Check out our FREE Resources page – Download complimentary business frameworks, PowerPoint templates, whitepapers, and more.







Flevy Management Insights Q&A
What are the best practices for calculating terminal value in Excel for accurate company financial modeling?


This article provides a detailed response to: What are the best practices for calculating terminal value in Excel for accurate company financial modeling? For a comprehensive understanding of Company Financial Model, we also include relevant case studies for further reading and links to Company Financial Model best practice resources.

TLDR Use the Gordon Growth Model or Exit Multiple Method in Excel, validate assumptions, conduct sensitivity analysis, and integrate with DCF for accurate terminal value calculation.

Reading time: 4 minutes


Calculating terminal value is a critical component of financial modeling, serving as a cornerstone for valuing an organization's long-term cash flow beyond the explicit forecast period. This calculation is essential for executives and analysts who aim to derive the most accurate valuation of an organization's worth. Understanding how to calculate terminal value in Excel with precision and strategic insight is paramount for informed decision-making.

There are primarily two methods to calculate terminal value: the Gordon Growth Model (GGM) and the Exit Multiple Method. The GGM, also known as the Perpetuity Growth Model, assumes that cash flows will grow at a constant rate indefinitely. It is calculated by dividing the last year's projected cash flow (adjusted for perpetuity growth) by the difference between the discount rate and the perpetuity growth rate. On the other hand, the Exit Multiple Method determines terminal value based on a future earnings metric (such as EBITDA) multiplied by an industry-standard multiple derived from comparable company analysis.

When calculating terminal value in Excel, it's crucial to use a framework that aligns with your strategic planning and valuation objectives. For the GGM, the formula in Excel would be "= (last year cash flow * (1 + growth rate)) / (discount rate - growth rate)". This requires you to have a clear estimate of the long-term growth rate, which should be conservative and reflective of the organization's sustainable growth capacity. Consulting firms like McKinsey and Bain often emphasize the importance of selecting a growth rate that does not exceed the long-term growth rate of the economy to ensure realism in valuation.

For the Exit Multiple Method, the approach in Excel is straightforward but demands market insight. After determining an appropriate EBITDA multiple based on industry comparables, you multiply this by the projected EBITDA of the last forecasted year. The formula in Excel would be "= projected EBITDA * selected multiple". This method hinges on the accuracy of the selected multiple, which should be derived from a thorough analysis of market trends and comparable organizations.

Best Practices for Accuracy

Ensuring accuracy in calculating terminal value in Excel involves adhering to best practices that align with industry standards and consulting insights. First, it's critical to validate the assumptions underlying your chosen method. Whether it's the growth rate in the GGM or the EBITDA multiple in the Exit Multiple Method, these assumptions should be based on robust, data-driven analysis. Consulting giants like Deloitte and PwC often highlight the importance of grounding these assumptions in realistic, achievable metrics.

Second, sensitivity analysis is a powerful tool to test the robustness of your terminal value calculation. By varying key inputs such as the growth rate or EBITDA multiple within plausible ranges, you can assess the impact on terminal value and gain insights into the valuation's sensitivity to these parameters. This approach not only enhances the credibility of the valuation but also prepares executives for various strategic scenarios.

Lastly, integrating terminal value into the overall DCF model with precision is crucial. This involves correctly discounting the terminal value back to the present value using the weighted average cost of capital (WACC). The formula in Excel for discounting terminal value is "= terminal value / (1 + WACC)^n", where n is the number of years to the terminal year. This step is critical for ensuring that the terminal value accurately reflects its contribution to the organization's overall valuation.

Learn more about Best Practices

Are you familiar with Flevy? We are you shortcut to immediate value.
Flevy provides business best practices—the same as those produced by top-tier consulting firms and used by Fortune 100 companies. Our best practice business frameworks, financial models, and templates are of the same caliber as those produced by top-tier management consulting firms, like McKinsey, BCG, Bain, Deloitte, and Accenture. Most were developed by seasoned executives and consultants with 20+ years of experience.

Trusted by over 10,000+ Client Organizations
Since 2012, we have provided best practices to over 10,000 businesses and organizations of all sizes, from startups and small businesses to the Fortune 100, in over 130 countries.
AT&T GE Cisco Intel IBM Coke Dell Toyota HP Nike Samsung Microsoft Astrazeneca JP Morgan KPMG Walgreens Walmart 3M Kaiser Oracle SAP Google E&Y Volvo Bosch Merck Fedex Shell Amgen Eli Lilly Roche AIG Abbott Amazon PwC T-Mobile Broadcom Bayer Pearson Titleist ConEd Pfizer NTT Data Schwab

Real-World Application and Template

In practice, the calculation of terminal value plays a pivotal role in major strategic decisions, from mergers and acquisitions to long-term financial planning. For instance, when an organization contemplates an acquisition, accurately assessing the target's terminal value can be the difference between a strategic success and an overvaluation pitfall. Consulting firms often develop customized Excel templates that streamline this process, incorporating industry-specific growth rates, discount rates, and multiples to facilitate accurate valuations.

