> For the complete documentation index, see [llms.txt](https://help.modelreef.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://help.modelreef.io/how-tos/valuation/build-a-terminal-value-model.md).

# Build a Terminal Value Model

This guide explains how to set up and interpret terminal value in Model Reef. Terminal value represents the value of cashflows beyond your explicit forecast horizon.

## Before you start

You should have:

* A working forecast with a reasonable explicit horizon (for example 5 to 10 years).
* FCFF and FCFE series populated.
* A sense of how the business behaves in the long run (growth rates, margins, capital intensity).

## What you will build

* A terminal value configuration using either:
  * A multiple applied to a financial metric, or
  * A long run growth framework applied to cashflows.
* A clear view of how much of the total valuation comes from terminal value.

{% stepper %}
{% step %}

### Choose an appropriate forecast horizon

Terminal value should represent the stable, mature phase of the business.

* Check your model end date:
  * Does the business reach a sustainable margin structure before the final year?
  * Are growth rates trending towards a steady state?
* If not:
  * Extend the forecast horizon until you see stable behaviour.

A cleaner horizon produces a more reliable terminal value.
{% endstep %}

{% step %}

### Decide on terminal value approach

Model Reef supports two main conceptual approaches.

#### Approach A: Multiple based terminal value

* Uses a market or transaction multiple.
* Common for:
  * EBITDA based values.
  * Cashflow based values.

#### Approach B: Long run growth style terminal value

* Uses a growth rate less than the discount rate.
* Well suited where you trust your FCFF or FCFE profile.

Decide which approach aligns best with your use case and available market data.
{% endstep %}

{% step %}

### Configure multiple based terminal value

* Identify a metric in the final forecast year:
  * EBITDA.
  * EBIT.
  * FCFF.
  * FCFE.
* In the valuation settings:
  * Select the **Multiple method** for terminal value.
  * Choose the metric to apply the multiple to.
  * Enter a conservative, evidence based multiple.
* Model Reef will compute:
  * Terminal Value = chosen\_metric\_final\_period × multiple.
  * Discount this amount back to the valuation date using the appropriate discount rate.

Check that the implied terminal value multiple looks sensible versus market comparables.
{% endstep %}

{% step %}

### Configure growth based terminal value

Long run growth logic is commonly applied to FCFF or FCFE.

* Confirm the final period FCFF or FCFE is representative of a stable steady state.
* Choose a **long term growth rate g**:
  * Lower than the discount rate.
  * Often at or below expected nominal GDP growth.
* In valuation settings:
  * Select the **growth based** terminal value configuration.
  * Enter g.
* Model Reef will compute:
  * Terminal Value using your chosen FCFF or FCFE and growth rate.
  * Discount the terminal value back using WACC or the equity discount rate.
    {% endstep %}

{% step %}

### Analyse the contribution of terminal value

After configuration:

* Look at the total valuation:
  * Sum of discounted explicit cashflows.
  * Plus discounted terminal value.
* Check the **percentage contribution** from terminal value:
  * If terminal value drives nearly all the valuation, consider:
    * Extending the explicit forecast horizon.
    * Reducing long term growth or multiples.
* Use scenarios:
  * Create alternative models with different terminal assumptions.
  * Compare how sensitive valuation is to the terminal configuration.
    {% endstep %}

{% step %}

### Document your assumptions

Terminal value is often the most contested part of a valuation.

* Use Notes or comments to:
  * Record why you chose a given multiple.
  * Document sources for comparable multiples.
  * Explain long term growth assumptions.

This provides transparency for reviewers and stakeholders.
{% endstep %}

{% step %}

### Check your work

* Forecast horizon is long enough for the business to reach a reasonably stable state.
* Terminal value assumptions are consistent with economic reality.
* Terminal value does not dominate the valuation to an uncomfortable degree.
* Documentation clearly explains how and why you selected your settings.
  {% endstep %}
  {% endstepper %}

## Troubleshooting

<details>

<summary>Terminal value is extremely large</summary>

Check that the multiple or growth rate is not too aggressive. Also verify the metric used in the final year is not unusually high or distorted.

</details>

<details>

<summary>Terminal value is very small or negative</summary>

Confirm that the final period cashflows are not structurally negative. Negative steady state FCFF or FCFE implies a non viable business.

</details>

<details>

<summary>Stakeholders challenge the terminal assumption</summary>

Prepare several scenario models with differing terminal values and show the impact on total valuation.

</details>

## Related guides

* [Construction & Contracting](/use-cases/construction-and-contracting.md)
* [Terminal Value Rules](/help/financial-outputs-and-valuation/terminal-value-rules.md)
* [Mapping API Data Into Variables](/help/importing-from-google-finance-and-yahoo-apis/mapping-api-data-into-variables.md)
* [Selecting Series for Charts](/syntax/chart-and-table-syntax/selecting-series-for-charts.md)