Choose the continuation regime first
Ask whether the company can really exist indefinitely. A limited licence, exhaustible resource or fixed-end contract may require a finite horizon and residual value rather than perpetual growth. Even a continuing business needs a transition to maturity that reflects competition, return on capital and investment needs.
The number of detailed years does not prove maturity. If unusually high margin and rapid growth remain at the end, simply labelling the next line “terminal” does not solve the issue. Extend the transition or explain the more complex regime; otherwise long-term value inherits assumptions that cannot persist.
A perpetual model under stated assumptions
Suppose next year’s free cash flow is 12 million roubles, the rate is 10% and sustainable growth is 3%. Terminal value at the end of the detailed period is 12 / (0.10 − 0.03), or approximately 171.43 million. With a five-year horizon, its present value is about 106.44 million. These are fictional parameters, not current market benchmarks.
The numerator is next year’s flow. Reusing the last forecast-year flow without explanation breaks the calendar. The rate must exceed growth, but that alone does not make every lower growth rate economically acceptable: a company cannot grow forever faster than the economy of which it is part.[95](#source-cv-terminal)
Growth consumes resources
In a simple mature model, growth can be linked to the reinvestment share and return on new capital. If growth is 3% and return is 12%, the required reinvestment share is one quarter of operating profit after the assumed tax. With NOPAT of 16 million, investment is 4 million and cash flow is 12 million.[97](#source-cv-value-creation)
A business cannot distribute all NOPAT, invest nothing in capacity or working resources and still remain the same expanding business. Separating maintenance and growth investment can be difficult, but a missing convenient breakdown does not justify a zero cash budget.
What changes with an exit multiple
If end-of-horizon EBITDA is 20 million and the selected multiple is eight, terminal business value is 160 million. The multiple must be supported by future maturity, risk and market conditions. Today’s comparables do not guarantee the same price in five years. The method becomes a hybrid of cash-flow forecasting and relative valuation.[96](#source-cv-pricing)
Comparing the methods is useful diagnostically, but averaging them does not automatically improve reliability. Identify the assumptions behind the difference: investment, margin, rate, growth or market valuation. Bad data are not repaired by arithmetic compromise.
The final memo should show the terminal-value date, method, growth regime, reinvestment and share of today’s value represented by continuation. A large share is not proof of error, but makes long-term assumptions especially important. No terminal method guarantees a future exit price or instructs anyone to sell after a chosen number of years.
Do not give the terminal line magic
Extending the detailed forecast by one year moves some value from the terminal line into an explicit flow. It does not improve the economics and should not sharply change valuation under consistent assumptions. A large change calls for checking the transition year, dates and numerator flow.
If cash or an investment portfolio is added separately at valuation date, do not silently include its full value again in the terminal sale. Choose a consistent treatment and keep it throughout the horizon. A reader should be able to reconstruct the last operating year, next flow and continuation method.