Private Equity Financial Modelling

and Analysis: A Practical Guide

Edited by
David Whittaker

David Whittaker

E
U
R B
O O
M O
O K
N S
E
Y
Private Equity Financial Modelling and
Analysis: A Practical Guide
A Practical Guide
Private Equity Financial Modelling
and Analysis: A Practical Guide

Edited by
David Whittaker

David Whittaker

E
U
R B
O O
M O
O K
N S
E
Y
Published by
Euromoney Institutional Investor PLC
Nestor House, Playhouse Yard
London EC4V 5EX
United Kingdom

Tel: +44 (0)20 7779 8999 or USA 11 800 437 9997

Fax: +44 (0)20 7779 8300
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E-mail: [email protected]

Copyright © 2013 Euromoney Institutional Investor PLC

ISBN 978 1 78137 093 3

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Contents

Introductionxi
Acknowledgementsxv
About the author xvii

1 Planning, controlling and analysing the fund 1

Financial modelling best practice 2
Scope5
Designing the financial model  7
Layout7
Layout exercise 8
Timeline8
Timeline exercise 8
Forecast – cash flows 9
Forecast – cash flows exercise  9
Cash flow summary 9
Cash flow summary exercise  9

2 Preparing a compelling business plan 11

Executive summary 11
Nature of business 12
Mission statement 12
Résumés of the senior team 12
Short, medium and long-term objectives 12
Operational plan 12
Market size and opportunity 13
Market segmentation 13
Details of current competitors 13
Environmental threats 13
How we plan to sell and promote our services? 13
Investment required and financial projections 14

3 Pre-investment modelling and analysis 15

Different types of private equity transaction 15
Buyout15
Development capital 15
Growth capital 15
Venture capital 15
Turnaround capital 15
Buyout capital financial modelling and analysis implications 16

v
Contents

Development capital financial modelling and analysis implications 16

Growth capital financial modelling and analysis implications 16
Venture capital financial modelling and analysis implications 16
Designing the financial model 19
Layout19
Layout exercise 24
Timeline24
Timeline exercise 24
Direct service costs 25
Direct service costs exercise 25
Calcs – existing 25
Calcs – existing exercise 26
Calcs – Contract 1 – Monthly Fcst 26
Calcs – Contract 1 – Monthly Fcst exercise 27
Order book calculation 28
Order book calculation exercise 28
Graph data 28
Graph data exercise 28
P&L Existing – Monthly Fcst 28
P&L Existing – Monthly Fcst exercise 28
P&L Contract 1 – Monthly Fcst 29
P&L Contract 1 – Monthly Fcst exercise 29
BS Existing – Monthly Fcst 29
BS Existing – Monthly Fcst exercise 29
BS Contract 1 – Monthly Fcst 29
BS Contract 1 – Monthly Fcst exercise 29
CF Contract 1 – Monthly Fcst 30
CF Contract 1 – Monthly Fcst exercise 30
CF Total Monthly Fcst 30
CF Total Monthly Fcst exercise 31
P&L Total – Annual 31
P&L Total – Annual exercise 31
B Sheet Total – Annual 31
B Sheet Total – Annual exercise 31
CF Total – Annual 31
CF Total – Annual exercise 32
P&L Total – Quarterly 32
P&L Total – Quarterly exercise 32
B Sheet Total – Quarterly 32
B Sheet Total – Quarterly exercise 32
CF Total – Quarterly 32
CF Total – Quarterly exercise 33
Summary33
Summary exercise 33

vi
 Contents

Contract KPIs 33
Contract KPIs exercise 33
Order book 33
Order book exercise 34
Graphs34
Graphs exercise 34
Graphs – pre financing cash 34
Graphs – pre financing cash exercise 35
Checks35
Checks exercise 35
Scenarios35
Scenarios exercise 36
Replicating the logic for the 39 additional contracts 36
Replicating the logic for the 39 additional contracts exercise 37
Finalising the private equity start up business planning financial model 37
Exercise finalising the private equity start up model 40
Sources of error 40
Self testing the model 40
Top level analytical review 40
Key output review 42
Flex and sensitivity review 54
Exercise self-testing the financial model 55
Using the model 55
Disclaimers55
Valuing the company 56
Asset-based valuations 56
Free cash flow 58
Multiples-based approaches 59
Terminal value 61
Enterprise value 62

4 Leveraged buyouts 64
Designing the financial model 66
Layout66
Layout exercise 67
Timeline67
Timeline exercise 68
Sales – Costs – Accounting 68
Sales – Costs – Accounting exercise 68
Financing and working capital 69
Financing and working capital exercise 69
Taxation69
Taxation exercise 71
Returns analysis 71

vii
Contents

Returns analysis exercise 71

Lender ratios 72
Lender ratios exercise 72
Profit and loss 72
Profit and loss exercise 72
Balance sheet 73
Balance sheet exercise 73
Cash flow 74
Cash flow exercise 74
Summary74
Summary exercise 74

5 Post-investment financial and performance management 75

Activity-based costing 77
Activity-based costing exercise 78
Capital budgeting 78
Capital investment appraisal exercise 81
Monthly cash flows 81
Monthly cash flows exercise 81
Capital rationing 81
Capital rationing exercise 82
Unequal project lives 82
Unequal project lives exercise 82
Weighted average cost of capital 82
Weighted average cost of capital exercise 83
Post monitoring the private equity investment 83
Post monitoring the private equity investment exercise 84

6 Distressed debt and the restructuring of leveraged buyouts 85

Improve business performance 86
Reschedule debts 87
Leveraged buyouts – strategic disposals 88
Leveraged buyouts – strategic disposals – exercise 89

7 Maximising value through exit strategies 90

Initial public offering 90
Initial public offering exercise 92
Sale to a corporate 92
Disposal93
Disposal exercise 94
Secondary private equity transaction 94
Recapitalisation95

viii
 C ontents

8 Using Excel VBA 99

Protect functionality 101
Unprotect functionality 101
Menu functionality 102
Auto open functionality 105
Auto close functionality 105
Using a timeout facility for demo financial models 106
Unhide sheets 108
Hide sheets 108
Exercise Excel VBA 109

9 Reviewing and auditing private equity financial models 110

Limited scope financial model reviews 110
Design review 111
Analytical review 111
Degree of integration and reconciliation of financial statement forecasts 111
Flex testing and sensitivity review 112
Parallel or shadow modelling 113
Macro review 113
Exercise self-testing your private equity financial model 114
Financial model audits – private equity financial models 114
Scoping118
VBA macros 136
Work plan 136
Coding review 138
Analytical review 140
Data book and legal documentation 140
Tax141
Accounting141
Review comments 141
Iterations and base case clearance process 141
Sensitivities141
Second senior review 141
Partner sign off 142

10 Sensitivity analysis 143

Data tables 143
Scenario manager 143
Goal seek 144
Risk exercise 145

Conclusion147
Glossary149

ix
Introduction

This book has been specifically written to address the financial modelling and analysis needs
for private equity transactions and portfolios. Private equity can be defined as investment
in private company transactions. Readers may currently be at the beginner or intermediate
level. However, this book is also useful for managers who require a further understanding
of the process without having to perform the actual role day to day. The major areas which
require analysis are addressed by the use of relevant extracts of a demonstration financial
model for example purposes. The reader will be able to go through the process of building
the financial models on a step by step basis with reference to the example exercises at their
own pace, providing an excellent source of skills transfer.
It is important to note that the figures or the Excel example logic used in this book do
not represent any past, current or indeed future private equity transactions or projects of
any kind. The numbers and results contained herein are purely fictional.
This book includes a series of Illustrations. It is important to note that some Illustrations
are provided as part of the book’s text and others are provided as Excel examples separately.
We will now explain the private equity transaction process.

