In business valuation, the income approach, particularly the discounted cash flow (DCF) method, often employs a two-stage model: a discrete forecast period and a terminal value assuming perpetual growth. The long-term growth rate (TGR) or terminal growth rate projects free cash flows (FCF) beyond the forecast period. While seemingly minor, TGR significantly impacts valuation. Unrealistically high TGRs produce invalid results, requiring macroeconomically grounded assumptions to ensure fair market value (FMV), especially for SBA 7(a) loans. This white paper examines TGR’s role, economic limits, and application, emphasizing the capitalization of earnings method for SBA 7(a) valuations.

The Role of the Terminal Growth Rate

In the Gordon Growth Model, terminal value is calculated as: TV = FCF × (1 + g) / (r – g)

Where:

• TV = Terminal value
• FCF = Free cash flow in the final forecast year
• g = Terminal growth rate
• r = Discount rate (typically WACC)

As g approaches r, valuation increases dramatically; if g exceeds r, the formula implies infinite value, which is mathematically invalid.

The Boundaries of TGR: Why It Can’t Exceed the Economy’s Growth Rate

A company cannot sustainably grow faster than the economy. A TGR exceeding the U.S. economy’s long-term growth rate (e.g., 4–5% nominal GDP) suggests the firm will:

• Surpass the economy’s size.
• Expand infinitely in a finite system, defying economic principles.
• Achieve unattainable market share gains.

This aligns with a macro consistency check, ensuring firm-level assumptions fit national/global economic constraints.

Empirical and Theoretical Boundaries for the Terminal Growth Rate

TGR should be:

• Below or equal to long-term nominal GDP growth (historically 4–5% in the U.S., per BEA, 2024).
• Consistent with industry lifecycle (mature industries: lower rates; high-growth: near upper boundary, not exceeding GDP).
• Reflective of inflation (e.g., 2% for stable, mature firms).

Example: A 6% TGR vs. 4% nominal GDP growth implies the firm will eventually dominate the economy, an unrealistic assumption even for giants like Apple or Amazon.

Regulatory and Professional Guidance

Valuation standards require reasonable and supportable assumptions. TGRs exceeding economic growth are generally unreasonable without extraordinary justification.

SBA 7(a) Loan Considerations

For SBA 7(a) loans, realistic TGRs ensure accurate valuation and debt service coverage ratio (DSCR) assessments. Overly high TGRs inflate enterprise value. The capitalization of earnings method also requires realistic growth assumptions to align with FMV. For example, a business with $500,000 FCF, a 10% WACC, and a 4% TGR yields a $8.3 million valuation, but a 6% TGR inflates it to $12.5 million.

Common Pitfalls and Red Flags

• Assuming 5%+ TGRs without data.
• Ignoring industry and macro trends in terminal value.
• Relying on untested management projections.
• Failing to stress-test valuations.

Industry Growth Rates

The TGR ranges are derived from professional valuation experience, macroeconomic data (BEA, BLS), and small business transaction trends. This analysis incorporates 2024–2025 data, including:

• Nominal GDP growth projections from the Congressional Budget Office (CBO).
• Industry employment and spending trends from the Bureau of Labor Statistics (BLS).

Each range reflects a steady-state estimate for use in discounted cash flow models or the capitalization of earnings method. A weighted average TGR of approximately 2.2% (assuming equal weighting across industries) is provided as a benchmark for multi-industry valuations.

