The valuation of a mature firm (often equated with the calculation of terminal value in a DCF model) is based on the assumption that the firm has reached cruising speed. Its cash flows are assumed to grow indefinitely at a constant average rate.
Here are the methodology and formula to be used:

1. The Perpetual Annuity Formula (Gordon-Shapiro Model)

To value a mature company whose activity is supposed to continue “indefinitely”, the geometric rent formula is used. The Enterprise Value (EV) is calculated as follows:

$\mathrm{EV}=\frac{\mathrm{FCF} \mathrm{normative} (1+\mathrm{g})}{(\mathrm{WACC}–\mathrm{g})}$

• Normative FCF: The Free Cash Flow for the base year (year 0 or last year of explicit guidance), adjusted to be representative of normal activity.
• g: The perpetual growth rate of flows.
• WACC: The Weighted Average Cost of Capital (discount rate).

2. Key Parameters and Adjustments

For this period model to be relevant, it is necessary to ensure the consistency of the parameters used:

• Normative Flow (FCF): It is crucial to adjust cash flow to reflect sustainable performance. The sources recommend eliminating exceptional items and normalizing investments.
  • For example, we can replace the real investment of the year with a “normative” investment (calculated via an average Capex / Sales ratio over 5 years) and normalize the variation in Working Capital Requirements (WCR).
• The Growth Rate (g): This rate must be conservative. From a long-term perspective, it is usually close to the inflation rate or GDP growth. The experts warn against using rates that are too high, sometimes even suggesting using negative rates (-2% or -3%) to reflect the erosion of performance due to competition.

The validity condition: Mathematically and economically, the growth rate g must be strictly below the cost of capital WACC for the formula to work.

3. Alternative by Economic Profit (MVA)

An alternative method of valuing a mature company is to calculate the MVA (Market Value Added) from the Economic Profit (EP). The value of the company is then equal to the sum of the Capital Employed (CE) and the present value of the Future Economic Results:

$\mathrm{EV}=\mathrm{CE}+\frac{\mathrm{EP} (1+\mathrm{g})}{(\mathrm{WACC}–\mathrm{g})}$

This approach makes it possible to better model the decrease in performance (the fade). Instead of projecting infinitely increasing cash flows, we can model an erosion of the company’s ability to beat the market (gradual decline in the ratio  of Economic Profit to Capital Employed until it tends to zero).