These are approximations, but they tie the exit multiple to the assumptions about long-run growth (g), WACC, ROIC, margins and taxes.
Valuers should then cross-check their exit multiple assumption against current medians, long-run sector bands, and transaction evidence. If comps diverge, valuers can explain why; differences in growth durability, capital intensity, or risk.
In reality, the selection of the multiple is based on the median or average of current valuations at the time of the analysis, or the average of the median over the last five to 10 years. But is this correct?
Well, as always—it depends. It could be. Data teaches us something important that we should incorporate into our thinking when selecting the exit multiple.
For exit EBITDA multiples, Michael Mauboussin found that expected EBITDA growth and the spread between ROIC and WACC have a significant impact on valuation for unprofitable companies. However, determining ROIC or exit EBITDA margin is difficult when companies are not yet profitable or in a stable phase.
For this reason, revenue growth and gross margin are often used instead.