Why might one choose to use multiples for terminal value (TV)?

Using multiples for terminal value (TV) is often preferred due to the complexities involved in estimating a long-term growth rate. When assessing the future cash flows of a business over an extended period, determining a growth rate that accurately reflects the business's potential can be highly subjective and challenging. Economic forecasts, market conditions, and company-specific factors all play significant roles in this estimation. Multiples, on the other hand, offer a more straightforward approach by applying a market standard or industry benchmark to derive a terminal value based on comparability.

This methodology capitalizes on the notion that businesses can often be valued relative to others with known performance metrics, removing some of the guesswork involved in predicting future cash flows. Thus, resorting to multiples allows professionals in the Liability Management & Restructuring space to bypass some forecasting difficulties and align their valuations with market realities.

Although ease of calculation might seem appealing, relying solely on that aspect can overlook the fundamental appropriateness of the approaches used. Liquidation values and the complexities associated with comparing companies each introduce various limitations that are not as closely aligned with the context in which multiples are employed for terminal value assessments.