What is M&A Modeling and how Fintalent can help you hire the best M&A Modeling Consultants
M&A Modeling is a specialized skillset for valuing deals, incorporating financial models to value deals, understanding the valuation drivers of deals and being able to formulate strategies for deals. It is a new business model of franchising that is based on the finance industry, which has been around for many decades. It was first used for business model in the United States and has gained acceptance in Europe, Asia and Latin America. The main goal of this model is to bring added value to its customers by providing them with unique services and products. An M&A franchisee offers a diversity of services that include IT support, accounting support, business consultancy services, online marketing etc.
FIntalent, the hiring and collaboration platform for tier-1 M&A and Strategy Professionals is the top hiring platform for M&A Modeling consultants as well as other experts with vast knowledge around M&A’s. Fintalent’s invite only platform ensures that only the best and most experienced consultants with impressive track records of success are admitted into the platform thereby guaranteeing value for money for our teeming clients.
History of M&A Modeling
The history of M&A Modeling can be traced back to 1993. A company by the name of BASIC (Business Assistance for Small Industry Companies) was created and started franchising its model in 1994. This model was focused on small business companies at that time. In 1996, the same company introduced a new, more comprehensive business model called M&A (Mergers & Acquisitions). This model is based on the services offered by BASIC but also includes accounting and finance, IT support and different types of consulting services. The company has established itself as a leader in this market segment due to its high level of customer satisfaction.
M&A Modeling and Deal Structuring
M&A modelling requires deal structuring. The structuring stage involves determining whether there are existing structures that could be used and whether these structures are appropriate for the target company. This could include deal structuring teams, like LBO’s or management buy-outs (MBOs).
The deal structuring team usually comprises financial professionals and lawyers. They construct the deal financing structure and are involved in negotiation to ensure that the structure adheres to any necessary regulatory requirements.
After the structuring stage, it is then important for M&A modelers to review the deal terms and ensure that they are structured in a way that will be beneficial for the target company. It is also crucial for modelers to assess whether there are any biases in the pricing of deal terms.
Typically, deals are financed through debt and equity. In M&A modeling, before these two could be used it has to be determined which is most appropriate given market conditions as well as industry characteristics and structure of target’s operations and business.
NPV and M&A Modeling
The most commonly used method to determine what course to take when trying to raise capital is the Net Present Value (NPV) Method. This method has a large number of applications and is widely accepted in investment decisions.
In order to determine whether a project is worth funding, NPV must be greater than zero. The higher the NPV is, the better it is for evaluating projects and selecting one that will provide a positive return or profit. Once the equity has been funded it can either be distributed amongst the shareholders or retained for future investment.
The Terminal Value Method (TVM) is used to determine the value at a certain point in the future. It uses projection of future cash flows and discounting them back to the present day.
There are two approaches:
The first approach projects an estimate for each year of the project and then applies a discount factor to it. The result is the present value which is then compared with all other cash flows to see which one is greater than (or better than) the present value. This approach can be clunky and time consuming but it provides more information about how cash flows will change over time for a project.
The second approach is to use a discounted cash flow model. Under this method the value of cash flows is calculated over a time period, usually 30 years. Then different discount rates are applied to the cash flows to determine their present value. The result will be the present value of all cash flows adjusted for the various discount rates.
If an M&A modeling firm can get access to sufficient financial information about companies being valued, it also has to be able to generate financial models for these companies based on that data. These models need to be able to capture the financial characteristics of the company and must be able to forecast its future performance. If a company has just been incorporated or there is not sufficient financial data, using a best-fit approach would be the next best option.
The most commonly used method in order to value a target company is called Discounted Cash Flow (DCF). This approach uses historical financial data provided by the target company that is then used to create forecasting models for future cash flow and profitability. The estimated future cash flows are discounted at a rate greater than the cost of capital for the firm, thus establishing its value in today’s dollars. This discounted value is then used to compare against the cost of purchasing the company.
Models can be built to value companies based on fundamentals. This model typically uses only historical data, although projections can also be made for several years into the future. The most common variables used in fundamental valuations are earnings (EPS), book value (BV), sales per share (SPS), cash flow per share (CFPS), and discounted projected EPS or CFPS.
There are three steps to this approach:
Step 1: Establish the target company’s NPer ratio (usually over 5 years) by dividing its EPS by its book value.
Step 2: Estimate the target’s NPer over 5 years and forecast its annual EPS and BV at year 4 by taking its earnings at year 3 and dividing it by its growth in book value.
Step 3: Compute the present value at year 4 of all future cash flows discounted to year 4, using a 3% discount rate.
Why you need Fintalent’s M&A Modeling Consultants
M&A modeling is a specialized skillset that requires not just comprehensive training but significant experience. Due diligence in valuing deals, valuation drivers of deals and operating experience in deal-making can provide an edge when applying these skillsets in M&A modelling. The best way to acquire these skillsets is by having an appropriate academic qualification and by gaining relevant work experience.
Fintalent helps firms that may not have employees that possess the relevant experience or qualification navigate this considerable setback by providing a pool of freelance M&A modeling consultants that are available for hire all across the world. Fintalent’s consultants are vouched to ensure they meet the criteria for qualification as well as that for experience which ensures clients are always pleased with their output.
