A mid-market private equity firm was looking to build a standardized acquisition model across its global investment teams. Each office had been using its own financial model template that lacked structure and clarity. The models were difficult to use, understand and update. The Investment Committee questioned the accuracy and consistency of the outputs, which led to unnecessary churn on deal recommendations.
Approach
We built a structured three-statement financial model following industry best practices. The model included a DCF (discounted cash flow) valuation, scenario analysis, sensitivities, and return analysis. It also included deal structure assumptions, with debt financing and leverage metrics.
Model inputs were clearly identified. Process calculation steps were broken down and simplified so they could be well understood and audited. Model outputs were summarized to suit the firm’s investment report standards. We also included a generous amount of comments and annotations throughout the model.
Results
Improved Underwriting
- The acquisition model was a critical component of the investment decision.
- Standardizing and streamlining the model led to better diligence, improved underwriting and repeatable efficiencies for the investment team.
Better Transparency and Consistency
- Clear and transparent assumptions resulted in higher confidence decisions by the Investment Committee.
- Key return metrics were consistently calculated and directly comparable between offices.
Conclusion
An effective financial model is able to address the different objectives of all stakeholders. Contact us if your critical business decisions could benefit from a powerful, well-structured financial model.