• Fund raising. This involves the process of the fund manager, that is, the general partner,
creating a private equity fund through the investment of its limited partners who are
typically its investors. The capital is raised typically from private investors (wealthy indi-
viduals), companies, pension companies and financial institutions.
• Preliminary analysis and review. The preliminary review stage is all about developing the
initial dialogue between the management team and the private equity investment team.
This will involve presentations and analysis by both parties.
• Valuation. The valuation process is the stage of placing a purchase price on the business
target. There are various techniques that could be used in provide a range of the upper
and lower valuation levels. We will see later in this book that this is an art not a science.
• Structuring. There will be the need to structure the transaction in terms of its long term
financial structures and usually incentivise the management team with equity and bonuses
based upon achieving certain performance targets.
• Due diligence. This is an independent review of a target company on behalf of its poten-
tial investors. The scope of such a review includes the business plan, material financial

xi
Introduction

Illustration 1
The private equity business model

Fund raising

Preliminary review
and analysis

Valuation

Structuring

Due diligence

Transaction

Post investment –
performance management

Source: Modelling Solutions

information and opinions. It is extremely important that any investor is aware of the
potential risks and opportunities of the target company.
• Transaction. This is a stage of the process which includes the production of legal documen-
tation in order to support the transaction. This may include the shareholder agreements,
the lenders agreements and possibly the update of the management team’s remuneration
package in order to incentivise. The key financial terms should of course be reflected in
the financial forecasts and modelling.
• Post investment. This involves the ongoing implementation of the business plan, regarding
forecasts, budgeting and performance management. There will be methods of performance
management between the investment team and the management team. This will involve
a member of the investment team working with the portfolio company’s board of direc-
tors. This will be facilitated through regular reporting and progress meetings between the
portfolio company and the investment company.
• Exit strategy. This involves the shareholders in a portfolio company selling part or all
of their holding. There are numerous methods of exit which are available such as initial
public offering, sale to a corporate, secondary leveraged buy outs, and recapitalisations.

xii
 Introduction

Private equity could often be a good source of funding for a private company seeking to
grow. Private equity can be defined as a source of finance which provides equity capital for
non-publicly traded companies. In a typical leveraged buyout deal the private equity firm buys
the majority of the private shareholding of an existing company. This can be differentiated
from venture capital where the private equity firm typically invests in start up companies
and does normally take a majority shareholding.
The corporate has the following advantages when undertaking a private equity
based transaction.

• This type of funder will be committed to the business due to their vested interest and the
need to make attractive returns on their exit.
• A private equity firm has the ability to bring in valuable skills, contacts and experience
to the business. They often provide a member of the firm who will sit on their board and
assist the corporate with strategic decision making and direction.
• The private equity firm will have an exit date in mind which will allow the corporate to
manage and grow a viable firm from that date in the future.

The corporate has the following disadvantages when undertaking a private equity
based transaction.

• It may be a time consuming process, such potential investors will seek information on
the business and its past results, forecasts and plans.
• Due to a person from the private equity firm sitting on the board the corporate is likely
to lose decision making power.
• After projecting the target company’s financial position and ensuring that the lenders
covenants are not breached there is a requirement to ensure that the sponsor, typically the
private equity firm has sufficient returns given the equity contribution and the acquisition
price of the company. Sponsors and private equity firms have typically looked for around
19% to 20% minimum returns on exit of the company. Although the private equity firm
may consider an exit strategy through IPOs or other strategies it is typical that the exit
occurs through a sale in a three to seven year time frame. Consequently, our financial
analysis from a sponsor’s viewpoint will consider the key variables of equity percentage,
exit date, multiples and the effect upon the internal rate of return (IRR).

xiii
Acknowledgements

I would like to dedicate this book to my daughter Daniella Whittaker, who at the time of
my writing this third book started school a few weeks ago at the age of four years. I look
forward to the day that she acquires the skills to read and appreciate my work.
I also dedicate this book to my parents and grandparents who have all been inspirational
in my life, education and professional achievements.

xv
About the author

David Whittaker is the Director of Modelling Solutions. He is a Chartered Management

Accountant, Practising Certificate Holder and a financial modelling solutions provider, who
has two decades of experience within financial modelling for commerce, industry, public
sector and the big four financial modelling practices. He has led several financial modelling
training courses and seminars for corporate finance. Modelling Solutions provide Excel-based
financial modelling services to organisations for private equity, corporate finance, project
finance, PPP and PFI. They also provide interims to organisations that require financial
and business managers with strong financial modelling and analysis skills, together with the
appropriate soft skills.

www.modellingsolutions.co.uk
www.david-whittaker.co.uk
www.skills-financial.com

xvii
Section 1

Planning, controlling and analysing the fund

It is apparent to us that a private equity investment company has a number of portfolio

companies albeit in different sectors that it invests in. This would in itself lead to the invest-
ment and management of a portfolio of investment companies. Indeed finance portfolio
management theory can be applied to such a situation.
Before we turn to the practical application of portfolio management let us first discuss
the concepts. The objective of portfolio management is to maximise the portfolios expected
return or internal rate of return (IRR) for a certain amount of risk by investing and managing
various assets. So, essentially, a diversified portfolio is likely to achieve such an objective.
However, the question arises how does one achieve a diversified portfolio? Of course, a
collection of assets or portfolio companies are more likely to reduce risk than a single asset
or company. However, the level of diversification goes further if the cash flows attributable
to each portfolio company are negatively correlated. In simple terms, the negative effect of
one company’s downside will be offset by another company’s upside. However, it is apparent
that correlations between asset classes are not fixed, but can depend upon external market
conditions. However, according to Markowitz the thought leader of modern portfolio theory,
an efficient portfolio is one that has the highest return for a given risk or the lowest risk
for a given reward.
There are certain financial modelling and analysis techniques that are applicable when
looking at the portfolio funds planning and analysis. These can be categorised as follows.

• Identifying key performance indicators.

• Long range forecasting.
• Review of actual performance to forecast and budget.

Before progressing to the financial planning and analysis let us consider how private equity
funds actually work.
Investors who provide capital into a private equity fund are known as limited partners.
Fund managers are known as general partners. Cash flows around the private equity fund
in the following manner.

• Committed. This represents the amount of capital that an investor has contractually agreed
to provide to the private equity fund under the limited partnership agreements.
• Invested. This represents the amount of committed capital that has been drawn down and
invested in portfolio companies.
• Drawn. This represents the amount of committed capital that has been drawn down and
invested in portfolio companies and also cash that is required for fees and expenses.
• Distributions. This represents the process of a private equity fund paying money to its
investors after exiting the portfolio company.

1
Private Equity Financial Modelling and Analysis

The key performance indicators actually used to manage a private equity fund include
the following.
Typically, fund performance is measured by calculating its limited partner’s IRR from
inception of the fund to date. It is usual that a J-curve relationship is shown over the time
of the investment and the IRR at that point in time, that is, progressing from negative to
positive as the investments are exited and distributions are made.
In terms of benchmarking the performance of a fund against the rest of the private equity
asset class, returns are measured on a vintage year basis. The vintage year IRR represents
measurement from the year that the fund was formed until a certain date. This will allow
funds in the private equity industry to be measured directly with other funds of the same age.
Given the background above let us move on to the financial modelling and analysis
needs that are typically required to plan and control the fund.
We will now go through the process of building a portfolio planning financial model.
The approach that is taken is step by step referring to Excel financial model extracts.

