How do you choose an appropriate exit multiple when calculating a company's terminal value?

Let me break it down simply:

Think of exit multiples like predicting a house's future selling price. You can't just guess randomly - you need to understand market trends, neighborhood dynamics, and comparable sales.

Look at current trading multiples for similar companies. If tech companies are trading at 15x EBITDA today, using something wildly different requires serious justification. It's like pricing your house way above neighborhood comps without a good reason.

Consider the company's projected growth and margin profile. Stable, high-margin businesses deserve premium multiples. A software company with consistent 30% growth might merit a higher multiple than a struggling manufacturer.

Industry trends matter hugely. Some sectors get re-rated over time. Tech might expand multiples, while traditional industries might compress. Like how downtown real estate values change faster than suburban neighborhoods.

Remember: An exit multiple isn't a dart throw. It should reflect the company's expected long-term performance, industry dynamics, and market sentiment. The best analysts can explain exactly why they chose their multiple.

Talk soon,

Sam