Terminal Value

Here is something every analyst knows and almost nobody outside the profession has been told.

When you value a company, you build a forecast. You project revenues, margins and cash flows year by year, and you argue about every line. Five years, sometimes ten. Then you reach the end of what anyone can plausibly claim to foresee, and you have to do something about the remaining infinity.

What you do is bundle it. Everything past the forecast gets compressed into a single figure, produced by a formula, and that figure has a name.

Terminal value.

Now the part that surprises people. In a typical valuation, that one bundled number is not a minor tail. It is usually most of the answer. In a standard five year forecast it commonly runs to around three quarters of total enterprise value, and for a company whose cash flows are mostly ahead of it, the figure can exceed ninety percent. Practitioners are taught to flag it when it goes above eighty, on the grounds that the valuation has stopped being about the business and become a bet on a formula.

Sit with that. The overwhelming majority of what any enterprise is worth lies in a period beyond which no one has any specific idea what will happen. All the argued over detail, the line items and the sensitivity tables, is decoration on the front of a number that came out of a formula about forever.

This is not a flaw in the method. It is the method reporting something true. Most of the value of any durable thing lies past the horizon of anyone’s competence to forecast, and the only reason we can put a number on it at all is that the discount rate shrinks it to something finite.

I have spent this book arguing that the discount rate is a function of how long we live. So let me finish by asking what happens to terminal value when the people doing the valuing expect to be there.

The people who built for strangers

Cologne Cathedral was begun in 1248. Work stopped in 1473 with an enormous wooden crane left standing on the unfinished south tower, where it remained for the next four hundred years, long enough that it became a fixture of the skyline and the city grew fond of it. Construction resumed in the nineteenth century and the building was completed in 1880.

Six hundred and thirty two years. Every person who laid the first stones died without seeing a roof. Their children died. Their grandchildren died. The medieval masons who cut those blocks were working to a design whose completion was as far from them as the Renaissance is from us.

This is not an isolated case, and cathedral building is only its most legible form. It is the general shape of how humans have always dealt with the long run. Constitutions are written by people who will not live under most of the decisions they govern. Forests are planted by foresters who will never see mature timber. Universities, dikes, canals, sewers, national parks, treaties, endowments. All of it is expenditure by people who knew, with certainty, that the benefits would land on strangers.

We usually call this altruism, or vision, or civilizational confidence, and there is something to all three.

But look at it as an accountant and a colder explanation appears.

If you are going to die, you cannot consume the future. It is not available to you at any price. Whatever value exists past your horizon is value you cannot capture, which means you have no reason to compete for it, hoard it, or price it. The only relationship you can have with the far future is to give something to it.

The cathedral is not evidence that medieval Europeans were more generous than we are. It is evidence that they had no other option. Death converted the entire terminal value of civilization into a gift, because a gift was the only transaction available.

That is the sixth job, and I have saved it for last because it is the one I am least able to model and most convinced is real.

The question the book ends on

So: what happens when you will be there to collect?

The optimistic answer is genuinely optimistic and I gave a version of it in Chapter 11. Patient capital builds things impatient capital cannot justify. A society that discounts the future at nearly zero will construct seawalls, restore ecosystems, fund research with fifty year payoffs, and take climate seriously in a way that no amount of moral argument has achieved. Alignment between the decision maker and the person who lives with the decision is the thing every long term policy problem has been missing, and long lives supply it automatically.

I believe that. It may be the single largest benefit in the entire ledger, and any honest version of this argument has to hold it alongside everything else.

The pessimistic answer is not that the cathedral stops being built. It is that the cathedral stops being given.

Everything that was previously a bequest becomes an asset. The forest is planted, but it is planted as a holding, by an owner who will harvest it personally in year two hundred. The infrastructure is built, and it is built as a permanent revenue stream for a permanent owner. The institution is founded, and it is founded as a possession rather than a legacy, because there is no succession event at which it would ever pass to anyone.

Nothing is destroyed in this picture. It is all still there. It simply never becomes anybody else’s, because the mechanism by which things became somebody else’s has been removed, and nothing replaced it. That is the argument of Chapters 4, 7 and 11, arriving one last time in a different currency.

A civilization can build magnificently and bequeath nothing. Venice did.

What a bequest actually is

It is worth being precise about the thing that would be missing, because “bequest” sounds like a sentimental category and it is in fact a mechanical one.

