What is an “exit multiple” and how is it used in DCF valuation?
In some discounted cash flow valuations, the terminal value is estimated using a multiple, usually of earnings.In an equity valuation model, the exit multiple may be the PE ratio. In firm valuation models, the exit multiple is often of EBIT or EBITDA. Analysts who use these multiples argue that it saves them from the dangers of having to assume a stable growth rate and that it ties in much more closely with their objective of selling the firm or equity to someone else at the end of the estimation period. As a counter, I would argue that exit multiples introduce relative valuation into discounted cash flow valuation, and that you risk creating an amalgam, which is neither DCF nor relative valuation. Furthermore, the exit multiple used in these multiples is, by far, the biggest single assumption made in these models and is often based upon multiples at which comparable firms are trading at today. On a long term investment, it seems foolhardy to assume that current multiples will remain i
