What is a “Terminal Value”?

If you’ve ever read a business valuation report and saw the term Terminal Value, it simply means this:

When we value a company, we normally forecast around 5 years into the future.
But companies don’t stop operating after year 5.

So instead of forecasting forever, we estimate the value of the business after the forecast period, assuming it continues as a normal, ongoing business.

That estimated future value is called the Terminal Value.
Then we discount it back to today and add it to the valuation.

Simple idea, complicated name 😅
But extremely important — in many valuations, Terminal Value accounts for a large portion of the final number.

If you want to understand more valuation concepts in simple language, we post regularly at ORNA.

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