Terminal growth rate for tech companies

Prospect in CorpFin

Currently valuing a tech company that provides ERP, CRM software. Recently moved to providing SaaS (say last year). I know the 5-year projections for the company and it's YOY growth rates are around 30% rn.

What would be a good terminal growth rate I can use? I know normally we use 2% but since it's a software company and is experiencing huge growth right now, I think 2% will be a bit too understated. What do you guys think?

Comments (17)

Nov 28, 2019

gonna need more info than that houston

What concert costs 45 cents? 50 Cent feat. Nickelback.

Most Helpful
Nov 28, 2019

Currently in a tech group and run into this a lot. Typically we will run the DCF over a much longer period, say 10 years as opposed to 5 to allow the company to arrive at more of a "steady state" growth rate. (I.e linear decrease in growth YoY until the terminal year in which we would use 2-4%)

Hopefully that helps.

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  • Prospect in CorpFin
Nov 28, 2019

What if client has only provided us 5 Year projections?

Nov 29, 2019

Basically forecast based on historicals (averages or hard codes). Essentially hold operating margin constant or use the average of the projection period. Once you have your "EBIT" basically you should be fine by using the effective tax rate.

For the balance sheet items we would typically use a modest growth in CapEx and D&A given the tech focus they won't have a ton of PP&E but instead will have larger amortization. To calculate change in working capital usually we would use the line items as % of revenue for the purposes of a DCF if projections aren't given. You obviously could use DSO, DPO etc..

Long story short you don't really have to project that many things to get to a functional DCF model over 10-Years.

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Nov 29, 2019

Out of curiosity: how do you account for probability of distress in a high growth company over a 10-yr projection?

Nov 29, 2019

Make scenarios and apply a probability to them.

Nov 29, 2019

What I have frequently been told, if you don't feel comfortable projecting full financials for 10-15 years, is to use Multi-Stage Terminal values. Plenty of articles on this out there

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Dec 1, 2019

You can use H model for stabilising the terminal growth

Dec 4, 2019

Out of curiosity, is this tech company actually profitable / CF+? (Lots of them aren't, as I'm sure you know).

Dec 4, 2019

Use EMM. Assume SoftBank buys you for 30x NTM revenue. Done.

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Dec 4, 2019
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