Does anyone have any simple diligence models you feel comfortable sharing? - Searchfunder

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by a searcher from The University of Michigan - Stephen M. Ross School of Business
in New York, NY, USA

1mo ago

Does anyone have any simple diligence models you feel comfortable sharing?

I have LBO models that I've used for larger deals, but need something simpler for smaller/SBA-based deals where I can plug in company financials and see growth/returns quickly. Thank you for your help.

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reply by an investor 1mo ago
from McGill University in San Diego, CA, USA

There are no shortage of free generic financial/LBO models you can grab online. Here's one: redacted But, if you plan to be the operator, I would compliment the generic with a bottom-up model (built from scratch). Why? Because most failed deals share the same post-mortem. The buyer missed a few critical drivers or made bad assumptions on things that mattered. A bottom-up model forces you to think through both operations and economics before you commit. Going through the exercise will help you with pattern recognition, which in turn, will help you move faster, and with greater clarity At a practical level, a financial model should start with how the business actually makes money: Customer base, cohorts, and concentration Pricing and discounting Churn / retention / renewal cycles Sales pipeline and conversion rates Having a view on these issues will help you break down sales by service line, product, geography, or customer type if relevant. From there you can then start to think what needs to be true to be able to provide those services. You then will be forced to contemplate costs (labor, commissions, CAC, insurance, rent, etc) and what needs to be true for sales to grow going forward. That will force you to confront timing and cash flow issues in that industry: Working capital needs (AR, AP, inventory) Capex requirements Debt service coverage Tax impact on real cash earnings Before long, you will have a detailed income statement, a balance sheet, a cash flow statement. Your financial can then tie in to deal economics. These generic models that are floating around only have a handful of financial line items with no balance sheet or cash flow statement and leave you with too many unknowns to make a high quality decision (one way or another). Having industry expertise, an understanding of what good enough business (in a particular industry) looks like, and a process to identify the key bets goes a long way these days. Too many searchers are skipping this step. If you would like to discuss this further, please feel free to DM me.

reply by an intermediary 1mo ago
from The University of Chicago in Chicago, IL, USA

Try redacted. It is DCF on steroids. No market data. Instant what-if analysis. Many unique features. a) IRR and Debt-service integration, b) Post-closing D&A which in most cases materially helps cash flow, c) Stock vs. Asset structure, d) CapX amortization, e) Asset step-up, etc.

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