What is a flaw of basing terminal multiples on public comparables?

What is a flaw of basing terminal multiples on public comparables?

• A. There is no flaw
• B. The median multiples may change greatly in the next 5-10 years; use a wide range and sensitivity; cyclical industries problematic
• C. It always overestimates
• D. It is too complicated

Answer: (B)

Using public comparables to set terminal value is vulnerable because market multiples are not stable over time. They move with investor sentiment, growth expectations, and risk appetite, so the median multiple today can change a lot over the next 5–10 years. Relying on a single multiple for the terminal value can therefore yield an exit value that doesn’t hold up under different future conditions. That’s why it’s important to apply a range of multiples and perform sensitivity analysis to see how the terminal value shifts under different scenarios. This approach is especially critical for cyclical industries, where multiples can rise in upswings and fall sharply in downturns, making current multiples poor predictors of long-run value.

Using public comparables to set terminal value is vulnerable because market multiples are not stable over time. They move with investor sentiment, growth expectations, and risk appetite, so the median multiple today can change a lot over the next 5–10 years. Relying on a single multiple for the terminal value can therefore yield an exit value that doesn’t hold up under different future conditions. That’s why it’s important to apply a range of multiples and perform sensitivity analysis to see how the terminal value shifts under different scenarios. This approach is especially critical for cyclical industries, where multiples can rise in upswings and fall sharply in downturns, making current multiples poor predictors of long-run value.