I made a few assumption mistakes in my LBO model, have a presentation on it in a week. How should I approach this?
Hey everyone!
I had a 3-hour LBO modelling test yesterday and the fund contacted me to set the presentation the next week. I was told that it is going to mimic an investor committee presentation. I am fine with presenting and getting questioned. I just have a problem. I made some stupid assumptions about the EBITDA margins falling and also some fuck up on the NWC assumptions. I might have made some sub-par assumptions on the business and its operating model, but my model was working, dynamic (could accommodate multiple scenarios) and covered everything they asked.
My question is: Should I keep defending the model the way I built, or should I admit my mistakes and present both sides than choose the right way of interpreting it for example? Because in the spur of the moment, I did some mistakes but I realized it right away. In a normal setting I would not have made such assumptions I think.
Would appreciate any responses.
Thanks in advance
They likely won't spend much time reviewing it beforehand. Make the edits and you'll be asked to share your screen or have print outs. Use the updated version then. If they actually question why stuff has changed, just be able to back it up.
I am able to back it up definitely. But do you think admitting it beforehand and explaining my approach during the presentation is a good strategy? Like just saying that I have upgraded some of the assumptions to reflect my investment thesis more accurately or something?
Thank you for the reply!
I personally sent the email with an updated version of excel & powerpoint a day or two before the presentation and was not challenged
Did you explain in the email what you changed or whether or not you changed anything?
And how did the presentation go?
just a simple sentence asking the person you're emailing to "please refer to the latest updated version", for example I updated the comps table and stock prices, no need to explain your modifications in detail.
Never admit a mistake beforehand, usually, people don't notice. if they ask remember what to say
Like above also never say "sorry I am late " sometimes people don't realize and it leaves a bad impression since you reminded them
And if they notice, what do I say? I just updated a few assumptions maybe?
The thing is, the business I was projecting had a metering installation and a data management segment, the latter having significantly higher margins. I should have reflected that on the EBITDA projection but I totally skipped that part. The business is evolving to become more of a SaaS with recurring revenue stream and at the moment I am completely disregarding the effect of that evolution on its valuation. Which is plain wrong. I could change the cash flow projection and possibly the IRR I initially arrived. Isnt there a different way to communicate this if I change it in the model? Does not saying anything leave me on the offensive side in case I am asked? What do you think?
Just leave an email saying that you updated it, most probably they won't realize it.
If they ask what the modification was you can say along the lines of " after extreme due diligence I have come to the conclusion that data management segment is far more cardinal to my EBITDA projection than my previous assessment and to avoid underestimating my FCF I have revised my estimates"
you just need to be confident
Just leave it as it is and say your base case is conservative and your upside case incorporates low hanging fruit growth from the data mgmt segment for XYZ reasons.
If you completely neglected to include this business in the model / valuation for all cases at all then sorry that sounds like a larger update than your OP suggested and I think it'd be inappropriate to send them an update correcting for this
Fundamentally these model tests are meant to assess two things - 1) can you build an excel model well enough that when you start working, people won't have to triple-check every cell to feel comfortable that it is working properly, and 2) can you think?
So setting aside the assumptions for a minute, if your model was functional, dynamic, and accurate, you have checked box number 1 - congratulations!
On number 2, it sounds like you made some assumptions that you, in retrospect, think weren't the greatest. If that is the case, I would simply present what you prepared during your three hours and for any assumptions that you aren't in love with now, would say something to the effect of "for this particular assumption, I was pretty [conservative] by saying XYZ. With more thought, if I was underwriting a base case, I might change this assumption to ABC because of [reasons], which would generate [additional] cash flow of around $X per year and allow you to pay $Y more while achieving the same returns." That's it.
In terms of updating and sending a new model - look, I have never heard of a fund that has you complete the model in advance and then do a presentation a week later, but if it were me I would be a bit put out by someone sending an updated model and not flagging what they changed (this behavior would also piss me off if I was actually working with the person in real life on a real project). If you just have minor tweaks that you would make, I would not bother sending an updated version. If you realized that there was a fundamental bust in the model, it's probably better to send it and identify it up front. If you are banking on people not checking the model in advance to try and sneak in a fixed version, I think that you're taking a risky approach when there are better alternatives, and if I realized you did it as an interviewer, it would be an auto-ding for lack of integrity. Just my two cents.
I would agree with above on likely reactions with regard to sending an updated model. Would rather not be ambiguous.
I did go through a similar experience - what I did was send an updated version and explain the key assumption changes I made / explain that those were made after "putting more thought" into it over the week. Then prepared to present either set of numbers whichever they preferred, which shouldn't be difficult as you only need to explain the x number of changes live (unless x is a massive number).
Didn't get a negative reaction on me updating the model. In fact they liked the additional thinking done around the assumptions.
Most important question - does the model balance? While presenting just craft some kind of story around your assumptions and have some echoing thoughts which sort of mention that you're cognizant of a separate approach to the assumptions. Speak with conviction and confidence and don't speak as if you've made a mistake but rather that you had a reason for your assumptions but that you understand why another set of assumptions might be appropriate. None of this is ideal but imo the best way to handle the presentation aspect. And also read the room - if people aren't reacting in a puzzled or confused manner from what your original assumptions are, don't address any other scenario etc.
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