perpetuity
$\dfrac{7{,}357}{800} \approx 9.2\times$
2.Sanity check vs. comps (~9x)
9.2x is right in line - the assumptions are mutually consistent.

Answer

The perpetuity assumptions (g = 3%) imply a 9.2x exit multiple, almost exactly where comps trade. When the two methods agree like this, you can defend the with confidence.

When they disagree

A perpetuity implying a 20x exit multiple (when comps trade at 9x) means your growth rate is too high. An exit multiple implying 6% perpetual growth means your multiple is too rich. Pull the outlier back toward reality.

Check yourself

Your perpetuity-growth method implies a 22x exit multiple, but comparable companies trade at 10x. What does this most likely indicate?

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The Perpetuity Growth Method

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WACC: The Blended Cost of Capital