Hello WSO, I'm a new undergrad about to enter FT at a pure M&A boutique. Throughout my years of finance projects in undergrad, the process of modeling is still ambiguous to me, particularly the rigor that would be required in an actual FT role.
For example, with projecting sales growth for models, building out the cases has always confused me. We would sometimes take averages of the past 5-10 years for base case. Then find some low consensus estimate for the bear case, and decaying the growth down to that amount. Likewise in the opposite direction for the bull case. However, in my last SA stint, I encountered a monstrosity of a model with like 20 different growth drivers and a sales projection page that linked to 5 different tabs and 2 other worksheets. (Granted this was a very small ~$15MM revenue company with nasty financials.)
I feel like these are extreme examples, but in the majority of cases, how rigorous are processes like projections?
If you're looking for a definitive answer, i think that it'll be hard to find. My personal experience is that it can vary to a great extent - but generally the deal size is the best indicator for how complex/demanding something will be.
I've put a little bit of thought into it, some of these factors might be obvious, but here you go anyways:
Valuation complexity and sophistication is highly dependent on the following factors: - the complexity of the business model (and its trend structure) - the customer (+ his own knowledge of the market / reliability of projections, this can be derived from the accuracy of their past projections and frequency of missing targets & budgets) - the level of sophistication of potential acquirors (they do have preferences, some like it clean and simple, some like a completely overengineered clusterfuck of drivers to really make you grind) - your MD (same as with clients, some will reject anything that is driven by more than 1 cell, while others want you to create something fancy to show you've done the math) - the SIZE of the deal (Generally, the larger = the more sophisticated) - time constraints
Hope that helped!
Got it, yeah...thats about what I thought haha, thanks for typing this out!
Glad to help, i think sometimes its just good to put it on paper!
also, consider this: Solid reference materials (e.g. broker reports of comparable companies) are a very welcome source of inspiration. The existence of a certain consensus can greatly reduce the effort you have to put into defending your individual assumptions. It makes your life 100x easier
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