The valuation of a fast-growing or restructuring company cannot be based on a simple perpetual annuity formula, because its cash flows are not yet stabilized. A two-period model  should be used that distinguishes between the transformation phase and the maturity phase.

Here is the detailed methodology:

1. First Period: Transformation and Growth (Explicit Horizon)

This period, lasting N years (usually 5 to 10 years), corresponds to the phase when the company transforms, restructures its activity or experiences rapid growth. During this phase, Free Cash Flows (FCF) are not simply deducted from each other by a constant rate.

• Method: A detailed financial model (Business Plan) must be built to forecast the flow of funds year by year.
• Sub-periods: This first phase can itself be subdivided (e.g. a restructuring phase, followed by a phase of strong growth, then a phase of moderate growth) before reaching maturity.

Calculation of the value (EV1): The present sum of the FCF generated during these N years is calculated.

${\mathrm{EV}}_1 = \mathrm{i}=\sum _{\mathrm{i}=0}^{\mathrm{n}}\frac{{\mathrm{FCF}}_{\mathrm{k}}}{{(1+\mathrm{CMPC})}^{\mathrm{k}}}$

2. Second period: maturity (terminal value)

It is considered that from year N, the company has completed its transformation and reached cruising speed. It is then assumed that FCFs grow indefinitely at a stable rate (g), close to inflation.

• Calculation of the value in year N (${\mathbf{TV}}_{\mathbf{N}}$): The perpetual annuity formula (Gordon-Shapiro) is used on the normative flow at the end of the period.

${\mathrm{TV}}_{\mathrm{N}}=\frac{\mathrm{FCF} (1+\mathrm{g})}{(\mathrm{WACC}–\mathrm{g})}$

• Discounting (${\mathbf{EV}}_{\mathbf{2}}$): As this terminal value is located in the future (in year N), it is imperative to update it to obtain its value today.

${\mathrm{EV}}_2=\frac{{\mathrm{TV}}_{\mathrm{N}}}{{(1+\mathrm{WACC})}^{\mathrm{N}}}$

3. Total Enterprise Value

The value of the company is the sum of the values of the two periods:

Enterprise Value (EV) = EV1 (Explicit Flows) + EV2 (Discounted Terminal Value)

Important points of vigilance

• The weight of the terminal value: Sensitivity analysis often shows that a very significant proportion (sometimes majority) of the total value comes from the terminal value (EV2). This means that valuation is based on distant and uncertain bets.
• The choice of growth rate (g): To avoid overvaluation (“trees never rise to the sky”), it is recommended to be careful. The g-rate must not exceed the growth rate of the economy (GDP) or inflation. It is even suggested to consider a decrease in performance (negative rate) to reflect the erosion of competitive advantages.
• Alternative by Economic Profit: To limit the risk of overvaluation of the terminal period, an alternative method is to discount future Economic Profit by modeling a decline in performance (the fade) that tends to zero in the long run, reflecting the fact that it is difficult to beat the market indefinitely.