The Role of Financial Modelling Specialists in the Deal
While specialists like legal, tax and accounting specialists are regarded as indispensable to deal teams, we recommend staffing your commercially critical deals with skillful financial modellers who are able to properly prepare, present and stress-test the assumptions and the wiring of the financial model. The financial modeller’s objective is to use the financial model as a communication tool in his interaction with his client and deal counter-parties to quickly bridge the commercial gap between both sides.
Good financial modelling is a skill that is acquired and refined over an extended period of time and ultimately boils down to achieving high standards of accuracy while demonstrating keen attention to detail and conscientiousness in our modelling efforts. It is no coincidence that many investment banking directors were themselves skilled and accomplished modellers.
Financial Modelling Components
The basic building blocks of a good financial model would include:
- Charting outputs
- Sources and uses of funds
- Static and periodic assumptions
- Operational assumptions
- Capital and operating expenditure
- Accounting and tax depreciation
- Summary financial statements
- Senior and junior debt principal, interest, fees and debt-sizing covenants
- Equity raising assumptions
- Discount rate computation
- Multiples derived from listed company and precedent transaction comparable
- Returns analysis (NPV, IRR, discounted payback)
- Transaction fees
What the Client Wants and Needs
While the above list of financial model components is not exhaustive, a mark of a good financial modeller would also take into consideration the level of financial modelling skill the likely audience/users would have. We think it is counter-productive for financial models to be over-engineered with complicated and long excel formulas and multiple worksheets as that may put off even the most savvy users.
While there is plenty of advice online on how to build industry-standard or banking-tested financial modelling, our view at Caravel Capital is that financial modelling is akin to getting a custom suit or a dress made for the particular occasion. Ultimately, attaining a high degree of client satisfaction would depend on:
- The event occasion: understanding users’ objectives for reviewing the model
- the required level of customization and add-on features: knowing the financial savvy and sophistication of the users
- the choice of fabric: are robust underlying assumptions available?
- the budget and timeline: financial models do not come off-the-rack, and hence there is no market price
Assumptions Register and Audit Trail
Lastly, the financial modeller needs to regularly maintain an assumptions register which tracks each input’s reference source, date, owner and application rationale. This allows for ease of model auditing purposes and continuity in an untimely departure of the financial modeller! As a best practice, changes to model assumptions and wiring should also be maintained with each major change to the model.