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The importance of financial models in the sale process

See all articlesThe Importance of Financial Models in the Sale Process
Corporate advisory
July 27, 2023
minute read

Thinking of selling your business? Read these key tools to set you up for success.

Amidst the complexity of negotiations, due diligence, and valuation, financial modelling emerges as one of the most important tools in forming the basis for data driven decision making through the sale process.

By utilising a financial model, vendors can:

  • evaluate different scenarios
  • understand the future financial profile of the business
  • assess the impact of various deal structures, and
  • understand how changes in financial variables affect deal outcomes.

This empowers sellers to make informed decisions based on quantitative analyses rather than relying solely on intuition or subjective assessments.

Throughout a sale process, what is a financial model used for?

Valuation Accuracy

One of the primary functions of financial models in the sale process is to assist in accurately valuing the business. Financial models use historical financial data and projections to estimate the company's future cashflows and potential earnings. This allows sellers to determine a fair and competitive valuation, while also providing potential buyers with a clear understanding of the business's underlying value.

Facilitating Due Diligence

During a sale process buyers conduct rigorous due diligence to verify the accuracy of information provided by the seller and assess the potential risks associated with the acquisition. A well-constructed financial model streamlines this process by organising and presenting financial data in a structured manner. It enables buyers to quickly analyse the current and future financial health of the business and identify any potential red flags or areas that require further investigation. Buyers can quickly stress test the business model against various scenarios (such as an increase in interest rates, reduction in sales, increase in costs) to see the impact on cash flows and profitability of the business.

Negotiation Tool

Financial models are an invaluable tool in negotiations, allowing sellers to justify their valuation and providing buyers with a transparent view of the company's financial performance. When both parties have access to the same data and assumptions used in the model, it generates a more collaborative and efficient negotiation process. This ultimately leads to a higher likelihood of reaching mutually beneficial terms.

Assessing Deal Structure Options

In sale transactions, the deal structure can significantly impact the outcome for both parties. Financial models assist in analysing different deal structures, such as cash versus stock transactions or earn-outs, to understand the implications on taxes, cash flow, and overall risk. This analysis enables both buyers and sellers to optimise the deal structure to align with their respective objectives.

Securing Financing

For buyers seeking external financing to fund the acquisition, a comprehensive financial model is essential in securing support from lenders or investors. A model showcases the company's projected financial performance and cash flow generation, demonstrating its ability to service debt. This provides lenders with the confidence to extend credit.

In the sale process, accurate financial models play a pivotal role in facilitating informed decision making, enhancing transparency, and driving successful outcomes for both sellers and buyers. By providing a comprehensive view of the company's financial health, projections, and potential risks, financial models enable parties to negotiate from an informed position and establish realistic expectations.


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