Alphabetical Table of Long-Term Sustainable Growth Rates by Industry

Industry	Typical LTG Range	Notes
Accounting/CPA Firms	1.5% – 2.0%	Mature industry with growth tied to inflation and population.
Auto Body & Collision Repair	1.5% – 2.0%	Stable demand, limited by competition and vehicle technology trends.
Auto Repair	1.5% – 2.0%	Similar to auto body, with growth constrained by market saturation.
Behavioral Health Clinics	2.0% – 2.5%	Steady demand from mental health awareness, tempered by regulation.
Boutique Fitness Studios	2.0% – 2.5%	Moderate growth from wellness trends, but competitive market.
Childcare/Preschool	2.0% – 2.5%	Driven by working parents, limited by costs and regulation.
Chiropractic Clinics	1.5% – 2.0%	Stable but mature, with growth tied to population and inflation.
Commercial Janitorial Services	2.0% – 2.5%	Steady demand from businesses, tied to economic activity.
Convenience Stores	1.5% – 2.0%	Facing e-commerce competition, growth aligns with inflation.
Copy Shops/Business Service Centers	1.5% – 2.0%	Declining demand due to digitalization, growth at inflationary levels.
Daycare Centers	2.0% – 2.5%	Similar to childcare, driven by demographic needs.
Dental Practices	2.0% – 2.5%	Aging population supports demand, but growth moderated by saturation.
Dry Cleaners	1.5% – 2.0%	Challenged by casual work trends and e-commerce, growth at inflation.
E-Commerce (Product Sales)	2.5% – 3.0%	Adjusted down from 3.5% due to market maturity; online retail penetration growing but slowing.
Electrical Contractors	2.0% – 2.5%	Tied to construction demand, moderate growth with infrastructure needs.
Engineering Consulting	2.0% – 2.5%	Steady demand from infrastructure projects, limited by competition.
Fitness Centers/Gyms	2.0% – 2.5%	Wellness trends support growth, but high competition caps potential.
Florists	1.5% – 2.0%	Online flower delivery competition limits growth to inflationary levels.
Grocery Stores	1.5% – 2.0%	E-commerce and large retailers challenge small grocers, growth at inflation.
HVAC Contractors	2.0% – 2.5%	Demand from construction and maintenance, moderate growth expected.
Hair Salons/Barbers	1.5% – 2.0%	Localized service with growth tied to population and inflation.
Healthcare (General)	2.5% – 3.0%	Aging population and chronic disease prevalence drive demand; AI/telemedicine as growth factors.
Home Health Care	2.5% – 3.0%	Strong growth from aging demographics, supported by healthcare spending trends.
IT Managed Services (MSPs)	2.5% – 3.0%	Cybersecurity and cloud adoption drive growth, but market saturation may temper long-term rates.
Landscaping/Lawn Care	2.0% – 2.5%	Steady residential demand, tied to housing trends and economic activity.
Liquor Stores	1.5% – 2.0%	Stable but mature, growth aligned with inflation and population.
Machine Shops	2.0% – 2.5%	Moderate growth tied to manufacturing demand, steady but not rapid.
Manufacturing – Metal	2.0% – 2.5%	Tied to industrial activity, moderate growth with global competition.
Manufacturing – Plastics	2.0% – 2.5%	Similar to metal manufacturing, steady demand with sustainability pressures.
Med Spas/Cosmetic Clinics	2.5% – 3.0%	Rising disposable incomes and aesthetic demand support growth.
NEMT (Medical Transportation)	2.0% – 2.5%	Tied to healthcare access, moderate growth with aging population.
Optometry Practices	2.0% – 2.5%	Aging population drives demand, but growth moderated by competition.
Painting Contractors	2.0% – 2.5%	Steady demand from construction and maintenance, moderate growth.
Pawn Shops	1.5% – 2.0%	Niche market with growth tied to economic conditions and inflation.
Pet Boarding & Grooming	2.0% – 2.5%	Rising pet ownership supports moderate growth, competitive market.
Pharmacies	2.0% – 2.5%	Steady demand from prescriptions, but large chains limit small pharmacy growth.
Physical Therapy Clinics	2.0% – 2.5%	Aging population and injury recovery drive demand, moderate growth.
Plumbing Contractors	2.0% – 2.5%	Similar to HVAC, tied to construction and maintenance demand.
Pool Maintenance	2.0% – 2.5%	Residential demand supports moderate growth, tied to housing trends.
Property Management	1.5% – 2.0%	Stable but mature, growth aligned with inflation and real estate trends.
Restaurants	2.0% – 2.5%	Moderate growth with consumer spending, but high competition and costs.
Retail – Specialty	1.5% – 2.0%	E-commerce competition limits growth to inflationary levels.
Test Prep/Tutoring Centers	2.0% – 2.5%	Education demand supports moderate growth, competitive market.
Towing Companies	1.5% – 2.0%	Stable but niche, growth tied to population and vehicle usage.
Urban Farm/Garden Retail	2.0% – 2.5%	Sustainable living trends support moderate growth, but niche market.
Veterinary Clinics	2.0% – 2.5%	Rising pet ownership drives demand, moderate growth with competition.

Conclusion

The long-term growth rate must reflect sustainable, macroeconomically grounded expectations. A range of 2–3% is typical, with 4% as an upper boundary in rare, defensible cases. TGRs exceeding economic growth are red flags, risking invalid valuations. For SBA 7(a) loans, the capitalization of earnings method with realistic TGRs ensures FMV, supporting sound collateral and lending decisions. Valuation blends art and science, but TGR demands economic logic.