Financial modelling best practice

A recommended approach to financial modelling best practice (FMBP) is shown in
Illustration 2.
A structured approach which should ideally be adopted is often referred to as FMBP. It
is because the financial modelling for private equity transactions is high risk due to the fact
that millions of pounds are involved with a number of complex calculations and arrange-
ments that a structured approach is desired.
We recommend that a FMBP approach is applied to all financial modelling projects, not
just private equity financial modelling projects.
Let us walk through Illustration 2 and discuss how FMBP relates to our need to build
and rely upon the results to be derived from our private equity portfolio planning model.
In the scoping stage, we will first take a look at stating the purpose of the model. The
purpose of the model here is to prepare forecasts to provide financial projections of a private
equity firm portfolio fund over a 10 year planning horizon.
In terms of the key output schedules that are required these would be the cash flow
forecast usually monthly over a 10 year forecast period. The main key output would need
to be the IRR for each portfolio company and the portfolio as a whole.
The following critical areas will also need to be thought about at the scoping stage.

• Sensitivities or scenarios, that is, the ability to flex the company’s assumptions and observe
the impact upon the results in the base case should be derived from the private equity
investor’s risk assessment process. The major business and financial risks should always
be defined as sensitivity cases and the impact measured and mitigated accordingly.
• The timescale that you have for your private equity portfolio modelling project given
where you are is critical given the size of the scope or type of resource required. For
example, if time is tight you may want to limit the outputs of your model to a bare
minimum and ensure that you use an experienced modeller on the project, who is able
to close out the work efficiently.

2
 Planning, controlling and analysing the fund

Illustration 2
Financial modelling best practice
• Purpose • Sensitivities • Timescales
Scope
• Key outputs • Functionality • Periodicity

Specify • Specification document • Sponsors buy in

Design • Excel? • Workbooks? • Modularisation

• Inputs/calcs/outputs • Unique formula

Build
• Simple formula • Check sums

Document • User and technical • Data book

Version
• Analytical review • Key outputs review
control Test
• Sensitivities
Change
control
Use • Handover session

Source: Modelling Solutions

• Functionality refers to the need to have special facilities in the model over and above the
basic calculations. An example of this would be any required optimisation or perhaps
data table functionality.
• At the specification stage, it is advisable to prepare a document that considers the purpose
of the model, key outputs, material calculations and assumptions as highlighted in the
scoping stage above. An example of a template that can be completed in order to scope
and specify the financial model can be seen by referencing Illustration 5.
• Moving on to the design stage, its often important to consider whether Microsoft Excel
is the best platform for this modelling and given the nature of private equity projects the
answer to this point is almost always a yes with 99.9% certainty. Consider how many
Excel workbooks are required? And given our knowledge and experience of private equity
modelling, normally the single Excel workbook will suffice. However, a very important
consideration is the models structure and layout. We prefer to adopt a modular approach
reflecting the sheet names which are labelled with common sense names.

3
Private Equity Financial Modelling and Analysis

From experience, we have often witnessed financial staff and modellers jumping straight into
the build stage and indeed many best practice methodologies ignore the other processes or
stages associated with FMBP outlined in this book.
However, once you are at your keyboard at your copy of Microsoft Excel, we recom-
mend that the following simple concepts are adopted. The first principle is to keep a clear
separation of inputs, calculations and outputs. More simply, try to design the model so that
it reads like a book from left to right. Where you cannot avoid including calculations with
your inputs, please ensure that you protect the calculation cells appropriately. The second
principle is to only use one unique formula in a row. What this exactly means is the logic
placed in the first column should be copied across all columns of a timeline. This makes it
both easier for you and others to review your formulae. Third, in order to ensure logical
accuracy along the way we recommend many cross checks and audit checks are placed in
the model. Some obvious ones are balance sheets balancing, cash flows equalling the move-
ment in the balance sheet cash, net profits equalling the movement in the balance sheet
retained earnings, amongst many others that could be cited. Our final pointer is to try to
keep your formula as simple as possible and your labels as clear as possible. However, it
is also recognised that it is often difficult to have very simplistic formulae when a financial
model builder is trying to gain flexibility in respect of the calculations and assumptions in
the financial model. Again, we recommend that a balanced approach is adopted.
Documentation refers to the need to produce user and technical documentation.
The testing and the use of the model will also be more fully discussed in Section 9 on
testing the model.
Our further recommendations are that both version and change control logs are kept in
your model. First, ensure that each model version has a sequentially numbered suffix at the
end of the Excel filename (for example, financialmodelV1.xlsx) and where timing permits
log the differences between each model version in the models version control sheet. Please
see Illustration 3. Second, you can use the model’s change request log for changes requested
or work outstanding and their status. Please see Illustration 4.

Illustration 3
Version control

Number File name Date Changes/comments Modeller’s name

1
2
3
4
5
6
7

Source: Modelling Solutions

4
 Planning, controlling and analysing the fund

Illustration 4
Change control

Number File name Date Change request Modeller’s name Status

details
1
2
3
4
5
6
7
8
9
10

Source: Modelling Solutions

We will now go through the process of building private equity portfolio planning financial
model. The approach that is taken is step by step referring to Excel financial model extracts.

Scope
Obviously, given the discussions regarding FMBP outlined above, our starting point for the
purposes of this book is to define the scope of our private equity financial model build project.
First, we need a financial projection model that is capable of taking the latest historic
cash flows and integrating the actual results with the monthly forecasts.
Second, we require IRR calculated for each portfolio company and the portfolio as
a whole.

Illustration 5
Specification template
Specification V1
The Financial Model for the Project Xxxxxxxxxxxxxxxx Forecasting Purposes

Contents

Objective of the model ............................................................................................................................ page x

Users of the model .................................................................................................................................... page x

Continued

5
Private Equity Financial Modelling and Analysis

Illustration 5 continued

Output schedules required ..................................................................................................................... page x

Material calculations .................................................................................................................................. page x
Input data ...................................................................................................................................................... page x
Functionality required ................................................................................................................................ page x
Appendices .................................................................................................................................................... page x

Objective of the model

The model will be used for 10 year monthly cash flow forecast for portfolio planning and
control purposes.
The following outputs should be produced.
∑∑ Cash flow.
∑∑ Summary sheet with the IRR calculated over the life of the fund by investment.
Appendix A shows the outputs outlined above.

Users of the model

The model will be owned and used by xxxxx xxx and his team.

Output schedules required

The output schedule formats are outlined in Appendix A.

Material calculations
∑∑ Flexible dates for Investments.
∑∑ Flexible dates and scenarios for distribution amounts.
∑∑ Specify others.
∑∑ Specify others.

Input data
The inputs are as required to be derived from the models outputs and calculations and MS
will define these.
More specifically. TBA

Functionality required
∑∑ User menu bars for navigation. TBA
∑∑ Defined sensitivity cases. TBA
∑∑ Any optimisations. TBA
∑∑ Any other areas. TBA

Appendix A
Output schedules
∑∑ Cashflow format. TBA
## Attach specimen outputs

Continued

6
 Planning, controlling and analysing the fund

∑∑ Key output summary. TBA

## Attach specimen outputs

Appendix B
Input schedules
The inputs are as required from the models outputs and calculations and Modelling Solutions
will define these where they have not been outlined.

Source: Modelling Solutions

Designing the financial model

Again, given the discussions regarding FMBP outlined above, our next stage is to define the
design for our private equity portfolio model.
It is obvious that our financial model can and will be built in Excel. Any version from
Excel 2007 onwards will be suitable for our requirements. One workbook is all that is required
and we will design our model on a modular basis breaking down the key areas of the logic.

