So a lot of people on this website talk about modeling, and building LBO and Merger models etc. However, when i had my summer analyst job at a boutique this summer, the firm used a standard model over and over for M&A, LBO, etc. Of course, there were certain situations in which it had to be tweaked because not every line item in the model applied to every company. However, to my knowledge, there was rarely, if ever, a time when someone had to rebuild a model from scratch.
I understand that its important to learn how the models are built and its a good skill to be able to build something from scratch, but are there every times in Investment Banking when an analyst has to build an LBO or M&A model from scratch?
Can someone explain this? Thanks.
I was told to do for a simple M&A model to make sure I knew how the accretion dilution would work for various purchase prices
ended up being real useful when we worked on something with an large and unnecessarily complicated earnout
It's true that it isn't too often that an analyst has to build a model completely from scratch. Trading and deal comps templates at most firms are completely standardized, if not firmwide then at least within the individual industry groups. With other models like merger, accretion/dilution, LBO, DCF, and the operating model, what ends up happening at most firms is that there are several versions floating around, even within specific groups and an analyst gets comfortable using certain ones and for most situations it works.
The reason people talk about building from scratch is mostly for the skills that it develops. No matter how well you think you understand a model you are working with, if you haven't built a model from scratch, you surely haven't encountered problems in modeling that are very valuable for an analyst to struggle through. Building a model forces you to think about accounting, corporate finance (and Excel) in ways which you can get away with avoiding when using a pre-built model.
And even though you likely wont do it very often, there will be times that you do need to build something from scratch. The other issue is that boilerplate models - like the one you're describing - tend to be large and complicated - because they have been built to accommodate a lot of functionality. They are awesome as long as they serve your purpose, but once you get to a situation that they can't handle, they aren't easy to adaptable; adding rows and columns could break a whole bunch of things unless the model was built extremely carefully.
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