Normal level of detail in models?

Hi all - I work in a small boutique that mainly advises on buyside M&A in the middle market. Currently in the midst of PE recruiting, and obviously reviewing my models as a result.

I've come to realize that our models are....well kinda shit and all very high-level. For example, when we evaluate CIMs for our clients to give a prelim view of valuation and what to bid, we generally take CIM numbers, make some judgement calls on haircutting revenue and margins, and project everything under the income statement as % of revenue.

Literally, the entire football field analysis can be done in ~1-2 hours.

Obviously operating models are more detailed, but really only on the income statement (which is VERY detailed). Everything else is still % of revenue.

I'm just wondering if this is common practice for M&A advisory on the buyside, or if other banks tend to actually build out the granular details of full 3-statement models. We also never do full merger models.

It does seem unnecessary in most cases, so I understand my bank's approach, especially since the acquisition targets are often small enough relative to our client that it doesn't matter. However, definitely makes me nervous if an interviewer asks about the operating model, and my response is, "oh yeah, we just project capex, D&A, and NWC as constant % of revenue..."

Comments (4)

 
Apr 24, 2020 - 3:42am

When I was in IB (Europe), on buy-sides we normally did quite some work on:
- market sizing (expert calls, reports, coverage bankers, etc)
- sustainability of revenue sources (stripping out advisory income linked to owner for instance)
- margin analysis (what is driving margin increase, compare to peers, expert calls on private competitors)
- capex plans (what is included in capex plan, how do asset-utalisation ratios change over time, etc.)

Merger models aren't really that interesting for PE.

 
Apr 24, 2020 - 9:56am

Yes, those are the same things we focus on except for capex, although to be fair, most of our clients are not heavy capex clients.

I am very comfortable walking through income statement projections down to EBITDA in great detail. Everything below that is very questionable though...

Been rebuilding the model with some more granularity, but not sure if I'm wasting my time...

 
Most Helpful
Apr 24, 2020 - 11:12pm

Yasuo the Unadjusted EBITDA:

Hi all - I work in a small boutique that mainly advises on buyside M&A in the middle market. Currently in the midst of PE recruiting, and obviously reviewing my models as a result.

I've come to realize that our models are....well kinda shit and all very high-level. For example, when we evaluate CIMs for our clients to give a prelim view of valuation and what to bid, we generally take CIM numbers, make some judgement calls on haircutting revenue and margins, and project everything under the income statement as % of revenue.

Literally, the entire football field analysis can be done in ~1-2 hours.

Obviously operating models are more detailed, but really only on the income statement (which is VERY detailed). Everything else is still % of revenue.

I'm just wondering if this is common practice for M&A advisory on the buyside, or if other banks tend to actually build out the granular details of full 3-statement models. We also never do full merger models.

It does seem unnecessary in most cases, so I understand my bank's approach, especially since the acquisition targets are often small enough relative to our client that it doesn't matter. However, definitely makes me nervous if an interviewer asks about the operating model, and my response is, "oh yeah, we just project capex, D&A, and NWC as constant % of revenue..."

Depends on the bank. The larger institutions are more prone to build out three statement models. MMs tend to build out only a very detailed P&L and perhaps B/S if there are working capital, capital structure (financing) considerations.

I find three statement models to be utterly pointless as private equity funds and lenders are going to use their own modeling along with baseline assumptions to test returns and risk under multiple scenarios. They are going to determine their own assumptions re: debt based on their specific financing source(s) and structure.

Opex projections tend to be relatively easy, but revenue and COGS/COS should be built up in detail. Even if you historically haven't done this (perhaps because you didn't have that level of detail), you really need to understand the genesis of the P&L - what are the underlying revenue streams and direct costs associated with providing a product or service. We've had models built up by SKU where every SKU was projected out based on specific assumptions guided by management and/or trends. Others may be more difficult to get granular on, but there should be some critical thought that goes in to them, otherwise, they are indefensible.

 
May 8, 2020 - 11:31am
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