The price of an error
A critical piece of any transaction is the deal model. It provides the crucial analysis underpinning a transaction, including valuation and other vital deal metrics. Overlooking critical analysis can significantly impact results.
Typically much of the focus in a transaction is put on historical analysis, rather than on the logic and accuracy of the deal model used to inform the decision. A poorly designed deal model can make or break the deal and jeopardize negotiations with the target and in presentations to your board, the bank and investors.
In many organizations only one person, often a junior resource, has the knowledge of how the financial models are constructed, or the spreadsheet has evolved over multiples users. This makes the risk of errors very high because others are unable to understand and verify the analysis.
Deal modelling issues could cost you plenty
Consider these potential pitfalls before your next transaction.
- A lack – or incorrect application of – robust valuation analysis of the target company.
- Limited external research into relevant forecast drivers (e.g. exchange/interest rates) and comparable valuation data (e.g. discount rates, multiples).
- Limited analysis of deal synergies and integration costs (e.g. no benchmarking, ‘high level’ assumptions).
- Not adequately considering how to optimize the financing structure within your constraints.
- Bridging between ‘accounting figures’ and ‘cash flows’ and appropriately modelling working capital changes.
- Lack of risk analysis to understand the impact of changes in value drivers on critical deal metrics (e.g. how pricing/ volume impacts IRR).
- Inconsistent operating assumptions (e.g. expansion opportunity with no capital expenditure).
- Oversimplified tax calculations (e.g. high level depreciation assumptions, no tax loss calculations, etc.)
- Not appropriately considering the impact of the acquisition on the pro forma financials for your company (e.g. accretion/dilution analysis).
- Mechanical errors in the model as a result of lack of testing and inability to update the model quickly – and safely – during the deal process.