Explaining Gordon Growth Model for Valuation (Excel Template)

This is a pretty interesting way to value cash flow that a unit produced and has implemented some very basic financial formulas in order to come to a number. Valuation is a very tricky thing and lots of things can go into trying to value cash flows.

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The Gordon Model
  • This excel template uses the most recent net operating income (EBITDA can be used as well) to drive the start of the growth and discounting.
  • Assumes a terminal growth rate (meaning we are assuming cash flow will be consistent and grow forever into the future.
  • Uses a discount rate to discount the value of future cash flows.
  • Sums up the total value of all the discounted values into perpetuity (the values get to a point where it takes 1,000 years to add a penny of value.
  • Shows a comparison with up to 4 discount rates.
  • Visual chart included to demonstrate the valuation relative to the discount rate applied.
This model is something that can also be used with respect to a SaaS model when trying to determine LTV/CAC because of its unique ability to grow and discount cash flow from customers relative to the cost to acquire that customer.