Back out the implied growth rate from your exit multiple before you trust the DCF

Something I've started doing on every DCF I build, and it has killed more of my own ideas than any other check.

If you terminate with an exit multiple instead of Gordon growth, you are still making a perpetual growth assumption, you just can't see it. You can pull it back out: g = (M\*r - 1) / (1 + M), where M is the exit multiple on terminal free cash flow and r is the discount rate.

At 20x FCF and a 9% discount rate that comes out to 3.8% forever, nominal. Which is fine if you actually believe the business grows a bit faster than nominal GDP for the rest of time, but that is a real claim and most people did not mean to make it. 25x gets you to 4.8%.

The reason it matters is how much weight the terminal number carries. Ten years of 8% FCF growth off a base of 100, discounted at 9%, exit at 20x: the explicit decade is worth about 950 and the terminal chunk about 1,825. So roughly two thirds of the answer is a multiple you picked in four seconds, and the ten year model you spent the weekend on is the minority shareholder.

I don't think the takeaway is to abandon exit multiples. It's that the multiple should be an output of some view about the terminal business, not an input inherited from comps that are themselves trading on somebody else's terminal assumption. When the implied g comes back above 3% I want a specific reason the company still has pricing power or share to take in year 30, and most of the time I don't have one.