A practical example of this is when a technology firm evaluates a potential acquisition. The firm would use a template that factors in the high growth potential typical of the tech industry, along with the volatility and risk factors. Such a template might include pre-set growth rates and multiples based on historical data of comparable tech firms, allowing for a more nuanced and sector-specific valuation.

Ultimately, the key to calculating terminal value in Excel lies in a deep understanding of the organization's strategic context, a rigorous approach to assumption setting, and the application of industry best practices. Whether through the Gordon Growth Model or the Exit Multiple Method, the goal remains the same: to arrive at a valuation that accurately reflects the organization's long-term potential.

In conclusion, mastering how to calculate terminal value in Excel is essential for C-level executives involved in strategic planning, investment analysis, and financial management. By leveraging frameworks, consulting insights, and Excel templates, executives can ensure their financial models are both strategic and accurate, providing a solid foundation for decision-making.

Learn more about Strategic Planning Financial Management

Best Practices in Company Financial Model

Here are best practices relevant to Company Financial Model from the Flevy Marketplace. View all our Company Financial Model materials here.

Did you know?
The average daily rate of a McKinsey consultant is $6,625 (not including expenses). The average price of a Flevy document is $65.

Explore all of our best practices in: Company Financial Model

Company Financial Model Case Studies

For a practical understanding of Company Financial Model, take a look at these case studies.

No case studies related to Company Financial Model found.

Explore all Flevy Management Case Studies

Related Questions

Here are our additional questions you may be interested in.

How can companies ensure the accuracy and reliability of their financial models in rapidly changing markets?
To ensure financial model accuracy in volatile markets, companies should adopt a Flexible Modeling Framework, strengthen Data Integrity and Governance, and engage in Continuous Learning and Improvement. [Read full explanation]
How can companies leverage advanced analytics and machine learning to enhance the predictive accuracy of their financial models?
Companies can significantly enhance the predictive accuracy of their financial models by integrating advanced analytics and machine learning, leveraging big data and sophisticated algorithms to uncover insights, forecast trends, and optimize strategies for improved decision-making and profitability. [Read full explanation]
What strategies can companies employ to ensure their financial models remain relevant amidst rapid technological advancements?
To ensure financial models remain relevant amidst technological advancements, companies should embrace Digital Transformation, focus on Scenario Planning and Stress Testing, and invest in Continuous Learning and Skills Development. [Read full explanation]
In what ways can real-time data analytics enhance the predictive accuracy of company financial models?
Real-time data analytics enhances predictive accuracy of financial models by incorporating current market conditions, improving granularity, and leveraging machine learning for better forecasting, operational efficiency, and cost management. [Read full explanation]
How can organizations ensure data security and privacy when using cloud-based integrated financial models?
Organizations can ensure data security and privacy in cloud-based financial models by adopting a robust Security Framework, fostering a Culture of Security Awareness, and leveraging Advanced Technologies, while ensuring compliance with international standards and regulations. [Read full explanation]
What role does scenario planning and stress testing play in preparing companies for unforeseen business disruptions?
Scenario Planning and Stress Testing are essential for Strategic Planning and Risk Management, enabling organizations to anticipate disruptions, minimize risks, and seize opportunities for resilience and long-term success. [Read full explanation]

Source: Executive Q&A: Company Financial Model Questions, Flevy Management Insights, 2024


Flevy is the world's largest knowledge base of best practices.


Leverage the Experience of Experts.

Find documents of the same caliber as those used by top-tier consulting firms, like McKinsey, BCG, Bain, Deloitte, Accenture.

Download Immediately and Use.

Our PowerPoint presentations, Excel workbooks, and Word documents are completely customizable, including rebrandable.

Save Time, Effort, and Money.

Save yourself and your employees countless hours. Use that time to work on more value-added and fulfilling activities.




Read Customer Testimonials



Download our FREE Strategy & Transformation Framework Templates

Download our free compilation of 50+ Strategy & Transformation slides and templates. Frameworks include McKinsey 7-S Strategy Model, Balanced Scorecard, Disruptive Innovation, BCG Experience Curve, and many more.