Terminal value: the double-edged sword in emerging market valuations

I recently had a stimulating discussion with Ahmed Ghazy, CPA, CMA, CME-4 on a question that surfaces time and again in M&A and private equity: what is the “right” share of Terminal Value (TV) in a company’s overall valuation, particularly in emerging markets?

In our case, the model showed TV at nearly 70% of the enterprise value. From a purely mechanical perspective, this is within market norms. Ahmed rightly pointed out that in a declining interest rate environment, a lower WACC will mathematically push more of the value into the terminal period. In fact, academic literature often places comfort ranges around 60–80%, especially when growth assumptions converge to long-term GDP or inflation forecasts.

Yet my concern is different. Having worked across volatile emerging markets, I have seen how over-reliance on TV creates discomfort for acquirers and investors. When 70% or more of the value rests on cash flows projected 7–10 years out, even small changes in assumptions (growth, margins, or discount rates) can swing valuations by billions. It is no surprise that in deals like Abraaj’s healthcare platform sales or the Naspers–Prosus structuring, debates around TV were often the most contentious part of the negotiations.

This aligns with academic critique too: while DCF frameworks teach us that “value is in the future,” empirical studies (Damodaran, Kaplan & Ruback, etc.) show that acquirers apply more conservative exit multiples or haircut assumptions precisely because of this fragility. Put differently, theory allows 70% terminal value, but practice often discounts it down to reduce buyer’s remorse.

In today’s high-frequency change environment, where geopolitical risk, inflation dynamics, and capital flows are shifting faster than models can adjust, I find it hard to argue with a calm heart that we will simply revert to long-term historical averages. Perhaps we are entering a new baseline where terminal assumptions deserve recalibration.

So the question remains: are we as an industry relying too heavily on terminal values, or are we simply reflecting the new monetary cycle?

I would be very interested to hear how colleagues and practitioners in the M&A and PE space are thinking about this balance today.