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April 30, 2024
9 Free Financial Modeling Lessons
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Based on the 10+ posts you've made about your case studies over the past 2 weeks: whatever firms you're interviewing for, you’re not qualified
I'm sure someone will come over the top with a much more in depth explanation about how all the accounting works, but my guess is you're just looking the mechanics on how to layer this in.
This should get you most of the way there for a quick and dirty model. Obviously a few other considerations you'd want to include if this is for a full blown transaction model.
On bullet 2, isn't this a double count with your adjustments for debt & equity funding? If you already show an increase in debt/equity, then why would you need to reflect the purchase price and fees in your cashflow statement?
Definitely take Private_Equiteer’s advice as it is the right way to do it. That said, if your deal team is super chill and you don’t need to show the model to any other parties, I suggest the following to save you a ton of time:
Assuming your mode is setup to run off of margin / percentages of sales, the rest of the model will all update accordingly. Furthermore, if you’re buying the business in year 3 or 4 and have a somewhat reasonable model, the growth of the base business combined with debt pay down combined with the earnings of the add-on should be sufficient enough to fund the acquisition with all debt. Putting a very large CapEx spend in the model will more or less replicate this. Only thing to be careful of is how you’re treating depreciation (new tax rules let you super accelerate depreciation, which is different than an acquisition scenario).
It’s not perfect but it will get you most of the way there.
I think I need to print this out and pin it up next to my desk. Direct acknowledgement and praise from CompBanker feels even better than when a partner remembers my name!
hey, would this solution work in a PE LBO case study that is 2 hours long? I would like to add acquisitions as part of the management case and was thinking that I could assume an acq spend as % of revenue. I would also for simplicity assume that no Goodwill is created (although unrealistic of course) as well as that the target's have no debt. as such, the effect on the balance sheet (if we finance with cash) would be a decrease in cash from the cash flow statement and a reduction in equity given we eliminate the target. Or alternatively we could finance with debt. but assets from target we assume would be fully offset by reduction in cash
If you are doing this for a PE LBO case study I would advise that you break it out slightly just because it A) makes it easier to follow B) makes it easier to discuss C) makes it easier to sell and understand what is going on. Honestly keeping things intuitive and not obfuscating is the best way I've found to perform your best.
With that said. You don't have to make it overly complex and even adding in CapEx for M&A next to your general CapEx line (so that it doesn't flow into your D&A schedule) would probably do the trick. I might also add in another revenue line or two to make it easier to follow and discuss and so that it doesn't look like organic revenue growth.
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