Layout
The next stage is to define the structure of the private equity portfolio planning model in
Excel, starting with the outputs and working back to the required inputs. This enables the
modeller to complete the logic and define the inputs and collect them.
The example outlined in Illustration 6 (see Illustration6.xlsx) shows a layout of the
financial model which will allows us to complete the build.
The financial model layout includes administration sheets at the front, followed by yellow
sheets for inputs, the intermediate calculations sheets are in green, and the output sheets are
in blue. The colour scheme adopted visually presents us with an increase of colour shading
from left to right in the form of white, yellow, green and blue. This is a standardised model
layout that we adopt for all our financial model build projects. You will notice that the
sheets are organised on a modular basis given the scope and purpose of the financial model.
The sheet names are clear and self-explanatory. Where there is an exception to this rule
please refer to the model layout listing in Illustration 6, which explains the purpose of each
sheet. Essentially, the input and calculations are in worksheets where you would logically
expect to find them. You will notice that the output schedules are already included as it is
quite standard to have agreed these with the end client at this stage in the financial model
build project.

7
Private Equity Financial Modelling and Analysis

Illustration 6
Layout

Worksheet name Description

Cover This represents the cover with the disclaimer
Version control This represents the version control log
Change control This represents the change control log
User and technical document This represents the documentation for maintaining and updating the model
General inputs This represents the general input assumptions
Actual – cash flow This represents the area for updating the actual cash flows
Forecast – cash flow This represents the cash flow over the 10 year forecast period
Cash flow summary This is the actual and forecast cash flows integrated
Output summary This is the forecast IRRs for the portfolio

Source: Modelling Solutions

When you cross reference the narrative above to the illustration it is plain to see that
the names used in our layout appear to be relatively self-explanatory and straight forward.
This is what one would expect to find from undertaking such an approach.

Layout exercise
You are now ready to start building your private equity portfolio planning model in your
copy of Excel. Please prepare the model layout by using the same sheet layout and output
schedules as used in the example.

Timeline
We will now compute the timeline for the private equity portfolio planning model. We will
now go through the logic of this module with reference to Illustration 7 (see Illustration7.xlsx).
The model start date for the first forecast dates (Portfolio fund start date and Actual
Period Ending) are defined in the General Inputs sheet by the use of a dropdown box which
has been set up using a date range. The range of dates used for selection is located in column
AI. The first date of each monthly interval is calculated and linked to the dropdown box
by selecting data, validation, allowing the list and selecting the range.

Timeline exercise
For the financial model that you have built to date please add the following logic to compute
the logic for the model’s timeline. Use the ‘EOMONTH’ formula to automate the monthly
timeline for the green calculation modules and the blue calculation modules.

8
 Planning, controlling and analysing the fund

Forecast – cash flows

We now need to forecast the future cash flows for our financial model.
We will now go through the logic of this module with reference to Illustration 8 (see
Illustration8.xlsx).
From rows 13 to 24, we can see the invested funds. The formula in D14 has been
replicated to the appropriate range. The formula references from the General Inputs sheet
and has been fitted to the timeline by the use of the ‘SUMIF’ formula.
Management fees are calculated quarterly as in the formula in D27 which references
the appropriate month in order to calculate a quarterly fee as a percentage of the fund size.
Distributions, that is, the receipts from exiting the portfolio companies are calculated in
rows 39 to 50. The formula in cell D40 uses a combination of ‘SUMIF’, ‘HLOOKUP’ and
‘CHOOSE’ in order to access the distribution cash flow at the correct date for the correct
scenario base case to case 5.

Forecast – cash flows exercise

For the financial model that you have built to date please add the following logic to
compute the forecast cash flows. Please add the investment, management fees and distribu-
tion cash flows.

Cash flow summary

We now need to need to integrate the future cash flows with the actual cash flows for our
financial model.
We will now go through the logic of this module with reference to Illustration 9 (see
Illustration9.xlsx).
Rows 14 to 23, shows the integration of the invested cash flows over the monthly
timeline by the use of the ‘SUMIF’ formula by accessing both the ‘Actual-Cash flows’ and
‘Forecast-Cash flows’ sheets.
Rows 27 to 36, shows the integration of the management fees cash flows over the monthly
timeline by the use of the ‘SUMIF’ formula by accessing both the ‘Actual-Cash flows’ and
‘Forecast-Cash flows’ sheets.
Rows 40 to 49, shows the integration of the distribution cash flows over the monthly
timeline by the use of the ‘SUMIF’ formula by accessing both the ‘Actual-Cash flows’ and
‘Forecast-Cash flows’ sheets.
The net monthly cash flows are shown in rows 53 to 62. The IRR is computed in the
block below by the use of ‘XIRR’ when the first date of investment is made.

Cash flow summary exercise

For the financial model that you have built to date please add the following logic to compute
the cash flows summary. Please add the investment, management fees and distribution cash
flows, net cash flows and IRRs from the date of first investment. Insert an additional sheet

9
Private Equity Financial Modelling and Analysis

and name it ‘Summary’. Link the IRRs and change the Case Selected in the General Input
sheet and observe the change in the IRR results from realising different distributions on exit
of investments in the portfolio.

10
Section 2

Preparing a compelling business plan

It is essential that any business or management team that seeks private equity based financing
are able to prepare and present a compelling business plan. Of course, the business plan-
ning document’s main purpose when raising finance is to sell the business proposal to the
private equity firm. In essence, the company or management team will have to demonstrate
that by investing in the venture you can provide the private equity firm an excellent return
from a compelling business.
The business planning document should address the nature of the business, its targets,
understand the market size and opportunity, consider how it would deliver its products
or services, how it will sell and promote its products or services, understand its relative
strengths and weaknesses in relation to its competitors, potential threats from its environ-
ment, the financial projections demonstrate a viable business and outline the investment
need and size.
The business plan should be prepared by the company’s management. The objective is
that the plan is owned by the management team. The targets included should be challenging,
clear and achievable. The private equity firm is seeking an understanding of why your busi-
ness opposition is unique and why they believe that it will be a success.
It is critical that the business planning document is prepared to a high standard and
contains all the areas that are required by a private equity firm before it is presented.

Executive summary
This provides readers with a high summary of your business plan. Of course, it must be
placed at the front of the document. It should address the following headings.

• Nature of business.
• Management team.
• Mission statement.
• Market size and opportunity.
• Operational plan.
• Investment required and financial projections.

The executive summary should be no more than two or three pages long and represent no
more than 1,500 words. The words need to deliver a succinct message to the private equity
firm as the attractiveness of this summary will determine how much further interest is shown
from the private equity firm.

11
Private Equity Financial Modelling and Analysis

Nature of business
This section is used in order to outline the product, service or opportunity. Here it is advan-
tageous to spell out the unique selling proposition.

Mission statement
The mission statement should be a clear and succinct representation of the enterprise’s purpose
for existing. For example, an accounting outsourcing firm may exist to provide value added
services at competitive rates.

Résumés of the senior team

It is very important that any company seeking private equity backing is able to demonstrate
that it has the management team that can successfully run the operation. This means a
management team of a Chief Executive, Sales and Marketing Director, Operations Director
and a Finance Director. The investor will be looking for a team that demonstrates comple-
mentary skills and experience that has a track record or clear potential for running the
company successfully. A full CV of each management team member should be added to the
business planning document.
It is highly recommended that you appoint a Non-Executive Director to your board.
Research has proven that such an appointment usually adds strength to your board. It is
usual that the private equity firm would appoint one of its directors to the board.
It is also great if you could outline what procedures the company has in place for
rewarding and evaluating the management.

