An exit multiple is one of the most commonly used terms in finance and it refers to the terminal multiple at which any given project will be exited. The most commonly used multiple is EV / EBITDA.

#### Terminal Multiples Definition / Exit Multiples

Exit multiples are often used for valuations. For example, if the standard EV / Revenue multiple for a sector is 3x and you have a 5 year financial projection model, you can estimate the value of the company in each of those 5 years using revenue projections and the 3x EV / Revenue multiple. In a discounted cash flow using the terminal value methodology, exit multiples are used to obtain a terminal value for the company. Please see the discounted cash flow definitions for more detail. The concept of an exit multiple is similar to that of an internal rate of return (IRR) and one can be used to calculate the other. Assume that an investment of \$100 is made in Year 1 and the investor wants to achieve a 3x exit multiple in 5 years time. In order to achieve this, his investment must grow by a certain rate each year. The formula for this will be familiar to any mathematics or finance student,

• 300 = 100 x (1+n)^5

where n is the growth rate required in the investment. In this scenario the answer is around 25%. To calculate in reverse, assume we invest \$500 into a company which we know will provide 10% compound return each year for a 10 year period. The total return is now 500 x (1+10%)^10 = \$1296 which is an exit multiple of roughly 2.6x. You can check out a video on the topic below.

#### Define Terminal Value

As a refresher, terminal value is the value of the company into perpetuity assuming that a company will continue to be a going concern. The terminal value can be calculated in a DCF through the terminal multiple method – taking the final year of projected EBITDA or revenue and multiplying it by the industry exit multiple (which is an average multiple at sale).

Module 1: Introduction

Module 2: Valuation: The Big Picture

Module 3: Enterprise Value & Equity Value Practice

Module 5: Trading Comps: The Setup

Module 10: Trading Comps: Benchmarking and Outputs

Module 11: Precedent Transactions: Introduction

Module 12: Precedents: The Setup

Module 13: Spreading Tiffany & LVMH

Module 16: Spreading Jimmy Choo & Michael Kors

Module 17: Spreading Dickies & VF

Module 18: Valuation Wrap-Up

Module 19: Bonus: Non-GAAP Practice