Ultimate Guide to Exit Valuation [All Questions Answered]

Conducting an exit valuation is usually overwhelming, given all the financial metrics, multiples, and different valuation methods you must comb through to get an accurate exit price.

Here’s the good news: you don't have to determine the worth of your business on your own.

At Exitwise, we help you work with the best M&A professionals in your industry to determine the best sale price possible for your business.

Contact us for a free consultation with our M&A advisor to find your ideal M&A team and uncover the secrets to a favorable exit value. 

What is an Exit Valuation?

An exit valuation is the value of a business at an exit event, such as a merger, sale, or acquisition. 

Private equity investors or venture capitalists commonly use the term to know the value at which they can expect to exit their investment. 

What is Terminal Value?

Terminal value is the estimated value of a business beyond the last year of the specified projection period when valuing using the discounted cash flow (DCF) method. 

The terminal value shows the value of all the future cash flows beyond the forecasting period, usually forming about 75% of the total implied value of a business valued using the DCF method. 

What is the Exit Multiple Approach?

Investors and venture capitalists use several approaches to valuing a business with the DCF, one of the most common being the exit multiple approach.  

The exit multiple approach is a financial metric to evaluate the return on investment when a business is sold, showing first the terminal value in the final year of forecasting. The approach is common in private equity and venture capital investments, where the main goal is high returns on investment.

If you use the exit multiple to value your business, you can apply a market multiple to a financial metric such as EBITDA or EBIT. 

The market-based exit multiple comes from comparing the multiples at which similar businesses were acquired or sold recently. 

For example, if you apply the exit multiple to your EBITDA, you’ll see how many times the EBITDA your business is worth in the last year of the projection period. 

Here's a formula for the exit multiple approach to determine the terminal value:

Since the exit multiple method also relies on the discounted cash flows valuation method to get the present value of all the cash flows in the forecast period, you also have to discount the terminal value.

As such, the total value of the company becomes:

Let's assume the present total value of all cash flows for a company is $750,000, and the discounted terminal value at the end of the final forecast year is $2,250,000. 

The implied value of the company would be $750,000 + $2,250,000 = $3,000,000

Exit Multiple by Industry

The exit multiple varies from one industry to another, depending on market conditions, the nature of the industry, and other factors. 

According to NYU Stern data, you can expect the following exit multiples for different US sectors based on EBITDA (where the multiple = company value ÷ EBITDA):

Health Exit Multiples

The health industry posts the multiples below in different sub-sectors: 

• Healthcare products: 21.51

• Healthcare Information Technology: 21.44

• Healthcare support services: 11.29

• Healthcare facilities: 8.75

Real Estate Exit Multiples

You can expect the multiples below in various real estate sub-sectors:

• Real estate investment trusts: 21.02

• Real estate diversified/general: 18.01

• Real estate development: 17.93

• Real estate operations and services: 14.98

Retail Exit Multiples

The retail industry has the following exit multiples for different sub-sectors:

• General retail: 16.63

• Distribution retail: 11.63

• Building supplies retail: 13.33

• Automotive retail: 11.63

• Food and grocery retail: 6.38

Importance of a Business Valuation for an Exit Strategy

Business valuations are important in exit planning for several reasons. Here's why you'll want to value your business with an exit in mind. 

Benchmarking

Studying the valuations of related businesses can show you the potential value your company could sell for in an exit. 

You'll also analyze the nature of the businesses and gain insights into internal loopholes to increase your company’s value. 

Negotiating Better Terms 

If your business has a high value, you can negotiate better sale terms with potential acquirers. 

A higher valuation also means your company can generate more demand, which you can exploit to ask for a higher price. 

Improving Future Planning

A high forecast exit value can motivate you to make better long-term business decisions that grow your company better. 

Exit Valuation Methods

There are several exit valuation methods to choose from, depending on factors like the nature of your business and industry trends. 

Here's a sneak peek into different methods: 

• Market Multiples Method: The market multiple method applies an industry-specific multiplier to financial metrics like EBITDA, EBIT, and sales. 

• Discounted Cash Flow Method: A complicated method, the DCF approach allows you to estimate the current value of future cash flows and discount them at an agreeable rate. 

• Comparable Company Analysis: A type of market-based valuation method, the comparable company analysis compares your company to similar publicly traded companies to determine your business's estimated value. 

Factors that Influence an Exit Valuation

Exit valuations increase or decrease based on various factors, as discussed below.

Market Conditions

The overall market atmosphere can boost or lower exit valuations. 

For example, business valuations are lower if the whole economy is in a financial crisis. 

Strength of the Management Team

A strong management team translates into great success, growth, and better handling of challenges. 

