The Formula Behind Every Business Appraisal Has a Hidden Assumption — And It Inflates Value

If you've ever seen a formal appraisal of a privately held business, the terminal value — the number that represents everything beyond a five-year forecast — was almost certainly calculated using the Gordon Growth Model. It dominates the profession. The formula has a quiet assumption buried inside it: the business will generate cash flows indefinitely. In practice the hurdle rate shortens that implied horizon, but the horizon it sets has no connection to how long businesses in the relevant sector actually survive. A food service business and a manufacturing firm get identical treatment, despite very different survival profiles. I've published a paper that quantifies the overstatement and provides an empirically grounded replacement, built from U.S. Census Bureau survival data for mature going-concern businesses across seven sectors. At typical discount rates the standard formula overstates terminal value by 20 to 58 percent. For anyone doing acquisition due diligence or negotiating price, this matters. The paper and a free companion Excel calculator are available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=###-###-#### Happy to answer questions.