Terminal value
Last updated
Quick Answer
Terminal value is the portion of a discounted cash flow that represents everything beyond the explicit forecast period.1
What it is
It is computed either by a perpetuity growth formula or by applying an exit multiple to a final-year metric, and the two methods embed different assumptions about what the business becomes. It routinely accounts for the large majority of total modelled value, which means a DCF's answer is mostly an assumption about a period nobody forecast in detail.1
Operational context
What good looks like
Why It Matters
Two DCFs that disagree usually disagree about terminal value, not about the forecast. Arguing over year-three revenue while accepting the other side's exit multiple is arguing about the smaller number.1
Term Family
Related concepts
Frequently Asked Questions
What is Terminal value in venture capital?
It is computed either by a perpetuity growth formula or by applying an exit multiple to a final-year metric, and the two methods embed different assumptions about what the business becomes.
Why is Terminal value important for startups?
Understanding Terminal value is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.T1-08 — International Valuation Standards CouncilIVS 105 — Valuation Approaches and MethodsInternational Valuation Standards Council(Terminal value is the portion of a discounted cash flow that represents everything beyond the explicit forecast period.)primary · T1 · valuation · metric
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