Financial Modeling for Private Equity: Key Use Cases and Best Practices

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Financial modeling services are well-known by companies that care about their future. These models involve an intricate combination of variables, such as revenue projections, operating margin and expenses, expected earnings, and earnings per share. For many companies, financial models have become the compass that guides business decisions, but their complexity defies DIY solutions.

After all, efficient financial models combine vast amounts of data, such as statements and track records, with cutting-edge technology to develop bespoke solutions. That’s when financial modeling services by AcquinoxAdvisors can help. Here’s how it works and where it works best.

Summary hide

Modeling the Future
Most Common Models
FAQ
Recommended Reads

Modeling the Future

Private equity funds (PE) use financial modeling services to determine a company’s health, viability, and growth prospects, very much like business managers do. However, PE firms have specific interests. It’s not enough to check how things are going before producing the wallet; it’s also necessary to foresee an exit point where investors can resell their shares for a reasonable profit margin.

Additionally, financial models help managers and investors emulate different scenarios to see how the company will play out. This imaginary exercise based on the “what if” question gives an idea of how companies will stand to adversities and sudden market fluctuations. So, it’s a crucial tool for staying ahead of the game, allowing companies to prepare for different scenarios, including worst-case ones.

Most Common Models

Unfortunately, there isn’t a silver bullet for financial models. It means each case must be treated according to its own particularities. Most models revolve around the following issues: cash flow observations, revenue projections, expenses with debt and interest, and sensitivity analysis.

PE firms never play by ear, thoroughly analyzing any business applying for new investments. They need accurate data to build a model for each case in this context. However, PE firms tend to use one of the four models below to make up their minds regarding a new investment. Learn more about each of them below.

Operational Model

As the name suggests, operational models derive their projections from operational data provided by a company, mostly focusing on expense and revenue. This model commonly works on the “three statements method,” where the balance sheet, income statement, and statement of cash flow are aligned to project future performance. Additionally, aspects like governance, organizational values, and what needs to be done to achieve the promised value.

M&A (Mergers and Acquisitions)

Mergers and acquisitions are specific kinds of models created to simulate the financial consequences of one or another. It also tries to predict how both companies will play along in the case of a merger. Arguably, it’s one of the most complex models, going deep into futurology. It’s not enough to assess the financial health of parts of the deal. Predicting revenue, cost synergies, and post-deal capital expenses is essential for a successful M&A model.

DFC (Discounted Cash Flow)

DFC models usually apply to early-stage businesses that don’t have much of a track record. A simple yet complex calculation compensates for the lack of data. Indeed, the principle is straightforward: the company’s current value is discounted against its projected cash flow. The tricky part is guessing future cash flows correctly.

Leverage Buyout (LBO)

Initially created to calculate buyout opportunities, LBO models include equity contributions, debt, and a company’s financial structure. It’s mostly used by PE firms and bankers who want to calculate a company’s future price, determining whether it’s a profitable deal. It focuses on debt scheduling more than any other model, considering that debt will be used to cover purchase costs.

FAQ

What is financial modeling? Why is it so important?

Financial models help managers and investors make better-informed decisions regarding capital allocation, risk management, and funding. They also help companies to prepare ahead of potential losses or market swings.

What are the most used types of models in private equity?

Four main types of models are used in this market: operation, discounted cash flow, leverage buyout, and mergers and acquisitions.

Where can you find reliable financial modeling services for private equity?

Acquinoxadvisors is the leading name in the financial modeling services market. More than clients, Acquinox Advisors has true business partnerships. The company has a long track record of success based on combining industry expertise, cutting-edge technology, and an unwavering commitment to client confidentiality and trust.

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