HOW TO BUILD SEARCH FUND MODELS
^[redacted] and I are hosting a one-hour session on modeling for search fund deals on March 25th at 12:00pm EDT.
I’ve spent 17 years building (typically over-complicated) models in large cap private equity, and happy to share best practices, approaches, common mistakes, as well as walking through actual economics of a search deal in Excel.
Building a simple, but thoughtful, model is critical to valuation and to attracting third party capital (lenders, investors). More importantly, however, a good model enables the searcher to understand the value drivers of the business, unpack historical performance and understand issues and opportunities in the business.
While the financial model we’ll walk through has typical self-funded economic terms, about 95% of the content is relevant for both traditional and self-funded searchers (agenda below).
Please let us know by commenting below if you have any questions, comments or suggestions on topics you would like to see covered.
We will also be sending around a copy of the financial model template in Excel after the session – please email me and Steve at [redacted] and [redacted] if you would like a copy (or can’t attend the session).
• What is a Model? a. Although often confused, when we talk about "the model", we're actually talking about two very different, but interconnected models: i. The Operating Model - how does the business make money? ii. The Financial Model - how do the various providers of capital divide up this money? b. Both are critical for a searcher to understand!
• Modeling Best Practices and Common Mistakes a. Modeling best practices b. Entry and Exit Multiples c. Scenarios (Base, Upside, Downside Cases) and Sensitivities d. “Fan of outcomes” not point estimates e. Most common mistakes
• Why Build a Model? a. Valuation b. Lenders c. Investors d. Diligence e. Operating levers f. Planning
• Operating Model – How the Business Makes Money a. Understanding unit economics, value drivers and how the business actually makes money b. Why building a simple but thoughtful operating model is critical for searchers: i. To identify gaps in diligence and what additional information you need from the seller ii. To identify the strengths and weaknesses of the business and to identify areas of improvement (e.g. is churn a problem? attracting new customers?) iii. To support effective planning for key hires, key investments, etc. in your first year as CEO iv. To inform your views on valuation of the business c. Recurring revenue example in Excel i. We’ll discuss why recurring revenue models are so attractive, and discuss the common value drivers across recurring revenue businesses: churn/retention, new customers, upsell/cross-sell, price increase/decreases ii. We’ll walk through how to model this in Excel - using historical value drivers from diligence to build thoughtful projections
• Financial Model – How the Various Capital Providers Divide This Money Up! a. Who are the providers of capital in a search deal? i. Lenders (e.g. senior bank lender) ii. Seller (if seller note or earnout) iii. Outside investors (preferred equity, common equity) iv. Searcher (common equity, options) b. What are typical terms for both self-funded and traditional deals? c. How do various capital structures affect the returns to the various providers of capital? d. What is the “waterfall” and how do you translate the legalese in a credit agreement, sale & purchase agreement, shareholders’ agreement, etc. into Excel? e. We’ll walk through a simple Income Statement, Cash Flow Statement, Debt Payoff Waterfall, and Returns Calculation in Excel
• Wrap Up and Questions