How can the terminal value be sanity-checked when using the exit multiple approach?

Determining the terminal value through the exit multiple approach can indeed be sanity-checked by backing out into an implied growth rate. This process involves evaluating whether the calculated terminal value appears reasonable when compared to historical growth rates of the company and industry.

When you back out the implied growth rate from the terminal value, you essentially examine if the assumptions driving the multiple are attainable over the long term. If the implied growth rate significantly exceeds historical averages or the projected growth rates for comparable companies in the market, it may signal an unrealistic terminal value that could warrant further review or adjustment.

This technique helps ensure that the exit multiple aligns with realistic expectations about future cash flows and growth, providing a critical check on the assumptions that underpin the valuation. Therefore, this method offers depth to the analysis, making it easier for analysts to justify their exit multiple assumptions based on fundamental financial performance and growth potential.

In contrast, calculating the total enterprise value tends to focus on overall valuation rather than validity of the specific terminal value approach. Performing a comparative analysis may provide insights into industry averages or peer valuations, but doesn't directly assess the logic behind the specific exit multiple chosen. Adjusting for market fluctuations, while important for ongoing valuations, does not specifically pertain to the underlying growth assumptions that a terminal