Valuation, Measuring and Managing the Value of Companies - by McK.&Co, T. Koller, M. Goedhart, D. Wessels
Terminal Value Weight
Valuation Breakdown by Time Periods
When breaking down an organization’s value into near-term and long-term components, the proportion of these two parts varies across different sectors. However, the weight of the value beyond the forecast horizon is significantly larger in any case (see photo).
First Forecast Period
The initial forecast period should ideally span 10-15 years. A shorter period can lead to undervaluation, resulting in an overly pessimistic picture since competitive equilibrium is predicted too soon. Practically, the length of the forecast horizon should not inherently affect the organization’s value, but shorter periods increase the likelihood of erroneous estimates.
McKinsey suggests dividing the first forecast period into two stages:
- Detailed forecasts for up to 7 years.
- Predicting only a few key parameters—growth, capital-to-sales ratio, margin, ROIC—beyond that.
Cyclical Companies
For cyclical companies, longer-term forecasting is recommended. It is crucial not to use peak or recession figures for the horizon period; instead, an average should be taken.
Source:
VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels