Discounted Cash Flow Valuations
March 2026
Estimating the terminal growth rate is a necessary procedure in utilizing a Discounted Cash Flow (“DCF”) method to value a business. The terminal growth rate (“TGR”) is the compounded annual growth rate that is assumed or projected at the end of a year-by-year projection of cash flow when calculating value at that point in time. This rate is the annual cash flow growth rate into perpetuity.
Some practitioners use a 2% or 3% TGR on the theory that the business’ cash flow will likely track long-term inflation. The recent 30-year expected inflation rate as reported by the Federal Reserve was about 2.4%. However, common sense tells one that it is unlikely that, in most cases, cash flow growth will track inflation as large fluctuations in year-to-year cash flow is the norm rather than the exception.
Other methods to estimate TGR include: 1) Assume historical long-term cash flow growth is a good indicator of future long-term growth in cash flow; 2) Query management as to their thoughts on long-term cash flow growth after the projection period; 3) Consider long-term growth estimates of long-term cash flow growth by comparable public companies; and 4) Check reasonableness of TGR by looking at the market multiples that it produces.
Using historical growth rate as the TGR is only acceptable when there aren’t any changes in the business, the economy, or the industry that would cause a change in the growth rate in the future. However, it would be highly unusual for a business to not have such changes.
One could argue that management of a business is in the best position to estimate TGR as it knows the most about their business. However, most businesses don’t make projections for valuation purposes, and their opinion could be biased.
Stock analysts commonly produce long-term earnings growth estimates for publicly-traded companies that can be used to estimate the subject company’s long-term growth rate in cash flow. But this method is only acceptable when the publicly-traded companies used are truly comparable.
Another way to determine a reasonable TGR is to look at the market multiple it produces. For example, a valuator performs a DCF analysis that results in a business value that is 5 times EBITDA, while comparable businesses in the industry are selling at 10 times EBITDA. This suggests that the TGR is too low. However, there may be valid reasons why the market multiple should be lower.
All in all, there is no one correct way to determine a reasonable TGR. Each method has its strengths and weaknesses. The most reasonable method depends on the facts and circumstances of each case and the quality and quantity of relevant data available.
Relevant Court Cases
-
In re the Marriage of Daniel P. Silvey
v. Maria Silvey,
Court of Appeals, State of Wisconsin,
Appeal No. 2023AP2343,
filed February 25, 2026
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In re the Marriage of Sumandeep Kaur and
Desraj Cauldhar,
Court of Appeal of the State of California,
Third Appellate District, Super. Ct. No. 21FL01668,
filed February 24, 2026
Recent Business Valuation Articles
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“The 2008 Financial Crisis Exposed the
Illusion of Asset Value,”
by Zachary Grill,
dated January 27, 2026
-
“Efficient Monte Carlo Valuation of
Corporate Bonds in Financial Networks,”
by Dohyun Ahn and Agostino Capponi,
dated February 13, 2026
Recent Engagements
- Valuation of 100% of the
common stock of an industrial
equipment manufacturer on a
controlling interest basis for
purposes of calculating the net
unrealized built-in gain as of
the date of conversion from C
corporation to S corporation.
- Valuation of the common stock
of a manufacturing and distribution
conglomerate for purchase/sale
purposes.
- Valuation of the
common stock of a niche
equipment dealership on a
minority interest basis
for estate tax reporting
purposes.
- Valuation of member interests
of an investment holding
company on a minority
interest basis for trust
administration purposes.
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