When such success is prevalent, a business's value is higher. 

Financial Health

A company in financial distress attracts a lower exit valuation, while its counterpart with commendable financials, like high profitability, gets a higher valuation. 

How to Calculate an Exit Valuation

You can choose one or a combination of different valuation methods. 

The discounted cash flow method is one of the best, and it involves calculating cash flows for each year in the forecast period and the terminal value. 

These values are then discounted to their present value using a discount rate to account for the “time value of money." 

Notably, you can calculate a company's total value using the exit multiple approach or the perpetuity growth method under discounted cash flow. 

Calculating Exit Valuation Using Exit Multiple

Let's assume the following metrics for a business XYZ:

• $60 million EBITDA in the last 12 months (Year 0)

• $30 million in free cash flow (FCF) over the previous 12 months

• A $2 million increase in EBITDA each year between Year 1 and Year 5 of the forecast period, meaning the Year 5 EBITDA will be $70 million [Year 1 EBITDA + $2 million x 5)] 

• A fixed 50% FCF to EBITDA ratio ($30 million ÷ $60 million)

• A 10% discount rate

• 8.0x exit multiple, based on market comparison

Year 1 EBITDA = $62 million, Year 2 EBITDA = $64 million, Year 3 EBITDA = $66 million, Year 4 EBITDA = $68 million, Year 5 EBITDA = $70 million

FCF Year 1 = $62 million x 50% = $31 million

FCF Year 2 = $64 million x 50% = $32 million

FCF Year 3 = $66 million x 50% = $33 million

FCF Year 4 = $68 million x 50% = $34 million

FCF Year 5 = $70 million x 50% = $35 million

Discount the free cash flows to the present value using the formula:

PV FCF Year 1 = $31 million ÷ (1.1^1) = $28,181,818 

PV FCF Year 2 = $32 million ÷ (1.1^2) = $26,446,280

PV FCF Year 3 = $33 million ÷ (1.1^3) = $24,793,388

PV FCF Year 4 = $34 million ÷ (1.1^4) = $23,222,457

PV FCF Year 5 = $35 million ÷ (1.1^5) = $21,732,246

Sum up all the discounted free cash flows to get $124,376,189

Now, calculate the terminal value using the final year EBITDA:

Again, you’ll discount the terminal value to the present value:

Present value of Terminal Value = Terminal value ÷ (1 + discount rate 10%)^the number of the final year = $560 million ÷ (1.1^5) = $347,715,940

Now calculate the total company value:

Total company Value for XYZ = $124,376,189 + $347,715,940 = $472,092,129

Determining your business valuation for an exit strategy can be overwhelming, which is why we at Exitwise work with you to find and manage a holistic team of M&A experts. 

Consult with us today to form your desired M&A experts team, who will help you calculate your exit value without having to crunch the numbers yourself. 

Calculating Exit Valuation Using Perpetual Growth Method

Let's use the same model business above, XYZ, with the additional specification below:

• 2.5% perpetual growth rate

Here's the formula for the terminal value using the perpetuity method:

Calculate the FCF value for the next year (year N) after Year 5:

FCF for Year N = FCF of the final year x (1+ The perpetual growth rate)

FCF for Year N = $35 million x (1 +2.5%) = $35,875,000

The terminal value for Year 5 = [$35,875,000 x (1 + 2.5%)] ÷ (10% - 2.5%) = $490,291,666

Discount the terminal value to the present value:

Discounted terminal value = $490,291,666 ÷ (1 + 10% discount rate)^the final year number, 5 = $304,432,549

Total company value for XYZ = Discounted FCFs for the forecast years + Discounted terminal  value = $124,376,189 + $304,432,549 = $428,808,738

Frequently Asked Questions (FAQs)

Below are extra questions about exit valuations:

What are Exits in Venture Capital?

Exits in venture capital are the strategic plans investors follow to sell their stake in a business or company at a profit. 

What is the Perpetuity Growth Method Formula?

The perpetuity growth method uses the formula below: 

What is the Terminal Value Exit Multiple?

The terminal value exit multiple is a multiplier applied to the financial metric (terminal value) of the final year in the projection period to determine the total value of your company. 

While the terminal value multiple formula seems straightforward, determining the terminal value itself is challenging. You can work with us at Exitwise to find out how to calculate the exit multiple and terminal value more easily. 

Conclusion

While we agree that conducting an exit valuation is difficult, we acknowledge that the process gets easier with the right team of business valuation experts. 

At Exitwise, we help you form the best team that will help you calculate an accurate exit value and get a top sale deal. 

Reach out to our advisory team for help finding the finest M&A experts.