The crucial role of a financial model when selling or fundraising

When embarking on either a disposal or fund-raising process, it’s essential to have a robust financial model in place for external parties to assess the business and ensure that the future success of the company is underpinned by robust assumptions, comparable to key metrics the business has delivered in the past. Whether it’s a rapidly increasing startup or an established company that is been trading for many years, the significance of a robust financial model cannot be overstated.

The financial model will serve as the cornerstone of the entire deal process, providing indispensable insights to parties both within and external to the business, such as key stakeholders looking to acquire or fund the Company and their due diligence providers and other advisers. Below we have summarised what we believe are the key areas to consider when developing and presenting a financial model when contemplating a sale or investment process:

  1. Valuation Precision: At the heart of any successful disposal lies the determination of the company’s true value. A financial model enables directors, shareholders and their advisers to honestly assess the worth of the business, drawing on a multitude of factors such as historical financial performance (including any normalisation adjustments for significant one off or non-recurring activities), revenue projections, key performance indicators and benchmarking those against similar companies in the sector who have recently completed transactions. By gaining a nuanced understanding of the company’s valuation, directors and shareholders can confidently set a reasonable valuation aspiration when embarking on a process that reflects the company’s true worth. Thereby, setting expectations in a sensible place up front and avoiding disappointment later down the line if offers come in below where they were hoping.
  2. Negotiation Leverage: When buyers and funders are assessing a number of inbound opportunities, the presence of a well-prepared financial model can be the differentiator that makes the opportunity more compelling. Pre-armed with a meticulously crafted financial model, directors and/or their advisers can present prospective buyers and investors with a compelling narrative backed up by empirical evidence with the financial model. By illustrating the company’s financial health, growth prospects, and strategic value, vendors will instil confidence in potential buyers and justify their asking price with conviction. Moreover, a robust financial model allows vendors to effectively counter objections, navigate contentious issues, and steer negotiations towards a mutually beneficial resolution.
  3. Transparency and Trust: Transparency forms the bedrock of trust in any business transaction. A financial model serves as a conduit for transparency, offering prospective buyers and investors a straightforward insight into the company’s financial performance, operational metrics, and growth trajectory. By providing a comprehensive overview of the company’s financial landscape and carefully sharing non-commercially sensitive financial information, directors and vendors will foster trust with the counterparty to the transaction, thereby nurturing stronger relationships with potential buyers and funders. Moreover, transparency engenders credibility and reliability, instilling confidence in the buyer or funders mind and expediting their own decision-making process.
  4. Strategic Decision-Making: Selling a company or raising new finance is not merely a transaction—it’s a strategic endeavour which can have far-reaching ramifications. A fully flexible financial model empowers directors to assess various sale scenarios or sensitivities, evaluate potential offers, overlay the funding of a proposed deal and discern their alignment with their own strategic objectives. By leveraging the insights gleaned from the financial model, directors can make informed decisions that optimise value creation, mitigate risks, and safeguard the long-term interests of all stakeholders. Whether it involves evaluating competing offers, assessing the impact on employee morale, or weighing the implications on brand equity, a robust financial model will be a key toll in guiding directors through their strategic decision-making processes.
  5. Due Diligence Preparedness: The due diligence process is a critical part of any disposal or fundraising transaction, wherein potential buyers and investors scrutinise every facet of the company’s operations, finances, and legal well-being. A comprehensive financial model lays the groundwork for due diligence preparedness, providing buyers with unfettered access to pertinent financial data, forecasts, and documentation. By proactively addressing potential concerns and providing a clear roadmap for due diligence, directors can streamline the process, advance the transaction timeline, and create a significant level of goodwill with prospective buyers and investors.
  6. Risk Management: Selling a company or raising new finance of course doesn’t come without risk, ranging from regulatory compliance issues to unforeseen market fluctuations. A financial model serves as a risk mitigation tool, enabling directors to identify, assess, and mitigate potential risks proactively. By stress-testing various scenarios, modelling sensitivity analysis, and devising contingency plans, directors can provide buyers or investors with the comfort that they can manage the company’s position and minimise downside risk should the market go against them, which will in turn enhance their appeal to potential acquirers and funders.
  7. Managing working capital: Financial models can provide insights into a business’s cashflow management and efficacy of its cash conversion. Too often however, businesses focus only on revenues and profits, and give insufficient attention to understanding and modelling how these turn into cash. By accurately forecasting the balance sheet and working capital impact of specific initiatives in the business the vendors can accurately predict much cash would be available to service any leverage put into the business at the point a transaction takes place and / or the “debt-free, cash-free” position at the point of exit. If, for example, a business is expected to trade at a multiple of 6x and takes on a new contract that will deliver c.£500,000 of EBITDA but will lock up c.£3 million in working capital because of an increase in WIP, Debtors and stock at any given point then taking on that contract will not add any equity value at the point a transaction takes place.
  8. Measuring success and return on investment post deal: When built correctly, the financial model can be updated on an ongoing basis and post transaction be used as a tool to continue to measure performance, report against budget and forecast compliance with ongoing financial covenants that may have been introduced during the deal. When we work with clients, we build a model with this in mind making the process of updating the current financial reporting for actual performance straight forward and where necessary having dynamic assumptions that will change over time to reflect the current trends in the business. This allows all stakeholders to measure the success of the business based on the assumptions made at the beginning of the deal, and where necessary, evolve certain assumptions to make sure that the future forecasts of the business remain achievable.

In conclusion, a well-crafted financial model is an indispensable for directors and shareholders embarking on the journey of selling or raising finance for their company. From precision in valuation and leverage in negotiations to transparency in disclosures and resilience in risk management, the benefits of a thoroughly prepared financial model enhance every facet of the sale and investment process. By investing time, resources, and expertise into developing a comprehensive financial model, directors can unlock the full potential of the company, maximise value creation, and orchestrate a seamless transition that paves the way for a prosperous future. Finally, in creating a dynamic model which can be updated and refined over time, the directors are able to continue to monitor success and measure the return on investment when making strategic investment decisions.

At HMT, we have dedicated financial modelling resource and offer specialist financial modelling capabilities either as part of a full-service offering, alongside our M&A advisory services or as a stand-alone service. Our team’s deep understanding of what is required of a transactional model and how it will be used during the process by a variety of parties, means that we can quickly and efficiently build or evolve financial models to make them fit for purpose.

As with all our services, our financial models are built on a bespoke basis to reflect the dynamics of our clients’ businesses and they therefore fully reflect the specific characteristics of each company we work with and if you are contemplating a transaction, we’d be delighted to speak to you to see how we might be able to support.


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