Implied exit multiple
DCFThe EV/EBITDA multiple a perpetuity growth terminal value is asserting, found by dividing that terminal value by terminal year EBITDA.
Also written: implied exit EBITDA multiple, implied terminal multiple
A perpetuity growth terminal value looks like a statement about growth. It is also, unavoidably, a statement about price: whatever number the formula produces implies a multiple of the terminal year's earnings. Dividing the terminal value by terminal year EBITDA makes that claim visible.
The point of making it visible is that a growth rate has no natural reference point while a multiple does. Nobody can look at 2.5% and say whether it is generous. Everybody can look at 7.0 times against a comp set trading at 10.0 times and form a view immediately.
It is also the direction of the cross check that gets forgotten. Candidates usually remember to back growth out of a multiple and rarely remember to back a multiple out of growth, even though the second is a single division and needs no algebra at all.
One discipline: the multiple should be judged against where the business will trade at exit, not where it trades today. A business the forecast says will have matured is not entitled to the growth multiple it carries now, so a low implied multiple is sometimes the correct answer rather than a problem.
Worked example
Terminal year unlevered free cash flow of 96 at a 9% WACC and 2.0% growth gives 96 times 1.02, over 0.07, which is 1,399.
Terminal year EBITDA is 200, so the implied exit multiple is 1,399 over 200, which is 7.0 times.
If comparable businesses trade at 10.0 times, the DCF is asserting this company is worth thirty per cent less than its peers in perpetuity. That may be a deliberate view about its cash conversion, but it now has to be one.