If a 12.0x EBITDA exit multiple suggests a 5% perpetuity growth rate, what does that imply?

The assertion that a 12.0x EBITDA exit multiple suggests a 5% perpetuity growth rate can imply potential concerns about the realism of the exit multiple itself. In financial modeling, exit multiples are typically derived from market comparables and are applied to a company's financial metrics, such as EBITDA, to estimate the future value of a business at the end of a forecast period.

A 5% perpetuity growth rate indicates expectations for consistent, continuous growth beyond the forecast period. In general, exit multiples should be aligned with reasonable expectations regarding growth rates, considering factors such as industry standards, economic conditions, and the maturity of the business. A 12.0x multiple, in conjunction with a relatively high growth expectation of 5%, may raise red flags, suggesting that the multiple priced into the market might not be sustainable or realistic over the long term.

Industry norms often suggest that long-term growth rates should not exceed the historical growth of the broader economy (usually around 2-3% for mature economies). Therefore, a perpetuity growth rate of 5% may exceed these norms, indicating that the exit multiple could also be overly optimistic if it is based on such growth expectations. This implies a potential disconnect between the assumed growth trajectory and the