Thus, the exit multiple should frequently be lower than the current multiple. That implied assumption is often (but not always) wrong because growth prospects tend to decline over time. However, there is an important implied assumption: growth prospects remain unchanged between the valuation date and terminal value date. On the surface, this approach may appear objective because the terminal value is based on an observable input.
For example, a practitioner may use a 10x EBITDA exit multiple because companies currently trade at 10x EBITDA. Perhaps the easiest way to overstate terminal value is to use an exit multiple based on current (i.e., as of the valuation date) multiples. This discussion will highlight how a practitioner may arrive at a terminal value that is too high. Given that Papa Bear had the largest bowl of porridge, the Papa Bear approach refers to methods that arrive at relatively high terminal values. This article provides some insight into the implied assumptions and relative biases of these approaches. Some approaches to terminal value tend to result in higher values, whereas other approaches tend to result in lower values. Terminal values deserve substantial attention for the same reason Willie Sutton robbed banks-that is where (most of) the value is.
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