What are limitations of using the Exit Multiple Method
What are limitations of using the Exit Multiple Method besides obvious fluctuations in market/cyclical business?
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Some limitations could be:
1. Assumes constant growth - exit multiple assumes constant CF growth, so if the firm is in a field that can be disrupted with new technology down the line, maybe the underlying assumption could be invalid.
2. Ignores any operational or financing risks in the long-term.
3. If the forecasting horizon is further into the future, there is no correct rationale for choosing a multiple based on current environment/comps. And you could manipulate valuation easily.
4. Company could be expected to have sufficient non-operating assets which need to be accounted for separately in terminal value.
Like any valuation methodology, it is an art and not a science; as such, the inherent limitation is that it uses subjective inputs which may prove to be inaccurate, in this case the exit multiple in question may not reflect what a rational buyer will pay in an arms length transaction in current market conditions.
This is a dumb ass question tbh
The main issue is that you’re using a relative valuation method for the bulk of your valuation in an intrinsic model. The main point of a DCF is that it’s a sense check with hard cash flows in a world where speculative investments drive potentially inflated valuations - you lose a lot of that benefit if you use a multiple in an intrinsic model
Think of it this way: the main lever to account for market condition or a high-growth industry is the risk premium baked into the discount rate. What happens when you require a higher return because you’re in a high growth industry? Your discount rate goes UP, not down. The hurdle goes up because you’re saying that there is a high return profile for this type of company - and it needs to back that up with cash flows. If a company really does, the valuation will probably land close to where you are using an exit multiple times
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