When you are considering a 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 detailed assumptions, comparable to key metrics the business has delivered in the past. Whether it’s a growing startup or an established company that has been trading for many years, the significance of a robust financial model cannot be overstated.
The financial model will be a key part of the deal process, providing indispensable insights to parties both within and external to the business, such as key stakeholders looking to 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 looking at raising debt finance: –
Valuation Metrics
Whether raising funds for an acquisition or growth, or considering a disposal, it is crucial that company directors, shareholders, and their advisers can clearly articulate, demonstrate, and assess the worth of the business.
A detailed financial model will draw on a multitude of factors such as historical financial performance (including any normalisation adjustments for significant one off or non-recurring activities), revenue projections, cost assumptions, key performance indicators, and benchmarking those against similar companies in the sector who have recently completed transactions.
Through 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.
Negotiation Leverage
When funders are assessing a number of debt opportunities, the presence of a well-prepared financial model can be the differentiator that makes the opportunity a more compelling proposition.
Having an accurate and carefully crafted financial model, directors and/or their advisers can present potential funders with a properly thought-through narrative backed up by empirical evidence with the financial model.
A robust model and supporting narrative will clearly set-out the company’s financial health, growth prospects, and strategic value, and instil confidence in funders.
Transparency and Trust
A long-lasting business relationship is developed through open and honest communication between parties to build mutual trust. A financial model serves as a conduit for transparency, offering prospective funders a straightforward insight into the company’s financial performance, operational metrics, and growth plans.
By providing a comprehensive overview of the company’s financial landscape and sharing non-commercially sensitive financial information, trust will be built with funders to the transaction, thereby nurturing stronger relationships, demonstrating credibility, and instilling confidence.
Strategic Decision-Making
Raising new finance is not merely a transaction—it’s a strategic decision which can have far-reaching consequences for owners of a business.
A flexible integrated financial model will support directors in assessing different scenarios or sensitivities, evaluate and overlay funding structures of a proposed deal, and ensure 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.
Due Diligence
The due diligence process can be a key part of any fundraising process, where funders will look to scrutinise every aspect of the company’s operations, finances, and legal well-being.
A comprehensive financial model lays the groundwork for due diligence preparedness, providing funders and external diligence parties with unfettered access to all relevant 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 funders.
Risk Management
There are of course a number of risks to consider when raising new finance. A financial model serves as an important risk mitigation tool, enabling directors to identify, assess, and mitigate potential risks proactively.
Being able to stress-test various scenarios, model various sensitivities and contingency plans, directors can provide funders with the comfort that they can clearly manage and minimise downside risks.
Managing Working Capital
Financial models will provide insights into a business’s cashflow management and efficiency of its cash conversion/generation. We see too often businesses focus only on revenues and profits and give insufficient attention to understanding and modelling how these turn into operational cash.
By accurately forecasting the balance sheet and working capital impacts, directors can predict cash availability to service any leverage put into the business at the point a transaction takes place and throughout the term of the new borrowing.
Measuring Success and Ongoing Monitoring
When built correctly, the financial model can be updated on an ongoing basis and post transaction used as a tool to continue to measure trading performance, report against budget and forecast compliance with ongoing financial covenants that may have been introduced during the deal.
When we collaborate 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.
A well-crafted financial model is an indispensable working tool for directors and shareholders looking to raise finance for their company. The benefits of a thoroughly prepared and detailed financial model enhance every facet of the sale and investment process and by investing time, resources, and expertise into developing a comprehensive financial model early in the deal process, directors ensure a smooth and seamless transition to completion.
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.
Inicio’s role
At Inicio, we have dedicated financial modelling resource and offer specialist financial modelling capabilities either as part of a full-service offering, alongside our capital 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. Therefore, they will 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.
How we work
At Inicio Corporate Finance, our expert team leverages decades of UK and global experience through our looped international relationships and M&A network. With strong relationships across Europe, Asia, North and South America, we offer a global perspective tailored to meet the unique needs of SMEs.
At the core of what we do is building long-term, trusted relationships.
We act as strategic partners, guiding companies through the intricate processes involved in achieving their financial goals.
We do not issue engagement terms until we completely understand your objectives, and we are confident that we can help and add value. This can take weeks, months, and in some cases, years.
To find out more please contact Scott Taylor at [email protected] or Kenny Hughes at [email protected]
