The terminal growth rate (g), or perpetuity growth rate, is the rate at which a company's cash flows are assumed to grow in perpetuity beyond the explicit forecast horizon in a DCF model. It is the most sensitive parameter in the terminal value calculation, which typically represents 60–80% of total enterprise value in a standard DCF — making it one of the most critical and most debated assumptions in business valuation.

The rate g is theoretically bounded by the long-term nominal GDP growth rate of the economy in which the company operates. For Franco-Swiss SMEs, g is typically set between 1.0% and 2.5%: 1.5–2.0% for a mature company in a stable sector (inflation + low real growth), 2.0–2.5% for a company in moderately growing sector. A g above 3% is only defensible for structurally high-growth sectors and must be supported by market data.

The sensitivity of terminal value to g is considerable: for a company with normalised NOPAT of CHF 2.0 million, WACC of 9% and g varying from 1.5% to 2.5%, terminal value ranges from CHF 23.5 million to CHF 30.8 million — a 31% difference from a single point of g alone. Professional valuators always present a sensitivity analysis of enterprise value to both g and the WACC.

Example: terminal value using Gordon-Shapiro: TV = FCFF n+1 / (WACC - g). Normalised FCFF year N: CHF 1.8 million. WACC: 9.5%. With g = 1.5%: TV = 1.8 / (9.5% - 1.5%) = CHF 22.5M. With g = 2.5%: TV = 1.8 / (9.5% - 2.5%) = CHF 25.7M. Difference: CHF 3.2 million — a CHF 2.1 million impact on EV after discounting.

At Hectelion, we systematically justify the retained g by documented sector and macroeconomic data in our Franco-Swiss valuation reports.