There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage of the company and expected growth drivers as well as the information available.
Each method has its advantages and disadvantages!
On this page, we address the question: “What are the draws backs of the liquidation (fire sale or orderly sale) approach to terminal value?”
There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage of the company and expected growth drivers as well as the information available.
Each method has its advantages and disadvantages!
The liquidation approach to valuation is the most conservative approach to valuation. It is difficult or even impossible to get a good idea of the liquidation value. Further, the liquidation value itself will be different if the liquidation is orderly vs. fire sale.
The size of the firm also impacts liquidation value. Examples of difficulties in estimating a liquidation value include a Hertz bankruptcy, putting out 100,000 cars killing the resale market or Carnival Cruise Lines, the largest cruise company, putting 100 ships into the market, each costing millions, with no one else available to buy its ships.