Is My Exit Multiple in the DCF reasonable: Testing Implied Growth Rates

fengelh
Apr 17
2 min read

Is Your Exit Multiple Reasonable in the DCF Context?

Assume you have benchmarked your project company against its peers / the competitor's universe and the LTM EBITDA exit multiple that you concluded on is 9.5x (you can read our other article on best practice for benchmarking and selecting exit multiples for your DCF / Income Approach). Now that we have our 9.5x LTM EBITDA exit multiple, how can we test whether this is reasonable in the context of our forecast?

We can use the Gordon Growth Model (GGM) to reverse-engineer the implied perpetual growth rate (g) from your exit multiple. This tells you what kind of long-term growth you’re baking into your DCF.

Common mistakes are:

If an EBITDA exit multiple is used, use the EBITDA for 'D1', as substitute for the dividends.
'D1' is not the final year EBITDA, but the period following the final year. Above this would be 2029. Use a reasonable growth rate, such as the real inflation 5%.
'P' is the Terminal / Exit Value, as subsitute for the Equity Value in GGM.

Example: A Reasonable Growth Rate

A 9.5x LTM EBITDA multiple might imply an 8.3% perpetual growth rate. That’s higher than real-world inflation (say ~5%)—but not necessarily a red flag if:

The company’s revenue and EBITDA are growing at similar rates (i.e. 9.1% revenue growth in the last year).
Its market segment supports long-term growth above inflation.
It's still in a scaling phase with room to grow.

If the implied growth far exceeds projections or economic reality, it's time to reassess.

Textbook vs. Practicality: Walking the Tightrope

Let’s say you you are being challenged on the 9.5x LTM EBITDA exit multiple and the 8.3% growth rate that it implies. The challenger believes an exit multiple in line with a ~3.0% inflation rate should be more appropriate. You can run a sensitivity test and find that an 8.0x exit multiple implies a 3.2% growth rate—comfortably in line with inflation. But is that market-consistent?

If all your comparables trade above 8.0x and no relevant precedent suggests otherwise, then using 8.0x—despite being “textbook correct”—might understate the company’s real terminal value.