When using the Multiples Method to calculate terminal value, which multiples should you primarily rely on?

When calculating terminal value using the Multiples Method, the focus should be on identifying the appropriate valuation multiples that truly reflect the company's ongoing cash flow generating potential. The choice of multiples primarily hinges on identifying consistent benchmarks that can effectively capture the industry context and growth expectations.

Current public comps can fluctuate based on market trends, while historical precedents might not take into account recent economic conditions or changes in the industry landscape. Relying solely on recent transactions may also skew the results as they could be influenced by unique circumstances surrounding those deals.

The most effective approach is to utilize a comprehensive analysis that not only considers current market conditions but also adjusts for historical trends and transactional data when necessary. However, rather than focusing solely on these methods in isolation, it is critical to calculate a blended perspective that accurately reflects the long-term growth prospects of a company. Therefore, relying exclusively on neither surface multiples nor precedents allows for a more nuanced and accurate estimation of terminal value, aligning the multiples used with the company's future cash flow projections.