A bequest is not a gift. A gift is voluntary, and the giver chooses the recipient and the timing and can decline to make it. A bequest is what happens when control is severed from an asset by an event outside anyone’s choosing, and the asset has to go somewhere. The generosity is not in the transfer. The transfer was compulsory. Whatever generosity exists is only in the choice of destination, and even that is heavily constrained by law.

Which means the thing death actually supplies is not kindness. It is a reset of control, applied universally, on a schedule nobody sets.

You can see how much work that reset does by looking at what happens when people try to avoid it. The perpetual charitable foundation is the standard attempt: an institution designed to carry out the founder’s intentions forever, funded by an endowment that never terminates. We have a century of experience with these now, and they fail in one of two directions with remarkable reliability.

Either the foundation stays faithful to the founder’s stated intent, in which case it ends up applying the priorities of a person who died decades ago to a world that has changed beyond their recognition, and slowly becomes irrelevant while remaining solvent. Or it drifts, in which case the professional staff who now run it pursue their own priorities using a dead person’s money, and the original intent becomes a legal fiction that everyone works around.

On this reading there is no third outcome. There is no version where the founder’s judgment stays live. Foundations are the closest thing we have built to an immortal economic actor, and what they demonstrate is that permanence of control and continued relevance are not compatible. The institution can have one or the other.

Now notice that a very long lived founder does not solve this. It makes it worse in the specific way that matters. The foundation that drifts at least ends up responsive to living people, however unaccountably. A foundation whose founder is present, engaged, and permanently in charge does not drift and does not become a fiction. It simply applies one person’s judgment, formed in one era, for as long as the endowment lasts.

That is the thing Chapter 12 is trying to replace, and it is why every proposal in it takes the same form. Not confiscation, and not a scheme for making anyone give anything away. A term. Ownership that has to be renewed, authority that has to be re-earned, control that reverts on a schedule rather than on a death.

We already know that permanent control fails, because we ran the experiment with foundations and watched it fail twice over. What we have not yet done is notice that the experiment is about to be run on everything.

Which of these happens

I do not know, and I want to be careful at the end of a book not to pretend to a confidence I have not earned.

The five mechanisms in Part II are, I think, solidly argued. Death sets the discount rate, turns over capital, turns over ideas, prices risk and creates vacancy, and none of those five has a backup. That much I will defend.

Whether the result is the frozen world of Chapter 11 or the patient, building, long horizon civilization that the same premises also permit is not determined by the economics. It is determined by whether anyone does the work in Chapter 12.

That is why the shape of this book is what it is. It is not a prediction. Predictions about this are worthless, and the people making confident ones in either direction are not doing analysis. It is an argument that a specific set of load bearing functions is about to lose its supplier, that the functions are identifiable, and that substitutes are constructible right now and only right now, while nobody yet knows which side of the divide they will be standing on.

The veil is still down. Thinly. That is the entire opportunity.

The choice that will be available

There is one more thing, and it belongs at the end because it is the strangest implication and the one I keep returning to.

In a world where aging is treated, living a long time will be a decision rather than an outcome. Not only in the sense of whether to take the treatment, but in the sense that continued existence will require continuous risk management, at a rising cost, forever. Chapter 6 laid out that arithmetic: you do not achieve immortality by curing aging, you convert it into an unbounded and unwinnable risk management problem, and the rational policy is to spend the rest of time reducing your hazard rate.

Some people will decline. Not out of despair, and not because anyone talked them into finding mortality beautiful. They will decline because the alternative is an existence organized entirely around not ending, and because a bounded life permits things that an unbounded one does not: risk, urgency, the frontier, and the particular seriousness that comes from having a fixed amount of anything.

I argued in Chapter 6 that these people inherit the physical universe, because they are the only ones who can afford to go there. Longevity buys you Earth. The stars go to whoever is still willing to die.

I would add now that they inherit something else as well, and it is the thing this chapter has been about.

They keep the gift. A person with an ending still cannot consume their own terminal value, which means they still have to do something with it, which means they will still be building for people they will not meet. The oldest and most reliable engine of human generosity keeps running for exactly as long as the endings do.

That is not an argument for dying. I said at the start of this book that I have no interest in the genre of essay that finds mortality secretly wonderful, and I have not changed my mind over the intervening chapters. Death is a catastrophe. Ending it is among the most worthwhile things our species could attempt, and I hope it succeeds.

It is an argument for noticing what we are about to stop doing by accident, and deciding whether to keep doing it on purpose.

Every generation before this one paid for a future it would never see, and had no choice in the matter. We may be the first that gets to see it. We will certainly be the first that has to decide, without any help from death, whether to pay for it anyway.