Is lack of modelling in LMM normal?
At a no-name in London. Deal flow has been great since I joined last year and have had very good exposure.
However, I’m getting increasingly concerned about the lack of modelling here, namely DCFs (LBOs out the question since we only do sell-sides). Forecasts for the next year are very common, but since all of our transactions are on LTM EBITDA multiples (we do research on precedents) the need for forecasts really only come up in DD requests and they don’t feel so in-depth and meaningful. I wanted to open the floor to anyone familiar with the work in the LMM space and find out if this is common and whether or not I should be concerned. Lateraling upstream is on the cards for me after I hit the 1yr mark FYI. Thanks!
In the LMM (Lower Middle Market) space, the lack of heavy modeling, such as DCFs or LBOs, is not uncommon. Based on the most helpful WSO content, here are some insights:
Nature of LMM Transactions:
Sell-Side Focus:
Should You Be Concerned?
Actionable Steps:
In summary, the lack of modeling in LMM is typical, but if you're aiming to move upstream, taking proactive steps to enhance your technical skills will be crucial.
Sources: Biotech finance part 2: valuation methodologies and modeling considerations, Lack of diversity in Banking/Finance, Feel Like I Got Conned - Small No-Name Boutique, Biotech finance part 2: valuation methodologies and modeling considerations, Financial modelling on the buyside
I'm in the exact same position, and I share your concern.
From what I’ve seen, many trade buyers in the vLMM space (£5-£30m) don’t typically expect models. It’s usually only when PE is involved that they request one.
For most of the deals I’ve worked on, I like to build a three-statement model, forecasts, and a DCF just to practice techs. I'll occasionally also put together a simple LBO to grasp the fundamentals and understand the high-level mechanics - as I'm hoping that will help w/ laterals down the line.
Curious to hear what others say too.
It’s normal, and why moving upstream is difficult. The issues and businesses you encounter at LMM are very different from MM or MF. Your value add at LMM is heavily weighted to professionalizing the company: accounting, hires, pricing, cash conversion, etc.
Models also only get you so far, and you don’t have the quantitative circle jerk in LMM that you would on MFs. You’re better off planning the operational overhaul than modelling a sensitivity analysis on a 50bps reduction in COGS on your IRR because your IC told you to run it.
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