In the terminal value method that uses a multiple, which metric is commonly used (sometimes NI)?

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Multiple Choice

In the terminal value method that uses a multiple, which metric is commonly used (sometimes NI)?

Explanation:
When valuing the terminal value with an exit multiple, you want a metric that cleanly reflects ongoing operating performance and is easily comparable across companies. EBITDA fits that purpose perfectly because it removes the effects of financing decisions (interest), tax environments, and non-cash charges (depreciation and amortization). This lets you compare how much operating profitability a business generates, regardless of its capital structure, which is exactly what market multiples like EV/EBITDA are designed to normalize for. In practice, the exit value is often expressed as enterprise value times EBITDA, which then needs to be adjusted to derive equity value. Net income, by contrast, can swing with tax rates, interest, and one-off items, making it a less stable basis for a cross-company exit multiple. Free cash flow is informative but introduces additional assumptions about capital expenditures and working capital, and exit multiples commonly focus on a pre-financing, pre-cash flow metric for easier comparability. Revenue multiples exist in some sectors but don’t reflect profitability or cash generation as directly, so EBITDA remains the standard choice for this method.

When valuing the terminal value with an exit multiple, you want a metric that cleanly reflects ongoing operating performance and is easily comparable across companies. EBITDA fits that purpose perfectly because it removes the effects of financing decisions (interest), tax environments, and non-cash charges (depreciation and amortization). This lets you compare how much operating profitability a business generates, regardless of its capital structure, which is exactly what market multiples like EV/EBITDA are designed to normalize for. In practice, the exit value is often expressed as enterprise value times EBITDA, which then needs to be adjusted to derive equity value.

Net income, by contrast, can swing with tax rates, interest, and one-off items, making it a less stable basis for a cross-company exit multiple. Free cash flow is informative but introduces additional assumptions about capital expenditures and working capital, and exit multiples commonly focus on a pre-financing, pre-cash flow metric for easier comparability. Revenue multiples exist in some sectors but don’t reflect profitability or cash generation as directly, so EBITDA remains the standard choice for this method.

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