Modeling Tools for Acquisition

March 04, 2024

by a searcher from Quinnipiac College in Monmouth County, NJ, USA

. Anyone have any good modeling tools they use when going through the search process? I have basic financial models in excel, but would love to hear what other use.

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Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

Thanks for the tag Luke. My approach was to try to match the tool to the stage of the deal process and try spend as much time with the sellers and understanding the business rather than in excel. I tend to be a numbers person so I have to keep myself from going overboard. For me, it was always better to keep tools I shared with others simple and use the detailed tools for my own peace of mind.

As others have said, I would build your own. If you are seriously going down this path, it is worth understanding the mechanics of the financial flows, how much of your return is predicated on multiple expansion vs debt paydown vs growth etc. The modeling tends to be eye opening for me. I would also comment that I notice a lot of folks focus on IS but a cashflow model is critical with high debt loads. You can't pay bills with profit, you need cash.

For early stage: build a debt tool that can quickly plug in cashflow/asking price and spit out how much debt the deal can handle and how much equity you need to bring to the table. This was really helpful because you can quickly see how interest rate, asking price, DSCR affect check size needed and with the check size and cashflow, you can get a quick idea of return ballpark with almost no work. Allows you to focus on evaluating the durability of cashflow/add backs and quickly see where an asking price is nowhere near where you can compete to save you from wasting time.

For deals I am evaluating and ready to get preliminary feel from lenders: build a simple LBO model trying to make it as dumb as possible. Enough detail to see the structure, not so much that a reader gets lost. EBITDA add backs, sources & uses, basic IS/BS. The tool Lisa Forest mentions above is a great place to start - this is the level of detail a lender wants to see.

For late stage: Full LBO model. EBITDA add backs, loan calculations, full 3 statement model w/ low/nom/high estimates, sources and uses, cap table, return profile, and loan performance. This should be something that a sophisticated lender/investor can drill into and is your sanity check to make sure you are checking all the boxes. The modeling exercise tends to be the easy part and the hard part is having justification for why you think the business will perform that way it has. I think this is more than most searchers do but when I am putting up a PG and vouching for a deal to investors, I want to ensure I have fully thought through the structure, drivers, etc.

Now that I am done searching and into operating, the full model has been an invaluable reference. I find myself going back to it on a regular basis to see where the model and reality diverge and focus on the high spot.

Reply by a searcher
from University of Maryland at College Park in Annapolis, MD, USA

Thank you for the tag, ^redacted‌. Modeling is incredibly important, so my strong advice is to either learn yourself, add someone to your team who can do it, or else hire a vendor. Even if you add someone to the team or hire a vendor, you need basic skills to: 1) understand the models that are produced for you, 2) design them to be flexible and adaptable for multiple deals (and even a single deal as it moves through the transaction lifecycle), 3) validate that they are error free, and 4) ensure that they produce the various types of output needed for all the constituent parties to a transaction (e.g., your own team, the banker/broker, the seller, equity investors, and senior and mezz lenders). Peter Lynch (A Simple Model) and Chris Reilly (Financial Modeling Education) offer great modeling courses, as do Wall Street Prep, Corporate Finance Institute, and various university executive education programs There are also industry specific and other pre-built models available online from sources like eFinancial Models, however be careful because pre-built models can be difficult to deconstruct and modify for your particular needs. Finally invest some time to understand the right kind of model for your needs, because the design, flexibility, analytics and output can vary widely. You will have different needs if you are a self-funded searcher just going for SBA financing vs. an independent sponsor evaluating multiple transactions and raising multiple classes of equity and debt. I am sure that many people are successful at buying a business with poor modeling, however the more complicated the business, transaction structure and financing, the more important it is to have a professional caliber financial model.

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