Financial model necessary for LBO model?

Hi,

In a couple of weeks I'll work at a small PE firm in Europe.

I hope you guys can give me advice. Your opinion is truly appreciated. Thanks!

1) Is it necessary to build a detailed financial model before the LBO model?

I've ordered the Wallstreet prep package. The LBO model is pretty straightforward, however the LBO model is linked with a very detailed (and time consuming) financial model & forecast (including BS, IS, Debt, CF).

Should I always build the entire financial model before I can do the LBO model?

2) Is there a way to build a financial model more easily/quickly? The wallstreep prep model takes around +150 pages to build.

I've also got this book written bij S. Benninga called Principles of Finance in Excel, which includes a much less complex financial model, but somehow I have the impression that it's not sophisticated enough?

3) How much time do you guys spend on building the financial model?

Thanks for your support guys!

Kind regards,

Mike

 

An LBO model is a financial model, just one specific for LBOs with IRR assumptions and extremely specific financing situations... An LBO model always needs the BS, IS, CF otherwise it doesnt work.

If your question is whether you need an operating model in the LBO model, yes. Define operating model, the key assumptions to revenue generation, margins, etc.

Regarding how to build it, if you're asking from scrath: start with your regular bs, is, cf and then the operating model linked to the IS. Next you go for the financing assumptions, then the capex d&a schedules, debt sched, tax sched and last the IRR.

You need the regular BS, IS, CF in order to link cells as well as PF the balance sheet for acquisition adjustments. Then you need the IS, Bs & CF in order to calculate the exit IRR.

It is rare that you get a request to build it from scratch. Typically you gut an old one and customize the operating model and financing and relink it (add new line items need be)...This is an ongoing update as you do you diligence process but the intial model may take less than a week (cumulative time) to fully build, the rest is just an ongoing modification...

LBO models are custom built for each deal so depending on the requirements of that deal, sweeps, shareholder loan, earnouts etc. you customize it for those specific situations. There are tons of guides on building basic LBO models but as the mechanics of each deal are different, there is no book that tells you how to model them all. Again, modeling is not rocket science, just logically making certain functions work when specific criteria are met. Once you understand the dynamics of that legal deal criteria eg cash sweep, then you can easily model it... all the model attempts to do is put a dollar value on what expecations and deal mechanics are used...

make sure you understand how to model the shell holdco (dividends and pf adjustments) because in Europe this is the standard way to do it... very different from the US. Also, quarterly ones are not common. Unfortunately, no book does this and you need to sit down with a european LBO model to learn it...

 

Guys,

Thanks for the comments. Really appreciate you took the effort to respond (especially Mezzket). The problem(?) is that the PE firm I'll work has its partners from a consulting, accounting and corp. strategy background. No investment bankers or people with PE backgrounds. My job is, next to the valuation stuff (have experience with that), model/structure investment decisions and returns. I don't have experience with the latter, so my assumption was that I need to understand basic LBO modeling (the firm has several portfolio firms and is setting up a new fund for new investments).

Which skills you think are necessary (in excel) for the modeling/structuring of investment decisions? (I thought LBO modeling?)

Btw, does anyone have experience with this?

I thought about ordering the Wallstreet prep advanced LBO modeling course: http://www.>wallstreetprep.com/programs/self_study/advanced_lbo_modeling.php

Is this stuff useful for my situation?

Thanks again!

Mike

(English is not my native language, sorry for my weak grammar)

 

Mike,

Don't think that because modeling at your PE shop isn't core that there is something wrong. The truth is that your partners have the best experience needed for PE, ie they can create value which unfortunately models can only quantify...

To get to your next point, I personally wouldn't waste my money on all those guides, I'd focus on the technical texts of debt markets and lbos in order to understand the dynamics, then the modelling will just fall into place... if you want to see an lbo model, go to this website and learn the connections... www.exinfm.com/excel%20files/LBO%20Model%20Template.xls

LBO modelling is the name of the specific model used in LBOs with a special IRR and multiple generation sheet. it still has the same is, bs, cf tabs as a valuation model, an m&a model etc. The main difference it uses tons of debt and the pf adjustments to the balance sheet vary (understand these)..

use this one for basics, sit down with it and then if you still have questions about how to create it from scratch, then you may look into lbo modelling courses...

 

Dear Mezzket,

Thanks for uploading the template. This brings up my main problem: I don't know how to build an operating model (BS, IS, CF, Debt, WC etc) without using the wallstreet prep package I got (150 pages to build a forecasted operatings model) and I don't know how to do it very quickly (being able to build the model in 1 day, is that realistic?)

I can mail you the completed template from the program (it looks a lot like the model you uploaded).

In one of your previous replies you stated that building an operating model from scratch takes around a week, is this correct? Would it go faster if I'd use a completed template?

What do you think about a very 'quick and dirty' solution to build the LBO model without an extensive operating model underneath: forecasting the revenue, FCF, Capex, WC directly with growth%? Would something like this be acceptable?

Thanks again for your input, Mezzket (and/or others as well)

Mike

 
Best Response

building a simple model in a day is realistic... I say a week because i refer to a full blown, "fancy" LBO model with all the quirky toggles and funky tools, monthly calculations and quarterly roll-ups... This also takes into account that you're also doing the diligence to properly model and adjust the operating model (this can even reach 30 tabs)... creating the links and toggles is the simple part, but refining the numbers (sometimes raw data) before presenting them to someone senior is what is time consuming... So if you're looking at just making it work / balance / link, a day is realistic but this means you know the links by heart...

If you used a completed template it is alot quicker, but templates don't have operating models which you need to build if you want to test different operating statistics... From the template u can add new lines to make it work, yes. Most people don't build them from scratch each and every time, it is time consuming so they take an old model and work off of that "customizing" it for that specific deal (new features, new line items etc.)

The operating model requires extensive conversations with management and a deep analysis of revenue drives and costs to model (extremely time consuming)...The quick and dirty method to doing this is ok, work with rev growth assumptions, gross margin assumptions, sg&a assumptions etc.. The balance sheet items, working cap, i would use DSO, DPO, Inventory turns and the other % of rev, other laib/assets & goodwill keep flat... these are more than acceptable and most likely the most realistic models if you don't have an opportunity to understand the detailed drivers needed for the operating model...

the operating model doesnt necessarily refer to all of those items, those are all financial model items (lbo having the irr calc.).. most times operating model just refers to the operating assumptions (revenue, margin, costs etc.. this can be for each office, building, region, country with different things growing revenue, volume plug-ins, price increases etc..)

 

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