Short, medium and long-term objectives

It is necessary to identify the number of clients, industry sectors and/or contract targets to
be achieved. It is advisable to show year on year growth. Indeed private equity firms will
expect to see year on year growth in terms of revenue.

At the end of year 1:

At the end of year 2:
At the end of year 3:
At the end of year 4:
At the end of year 5:

Operational plan
Presentation of your operational plan will help to inform the private equity firm how your
management team plans to run its operations, that is, how it will deliver its products or
services and provide certain support functions. In the operational plan you should consider
and outline your organisation structure, the rollout of certain department’s infrastructure
and headcount as the business grows. Do you propose to adopt a regionalised structure for
distribution of your products and services? Where will you locate your headquarters? Is it

12
 Preparing a compelling business plan

advisable to be located in a major city with good transport links and so on? You must in
short be able to demonstrate that you have an efficient operation.

Market size and opportunity

There is obviously the need to sell a credible proposal that is supported by sufficient oppor-
tunity and market size for your business.
You will need to undertake market analysis and research. Both by using desk research tech-
niques and commissioning market research organisations. The following must be addressed.

• Market size. The size of the company’s target market in terms of volumes, pounds and
growth expectations.
• Number of competitors. It is important to get a feel for the degree of competition in your
target market. Clearly, an already tapped market is likely to present a higher challenge
to penetrate than a new market opportunity.
• Barriers to entry. It is advisable to outline how easy it would be for new market entrants
to enter your proposed market. The higher the potential barriers to entry the better for
your opportunity. Examples of potential barriers to entry are perhaps higher capital
investment requirements, government or regulatory requirements amongst many others.
• Client needs. It is important to show a detailed understanding of your client needs and
how they buy and make their decision. It would be advantageous to show who are your
buyers and who can influence them.

Market segmentation
It is also advantageous to show certain segments of your target market and how segmenting
these will lead to improved opportunity and value creation.

Details of current competitors

• Who are your competitors?
• What are their relative strengths and weaknesses in relation to your company?
• What makes your company different to your competitors?
• How can you differentiate your offering in terms of price, service and so on?

Environmental threats
• Legal regulatory matters.
• Other areas?

How we plan to sell and promote our services?

• Qualification: that is, ensure that the clients meet a certain criteria which would represent
a viable business opportunity.

13
Private Equity Financial Modelling and Analysis

• Marketing: the use of promotions and branding.

• Press and media: profile raising.
• Pipeline management: ensure that you always report, plan and control your sales pipeline.
• Prioritisation of market segments: show which target market segments is your priority.

Investment required and financial projections

This is indeed a material part of why this book has been written. It is extremely important that
you demonstrate financially viable projections based upon your business plan together with
an indication of the amount of investment required from the private equity firm. A financial
model will have to be built whereby the outputs will be attached to your business planning
document as an appendix. This is ideally a chance to demonstrate to your potential investor
that the projections provided have a realistic chance of attaining the results demonstrated,
that is, that your company’s plan demonstrates the delivery of the return that the private
equity firm requires. You will be expected to be able to present a set of integrated financial
statements, that is, profit and loss account, balance sheet and cash flow. As the typical exit
period for a private equity transaction is three to five years it is advisable to adopt a five-
year forecast horizon. The annual statements should be backed up by monthly forecasts.
The adoption of financial modelling best practice (FMBP) will help to clearly outline the
assumptions that the forecasts are based upon. The assumptions and their source should be
identified. The key outputs should the revenue growth, EBITDA growth, cash levels, funding
structure the rates of return and exit valuations. Scenario and sensitivity analysis should be
performed upon the key outputs of the transaction. A typical scenario is a low, mid and
high case for the company’s sales or revenue targets.
It is also advisable to outline the financial management and accounting systems and
processes that are in placed to plan and control the investment, that is, budgets and manage-
ment reporting systems.

14
Section 3

Pre-investment modelling and analysis

Different types of private equity transaction

We will now outline the different types of private equity transaction and discuss how these
may influence our financial analysis and modelling approach.

Buyout
The typical characteristics of a buyout transaction, is first that they are leveraged or that they
have a high debt to equity ratio. A buyout transaction is typically undertaken in mature or
decline markets. The shareholder stake that the private equity investor will normally take is
that of a majority shareholder.

Development capital
The typical characteristics of a development capital opportunity, is first that they are not
leveraged with debt. A development capital transaction is typically undertaken in mature or
decline markets. The shareholder stake that the private equity investor will normally take is
that of a minority shareholder.

Growth capital
The typical characteristics of a growth capital opportunity, is first that they are not leveraged
with debt. A growth capital transaction is typically undertaken in growth markets. The share-
holder stake that the private equity investor will normally take is that of a minority shareholder.

Venture capital
The typical characteristics of a venture capital opportunity, is first that they are not leveraged
with debt. A venture capital transaction is typically undertaken in new markets. The shareholder
stake that the private equity investor will normally take is that of a minority shareholder.

Turnaround capital
This is where a company is underperforming or has a distressed debt position. There is no
real set parameter for the funding structure here. Things really need to be done on a case
by case approach ensuring financial viability.

15
Private Equity Financial Modelling and Analysis

Buyout capital financial modelling and analysis implications

A buyout company transaction will have financial history, a current EBITDA, the ability to
forecast its EBITDA, a current actual P&L balance sheet and cash flow. It is likely to be in
the position that comparable company data is available in the industry and therefore reason-
able EBITDA multiples can be applied to existing and future EBITDA levels. Here, there is
a need to value the company at the buyout stage and apply a funding structure, financially
plan and control the company over the investment period until exit in three to five years.
The ultimate return will be determined upon exit of the investment less the net debt.

Development capital financial modelling and analysis implications

A development capital transaction will have financial history, a current EBITDA, the ability
to forecast its EBITDA, a current actual P&L balance sheet and cash flow. It is likely to
be in the position that comparable company data is available in the industry and therefore
reasonable EBITDA multiples can be applied to existing and future EBITDA levels. Here,
there is a need to value the company at the development capital stage and apply a funding
structure which would typically involve a minority capital injection, financially plan and
control the company over the investment period until exit in three to five years. The ultimate
return will be determined upon exit of the investment less the net debt.

Growth capital financial modelling and analysis implications

A growth capital transaction may not have financial history, a current EBITDA, a current
actual P&L balance sheet and cash flow. Of course, there will be the need to undertake
financial projections from a zero base with no previous trading position.
Of course, comparable company data is unlikely to be available in the industry and
therefore reasonable EBITDA multiples can be applied for valuation purposes. Here, there
is a need to value the company at the growth capital stage and apply a funding structure
which would typically involve a minority capital injection, financially plan and control the
company over the investment period until exit in three to five years. The ultimate return
will be determined upon exit of the investment less the net debt.
Growth capital is often structured as either preference shares or equity, although certain
investors will use various debt structures for the company. Often, companies that look for
growth capital funding are not good candidates to borrow additional debt, either because
of the stability and indeed potential volatility of the company’s earnings or because of its
existing debt levels.

Venture capital financial modelling and analysis implications

A venture capital transaction will not have financial history, a current EBITDA, a current
actual P&L balance sheet and cash flow. Of course, there will be the need to undertake
financial projections from a zero base with no previous trading position.
Of course, comparable company data is unlikely to be available in the industry and
therefore reasonable EBITDA multiples cannot be applied for valuation purposes. Here,

16
 Pre-investment modelling and analysis

there is a need to value the company at the start up stage and apply a funding structure
which would typically involve a minority capital injection, financially plan and control the
company over the investment period until exit in three to five years. The ultimate return
will be determined upon exit of the investment less the net debt.
An important aspect of the venture capital investment process is the valuation of the
business seeking outside investment. Following is a basic outline of commonly used valuation
methods for early stage companies. Here, we can use traditional company valuation methods.

