For Companies.

Financial Models for Corporate Clients

Financial models are tools typically employed by investors and larger corporates that support strategic and investment decision-making, and are generally used for the valuation of participations. By monitoring key KPIs, such as the expected equity return of the options at hand, they make the different options comparable on a like-for-like basis. In M&A transactions financial models are routinely employed to determine the purchase price for a target company or project.

Financial models typically show the expected (and historic) cash flows from a company, a transaction or a project in a certain level of detail and based on a clear set of assumptions. They can incorporate a number of scenarios with varying operational and financing assumptions, and the balance of risks and opportunities can be determined via sensitivity analysis.

Numbers don’t lie, some say. Financial models can help putting commercial discussions on an objective setting, taking any emotional or other biases out of decision-making processes. Financial models ensure transparency and clear communication between the different parties collaborating on a project.

Potential Applications

In the context of transactions, financial models are often employed for the following purposes:

  • Determining the purchase price: Financial models are often required in M&A transactions to determine the value of a company or project on the basis of carefully diligenced assumptions (both on the seller’s and the buyer’s side). The buyer typically develops their own buyside business plan on the basis of the sellside business plan provided by the seller and documented in a financial model. The financial model greatly facilitates communication between the parties;
  • Scenario analysis: How does the transaction base case look like, and what would be the outcomes of a positive and a negative scenario? What are the implications for the company’s strategy? Scenario analysis helps to determine the risk profile of a transaction and therefore with pricing;
  • Fundraising: Equity investors often expect from their corporate partners the presentation of a thought-through business plan that enables the investor to develop a clear investment case for the company. A good financial model makes a business plan more tangible and its analytical outputs gives it credibility. In larger transactions lenders, such as banks, often also require the presentation of a lender model;
  • Management incentivisation: A financial model can help to tie the compensation of the company leadership directly to the success of a transaction (or another project). In the financial model, the incentive plan for management can be developed and calibrated to the right level (LTIP, MIP, ratchet mechanisms, etc.).
  • Monitoring: Financial models can be used to monitor the development of an investment project and to compare its actual with the project’s expected development. This enables a company to identify any weaknesses (or strengths) of the underlying business plan, and to optimise and manage the project accordingly.

Outside of a transaction context financial models can also be useful in many ways:

  • Strategic decision-making: Financial models can visualise a company’s business model (also graphically) and to make various commercial options comparable on a like-for-like basis on the basis of financial KPIs, such as the expected equity return. The model can therefore help a company to focus on those projects that promise the highest financial return on investment;
  • Optimisation of the business model: With the help of a financial model a company can optimise its cost structure, pricing strategy and resource allocation and hence its profitability in a targeted manner;
  • Long-term business planning: A robust financial model can be used for forecasting a company’s future financial development on the basis of a pre-determined set of assumptions. This supports company management in the systematic planning of business plans, budgets and company targets;
  • Covenant compliance: Financial models can reflect agreements made with the company’s lenders (e.g. compliance with certain financial KPIs) and regularly determine compliance with these agreements. This can help a company’s finance team to optimally use credit lines and to avoid uncomfortable situations where covenants are breached. In addition, the financial model facilitates communication with banks and other lenders;
  • Company valuation: Financial models can enable the shareholders and management to monitor and forecast the expected value of their company (even without the company being listed). This helps decision-makers to understand the company’s market position and to prepare for future financing and transaction decisions (e.g. mergers and other M&A transactions, including a sale of the business).

    Our Service Offering

    DTRAG’s team members have longstanding experience in the development, optimisation and auditing of financial models. Our experience is not limited to the Mittelstand market. We can deliver market standard financial models on par with the quality offered by international investment banks, built to meet your requirements.

    Contact Us

    Should you be interested in finding out more about our company valuation offering or our other services, please contact us anytime on kontakt@dtrag.de. We are looking forward to meeting you.