Operating Models - Does Your Team Build Them?
Question is simple:
Does your team build operating models? The team at the BB that I will be returning full time to did not build Operating Models. They elected to build a P&L instead.
Is this common across the street? Does your team actually build Operating Models or do they follow the same P&L method that my team does?
In what context?
At a pitch or a live M&A engagement, if asked to build an LBO valuation for Company A, a member of my team would create a P&L for Company A and build the LBO valuation based off of that.
This is as opposed to creating a full operating model for Company A and building the LBO valuation based off of the operating model.
I guess this more a definition question than a different method/approach. For LBO you need delta W/C and Capex, so just a P&L is never sufficient. An operating model basically is just extra/more detailed drivers for your P&L and BS.
I think he means a P&L and then a semi cash flow statement, just to get to FCF i.e. just CFO less capex essentially.
I've seen some BB's do this before instead of creating a full 3 statement model as it's a lot quicker and the results are usually pretty close.
Precisely! Thank you for clearing it up!
For example, I was tasked with creating a debt paydown for a company going five years into the future. It began with a free cash flow calculation which was fed into the actual debt paydown.
Using the past debt paydown for the company, I did not create a 3-statement model for the company but instead a P&L containing:
Is this how this particular project would be approached at all banks or would some teams build a full operating model? Is a full operating model required for other projects such as a full LBO model or an M&A model? Multiple analysts on my team explicitly said they do not build operating models at all. They just use P&Ls for all models.
You never really need a full operating model to be honest, some MD's/VP's just like to have one to show clients or to be complete or whatever reason (like the guy below said). Doesn't add much value IMO, it's more of a preference thing.
I wouldn't worry about not getting exposure to full 3 statement models, they're pretty quick to learn if you do need to later on and if you're already familiar with the mechanics of DCF's, LBO's,etc you shouldn't have an issue.
It depends on your VP / MD. I had one MD who insisted on full 3-statement models every time, and another who just needed the high level FCF calculation as a gut-check. For banking you’re mostly just trying to back into a valuation that your boss already has in mind, which is more art than science.
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