Illustration 10
Specification template
Specification V1
The financial model for a start up company looking to raise private equity finance

Contents
Objective of the model ............................................................................................................................ Page x
Users of the model .................................................................................................................................... Page x
Output schedules required ..................................................................................................................... Page x
Material calculations .................................................................................................................................. Page x
Input data ...................................................................................................................................................... Page x
Functionality required ................................................................................................................................ Page x
Appendices .................................................................................................................................................... Page x

Objective of the model

∑∑ The objective of the business planning financial model is to project the accounting and
finance outsource business financial forecasts or projections over a five year horizon on a
monthly basis.
∑∑ The monthly projections are presented on a quarterly and annual basis.
∑∑ The results will be used for both internal management and prospective investors.
Appendix A shows the outputs outlined above.

Users of the model

∑∑ The model will be owned and used by xxxxx xxx and his team.
∑∑ The model will be made available to TBA bank.

Output schedules required

The output schedule formats are outlined in Appendix A.

Material calculations
∑∑ All cost and revenues estimates are provide at today’s prices.
∑∑ The headcount increases are either triggered by a defined date or flexed according to case
load assumptions according to the sales forecasts (deals).

Continued

17
Private Equity Financial Modelling and Analysis

Illustration 10 continued

∑∑ The new contracts direct managed service costs are calculated as follows.
## Staff costs, service provider costs, general costs, are all sized in relation to the typical
cost base given the annual revenue base and projections thereof.
## Bad debts are as a percentage of sales.
## Upfront costs are depreciated as appropriate.
## The contracts are assumed to have cost reduction benefits both pre and post service
centre implementation.
## The shared service centre is assumed to be rolled out at a certain date and attracts cost
reductions direct managed service costs (staff costs, general costs and service provider
costs).
## Corporation tax is currently ignored.

Balance sheet and cash flow calculations

∑∑ Trade debtors are based upon the number of days’ sales outstanding.
∑∑ Trade creditors are based upon the number of days’ purchases (invoiced expendi-
ture) outstanding.
∑∑ Other debtors are based upon a percentage of turnover.
∑∑ Other creditors are based upon a percentage of invoiced expenditure.
∑∑ VAT is based upon quarterly payments made a month in arrears.
∑∑ Fixed assets are depreciated on a straight line basis.
∑∑ Financing is assumed to be 100% equity and is drawn when there is a negative cash before
financing on a monthly basis. Note that this should interpreted with care – that is, whether
the projections are viable, that is, producing positive gross margins, EBITDAs and contract
paybacks. Note an unviable set of projections will require funding but derive unviable returns.

Input data
∑∑ The inputs are as required to be derived from the models outputs and calculations and
MS will define these.
∑∑ More specifically. TBA

Functionality required
∑∑ User menu bars for navigation. TBA
∑∑ Defined sensitivity cases. TBA
∑∑ Any optimisations. TBA
∑∑ Any other areas. TBA

Appendix A
Output schedules
∑∑ Cash flow format. TBA
## Attach specimen Outputs.

Continued

18
 Pre-investment modelling and analysis

∑∑ Profit and loss account. TBA

## Attach specimen Outputs.
∑∑ Balance sheet. TBA
## Attach specimen Outputs
∑∑ Key output summary. TBA
## Attach specimen Outputs.

Appendix B
Input schedules
The inputs are as required from the models outputs and calculations and Modelling Solutions
will define these where they have not been outlined.

Source: Modelling Solutions

Designing the financial model

Again, given the discussions regarding FMBP outlined above, our next stage is to define the
design for our private equity start up business planning model.
It is obvious to us that our financial model can and will be built in Excel. Any version
from Excel 2007 onwards will be suitable for our requirements. One workbook is all that
is required and we will design our model on a modular basis breaking down the key areas
of the logic.

Layout
The next stage is to define the structure of the private equity start up business planning model
in Excel, starting with the outputs and working back to the required inputs. This enables
the modeller to complete the logic and define the inputs and collect them.
The example outlined in Illustration 11 (see Illustration11.xlsx) shows a layout of the
financial model which will allows us to complete the build.
The financial model layout includes administration sheets at the front, followed by yellow
sheets for inputs, the intermediate calculations sheets are in green, and the output sheets are
in blue. The colour scheme adopted visually presents us with an increase of colour shading
from left to right in the form of white, yellow, green and blue. This is a standardised
model layout that we adopt for all our financial model build projects. You will notice that
the sheets are organised on a modular basis given the scope and purpose of the financial
model. The sheet names are clear and self-explanatory. Where there is an exception to this
rule please refer to the model layout listing below which explains the purpose of each sheet.
Essentially, the input and calculations are in worksheets where you would logically expect
to find them. You will notice that the output schedules are already included as it is quite
standard to have agreed these with the end client at this stage in the financial model build
project. In the summary output section you will see the total company P&L, total company

19
Private Equity Financial Modelling and Analysis

balance sheet and cash flow on annual and quarterly basis. A summary sheet will be included.
There is the need to show the contract KPIs, that is, net present value (NPV), internal rate
of return (IRR), payback and so on, on a contract by contract basis. Essential graphs and
checks are also included.

Illustration 11
Layout

Worksheet name Purpose of the worksheet

Cover This is the operating model disclaimer
Version control This is the log which keeps a track between versions
Change control This is the log which keeps a track of change requests
User and technical documentation This is the sheet that contains the operating model documentation
<<<Input sheets>>> The start of the input section
General inputs The general inputs that do not fit in the other input sheets
Scenario – low The sales assumptions for the low case
Scenario – high The sales assumptions for the high case
Model P&Ls – GM This represents the direct contract costs pre and post service centre
Inputs – central overheads Five-year monthly assumptions for central overheads
Inputs – finance Five-year monthly assumptions for finance
Inputs – business development Five-year monthly assumptions for business development
Inputs – delivery Five-year monthly assumptions for delivery
Inputs – shared service centre Five-year monthly assumptions for the shared service centre
Financial statements pre plan The historic total P&L, cash flow and balance sheet
<<<Calc sheets>>> The start of the calculation sheets
Direct service costs The calculation of the direct service costs from operations
Calcs – existing The five-year monthly calculations for the existing contract & central
projections
Calcs – Contract 1 The five-year monthly calculations for the new contract
Calcs – Contract 2 The five-year monthly calculations for the new contract
Calcs – Contract 3 The five-year monthly calculations for the new contract
Calcs – Contract 4 The five-year monthly calculations for the new contract
Calcs – Contract 5 The five-year monthly calculations for the new contract
Calcs – Contract 6 The five-year monthly calculations for the new contract
Calcs – Contract 7 The five-year monthly calculations for the new contract
Calcs – Contract 8 The five-year monthly calculations for the new contract
Calcs – Contract 9 The five-year monthly calculations for the new contract
Calcs – Contract 10 The five-year monthly calculations for the new contract
Continued

