New Jersey Business Valuations Expert Discusses Terminal Value
My name is Robert Bonavito, New Jersey Forensic Accountant. This video is part of a series of videos where I discuss Forensic Accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances.
My name is Robert Bonavito, New Jersey Forensic Accountant. Today we're gonna talk about terminal value. And all the time when I get my deposition or in trial, the attorneys love to ask me about terminal value and they basically think it's nonsense. You know, and what terminal value is, is when you're valuing a company, you have cash flows for the first five years, but what about the years six and out? You know, if the company lasts like... let's say it's 1924 and you're valuing Ford Car Company, and you only took five years of cash flow, was that fair? Ford is still around, it's 2015. So how do you get those other years? So it's 1920, you're valuing Ford stocks, so you get it from '20 to '25, but what about the rest? That's where terminal value...Terminal value will value those hundred years or hundred and fifty years into the future, okay? Because, you know, a company is a legal entity and technically, they can go on forever. You know what? We do have a lot of companies that have been around quite a long time. General Electric, General Motors, Ford Motor Company. You know, lots of companies evolve and change, but you'd be surprised how many of the original Dow companies are still around in one form or another, it is like 60% or 70%.
So this terminal value is a calculation that Finance has developed and we use. It's pretty simple. All it is, is the cash flow, okay? And it's gonna be rate of return minus growth and you're just dividing it. So, for example, if your cash flow is $100 million in year six of your valuations, you're gonna take your discount rate minus the growth, and divide it, and that's what you're gonna get. It's a simple calculation. You wouldn't think it would be that simple to evaluate the cash flows for the next hundred years, but that's what it is. And it's an important concept. I ended up explaining in great detail in court a lot, but intrinsic value is something that you have to consider when you're doing appraisals and if you have any questions on this, feel free to email me.