20
Worksheet name Purpose of the worksheet
Calcs – Contract 11 The five-year monthly calculations for the new contract
Calcs – Contract 12 The five-year monthly calculations for the new contract
Calcs – Contract 13 The five-year monthly calculations for the new contract
Calcs – Contract 14 The five-year monthly calculations for the new contract
Calcs – Contract 15 The five-year monthly calculations for the new contract
Calcs – Contract 16 The five-year monthly calculations for the new contract
Calcs – Contract 17 The five-year monthly calculations for the new contract
Calcs – Contract 18 The five-year monthly calculations for the new contract
Calcs – Contract 19 The five-year monthly calculations for the new contract
Calcs – Contract 20 The five-year monthly calculations for the new contract
Calcs – Contract 21 The five-year monthly calculations for the new contract
Calcs – Contract 22 The five-year monthly calculations for the new contract
Calcs – Contract 23 The five-year monthly calculations for the new contract
Calcs – Contract 24 The five-year monthly calculations for the new contract
Calcs – Contract 25 The five-year monthly calculations for the new contract
Calcs – Contract 26 The five-year monthly calculations for the new contract
Calcs – Contract 27 The five-year monthly calculations for the new contract
Calcs – Contract 28 The five-year monthly calculations for the new contract
Calcs – Contract 29 The five-year monthly calculations for the new contract
Calcs – Contract 30 The five-year monthly calculations for the new contract
Calcs – Contract 31 The five-year monthly calculations for the new contract
Calcs – Contract 32 The five-year monthly calculations for the new contract
Calcs – Contract 33 The five-year monthly calculations for the new contract
Calcs – Contract 34 The five-year monthly calculations for the new contract
Calcs – Contract 35 The five-year monthly calculations for the new contract
Calcs – Contract 36 The five-year monthly calculations for the new contract
Calcs – Contract 37 The five-year monthly calculations for the new contract
Calcs – Contract 38 The five-year monthly calculations for the new contract
Calcs – Contract 39 The five-year monthly calculations for the new contract
Calcs – Contract 40 The five-year monthly calculations for the new contract
Order book calculations The order book calculations
Graph data The graph data used for plotting the graphs
<<<Output sheets>>> The start of the detailed output schedules
P&L existing – Monthly Fcst The existing contact and central P&L with growth
P&L Contract 1 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 2 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 3 – Monthly Fcst The five-year monthly P&L for the new contract
Continued
Illustration 11 continued
Worksheet name Purpose of the worksheet
P&L Contract 4 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 5 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 6 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 7 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 8 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 9 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 10 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 11 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 12 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 13 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 14 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 15 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 16 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 17 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 18 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 19 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 20 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 21 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 22 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 23 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 24 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 25 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 26 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 27 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 28 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 29 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 30 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 31 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 32 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 33 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 34 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 35 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 36 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 37 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 38 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 39 – Monthly Fcst The five-year monthly P&L for the new contract
P&L Contract 40 – Monthly Fcst The five-year monthly P&L for the new contract
Continued
Worksheet name Purpose of the worksheet
B S existing – Monthly Fcst The existing balance sheet with growth for central
B S Contract 1 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 2 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 3 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 4 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 5 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 6 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 7 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 8 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 9 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 10 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 11 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 12 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 13 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 14 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 15 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 16 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 17 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 18 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 19 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 20 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 21 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 22 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 23 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 24 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 25 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 26 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 27 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 28 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 29 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 30 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 31 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 32 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 33 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 34 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 35 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 36 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 37 – Monthly Fcst The five-year monthly balance sheet for the new contract
Continued
Private Equity Financial Modelling and Analysis

Illustration 11 continued
Worksheet name Purpose of the worksheet
B S Contract 38 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 39 – Monthly Fcst The five-year monthly balance sheet for the new contract
B S Contract 40 – Monthly Fcst The five-year monthly balance sheet for the new contract
<<<Summary outputs>>> The start of the summary output sheets
P&L total – annual Total P&L annually
B sheet total – annual Total balance sheet annually
CF total – annual Total cash flow annually
P&L total – quarterly Total P&L quarterly
B sheet total – quarterly Total balance sheet quarterly
CF total – quarterly Total cash flow quarterly
Summary The summary dashboard
Contract KPIs The contract by contract key financial KPIs
Order book The sales order book over five years
Graphs Five-year key graphs
Graphs – pre financing cash Ten-year graphs cumulative and non cumulative
Checks This represents the cross checks

Source: Modelling Solutions

When you cross reference the narrative above to Illustration 11, it is plain to see that
the names used in our layout appear to be relatively self-explanatory and straight forward.
This is what one would expect to find from undertaking such an approach.

Layout exercise
You are now ready to start to build your private equity start up business planning model
in your copy of Excel. Please prepare the model layout by using the same sheet layout and
output schedules as used in the example.

Timeline
We will now compute the timeline for the private equity start up business planning model.
We will now go through the logic of this module with reference to Illustration 12 (see
Illustration12.xlsx).

Timeline exercise
Please add the appropriate timeline to each of the green calculations sheet and the blue
output sheets on either a monthly, quarterly or annual basis as required.

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 Pre-investment modelling and analysis

Direct service costs

This sheet details some calculations which are necessary to calculate direct cost from opera-
tions. First, the two inflation indices are calculated in rows 13 and 14 on a compound basis,
that is, general costs and wage indexation.
Rows 17 to 57 shows the start flag for each new contract over the life of the monthly
forecast. Column A picks up the contract name from the general inputs sheet. Column B
picks up the start date for service commencement for each dependent upon whether the high,
low and medium case is selected.
From cell D17 onwards tests whether the start of service delivery equals the timeline
month in row 9, if so a 1 is invested otherwise a zero is invested. Range 104 to 145 sched-
ules in the cost for the contract HR resource.
As in the ‘Inputs-Delivery’ sheet the resource is required – three months to one month
from service commencement date. These are required for each contract at £600 a day.
The calculation logic in cell D104 which has been replicated to the range in question,
checks to see if the date is blank then puts a zero. There is a check to see if the timeline
month as in row 9 is greater than or equal to the –3 months from the start of service
delivery by using the ‘EOMONTH’ formula. The phasing of the cost stream stops if the
timeline month ending as in row 9 is less than or equal to one month from start of service
delivery by using the ‘EOMONTH’ formula. If the date of the test falls between the param-
eters then the calculation is made, that is, 20 days a month at £600 a day at the wage
inflation index.

Direct service costs exercise

Please add the logic for a HR resource to start three months before service delivery commence-
ment date for each contract and until nine months post the service commencement date at
£600 a man day and include an inflation index based upon wage inflation and apply this
to your cost projection.

Calcs – existing
This sheet represents the five-yearly monthly calculations for the company’s existing contract
and central projections. Range B11 to B18 links in the contract assumptions for the existing
contract. Row 20 shows the month’s operational flag whereby the existing contract end
date is less than or equal to the date on the monthly timeline, otherwise a zero is used.
Row 21 shows the renewal of the existing contract. The logic works when the timeline is
greater than the existing contract end date, the contract is renewed and the renewal end
date is less than or equal to the monthly timeline in row 9, then a 1 is used, otherwise a
zero is used.
Row 24 shows the revenue for the renewed contract from the renewal date given the
discount granted from current rates. Row 25 shows the revenue from the existing contract.
Indexation is applied from the month of the anniversary of the contract. The total revenue
is calculated for the existing contract and its renewal.

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Private Equity Financial Modelling and Analysis

Calcs – existing exercise

Please add the P&L for the existing contract based upon the assumptions made in the yellow
Sheets please add the contract and central P&L calculations.

Calcs – Contract 1 – Monthly Fcst

We can now turn our attention to Illustration 13 (see Illustration13.xlsx). This shows the
calculations that are specifically for Contract 1. The contract type, go live date and the
contract end dates are referenced in ranges B13 to B15. As the turnover is driven by the high,
low and mid cases for scenario selection purposes each of the three calculations selects the
relative data given the scenario required. Each contract will be allocated a specific contract
number as in cell B2. When the sheet is completed, tested and debugged accordingly it can
be replicated 40 times representing the 40 contracts. In cell A3 the contract name is refer-
enced by the use of the ‘VLOOKUP’ formula.
The deal size calculation selects the deal size number by the use of the ‘RIGHT’ formula,
one character from the right. The revenue a year in cell B17 is referenced from the case
selected, that is, high, medium or low using the ‘SUMIF’ formula.
The anniversary for account growth, cell B18 uses the ‘EOMONTH’ formula to defer
the required to defer the required date by 12 months.
The deal type B19 uses the ‘LEFT’ formula to select one character from the left. The
Account Growth (B20) and revenue indexation type (B21) again uses the scenario selected
to reference the required by the use of the ‘VLOOKUP’ formula.
The revenue percentage a year (B22) is referenced by the use of the ‘VLOOKUP’ formula.
This is also used for the year for the start of the shared service centre.
The revenue – £000s (row 28) – is calculated by references whether the ‘Go Live date’
is greater than or equal to row 9, that is, month end of the timeline, and likewise whether
the contract end date is less than or equal to row 9, that is, the month end of the timeline.
The indexation of the revenue applied in row 29 tests whether the month of the timeline
is equal to the month of the go live date, if so indexation is applied on a compound basis.
Row 30 represents the revenue in nominal terms, simply the multiplication of the base
revenue and the indexation.
The Account Growth (row 31) for deal types B is calculated on a compound basis, the
other two deal types are calculated on a non compound basis.
The nominal revenue is simply the multiplication of the revenue and the account growth index.
The revenue for the case managed service contract (row 34) is the revenue without
the growth.
The out of scope of revenue is the account growth amount.
The Other Income (row 38) is a percentage of the total revenue multiplied by the relevant
percentage given whether a high, low or medium scenario is selected.
The operational timing flag for the contract is scheduled by inserting a one for a relevant
month by considering whether the date is greater than or equal to the go live date or less
than or equal to the contract end date.

26
 Pre-investment modelling and analysis

The direct managed service costs that are directly controllable, that is, staff costs, service
provider costs and general costs are sized relative to the annual contract revenue.
The Contract Size (row 43) the total monthly turnover is computed on annual
equivalent basis.
The base contract size is referenced for sizing purposes.
The indexation in row 46 uses compound inflation principles which is triggered by
referencing the month of May.
The operational month flag looks for the months whereby the go live date and contract
end date are greater or equal to and less than or equal to the monthly baseline.
Row 52 to 81, rows 93 to 122 and rows 132 to 161, calculates the timing and percentage
cost reductions from the three different phases, that is, panel optimisation percentage cost
reduction from the three different phases.
The different phases represent the panel optimisation (reducing the degree of bought out
resource), process optimisation (pushing less complex tasks down to lower graded cheaper
staff) and the cost reductions associated with using a shared service centre.
The totals at rows 84, 123 and 163 simply take the base line cost multiplied by the
indexation and discounts the cost by the cost reduction percentage attributable to the phased
achieved, together with other cost reductions.
Bad debts calculated in row 165 is simply the total turnover multiplied by the bad debts
as a percentage of turnover assumption.
Rows 169 to 185, shows the acquisition cost associated with the contract. The acquisi-
tion costs will start from the ‘implementation date’ as in cell B14.
Any incentive payment (row 171) will be phased in the timeline as at the
implementation date.
Any one-off entitlement under the existing staff contracts such as a Beckmann liability
and one-off redundancy costs (row 173 and row 175) are phased in the timeline at the
implementation date.
With many outsourcing contracts there is the need for financial due diligence. This is
calculated as a percentage of the contract size.
Business process outsourcing (BPO) consultancy, systems costs and consultancy costs are
included as a number of months from transition.
The IT cost for each head of staff that is taken over as part of the outsourcing arrange-
ment is also considered in the next row.
Rows 311 to 332 highlighted in blue represents the outputs that are used in the financial
statements, that is, profit and loss, balance sheet and cash flow.
First, the turnover, direct costs, bad debts and amortisation and depreciation are referenced
for P&L purposes. The balance sheet lines are referenced accordingly in rows 319 to 326.
The cash flow items representing the balance sheet forecast movements in working capital
balances and specific cash flow amounts are shown in rows 327 to 332.

Calcs – Contract 1 – Monthly Fcst exercise

Please add the P&L, cash flow and balance sheet calculations for the first contract that can be
replicated for an additional 39 future contracts and the inputs changed for each specific contract.

27
Private Equity Financial Modelling and Analysis

Order book calculation

We can now turn our attention to Illustration 14 (see Illustration14.xlsx).
An order book shows what contracted sales value a company has on hand and repre-
sents committed or contracted sales or order at a point in time. This is usually a critical
measure of success of a company. Indeed an order book is a material contributory factor
for commercial and financial success or failure.
Calculations are made monthly across the timeline. Column A shows the existing contract
plus the 40 potential contracts linking from the General Inputs sheet.
The go live date shown for each contract in column B is calculated by the use of the
selected case, that is, high, low or medium cases using the ‘VLOOKUP’ formula and the
‘IFERROR’ formula for error handling needs.
From C15 to GA55, A 1 represents a flag which indicates where the go live date exceeds
or is equal to the timeline date in row 9.
In rows 59 to 101 we have linked in the total revenue projected from each of the
contract P&Ls.
In rows 105 to 145 the revenue from the particular month is projected until the end
of the forecast.
In row 148 the order book £000s sums the future revenue where the contract is committed
and part of the order book. This is done by using the ‘SUMIF’ formula to include the
contracts future revenue where a 1 is present.

Order book calculation exercise

Please calculate the order book calculation linking the projected revenue from the date of
committed contract timing.

Graph data
We can now turn our attention to Illustration 15 (see Illustration15.xlsx). This is simply a
referencing sheet for graph plotting purposes.

Graph data exercise

Please reference the graph data for sales, order book, EBITDA, net profit, cash flow and
cash flow before financing.

P&L Existing – Monthly Fcst

We can now turn our attention to Illustration 16 (see Illustration16.xlsx). The P&L Existing
– Monthly Fcst is simply a link to the existing calculations sheet.

P&L Existing – Monthly Fcst exercise

Please link in the P&L existing on a monthly basis from the existing calculations sheet.

28
 Pre-investment modelling and analysis

P&L Contract 1 – Monthly Fcst

We can now turn our attention to Illustration 17 (see Illustration17.xlsx).
A summary P&L is constructed for each contract on a monthly basis over the life of the
contract. The total turnover and total direct managed service costs are directly sourced from
the total sheet in the Calcs-Contract 1 Sheet. Rows 27 to 29 show very simply calculations
for the gross margin, gross margin percentage and EBITDA.
The logic for this sheet and module can be duplicated for the purposes of forecasting
Contracts 1 to 40.

P&L Contract 1 – Monthly Fcst exercise

Please link in the calculations from the Contract 1 calculations sheet to compute the monthly
calculations for P&L.

BS Existing – Monthly Fcst

We can now turn our attention to Illustration 18 (see Illustration18.xlsx).
This sheet simply references the Calc Existing sheet at the bottom in order to present the
forecast balances on a monthly basis. The exception to this is that the budget is referenced
in column C from the Financial Statements Pre Plan sheet.
Row 50 represents the balance sheet reconciliation check, that is, whether the net assets
equals the total shareholders’ equity.

BS Existing – Monthly Fcst exercise

Please link in the calculations from the existing calculations sheet to compute the monthly
calculations for the balance sheet.

BS Contract 1 – Monthly Fcst

We can now turn our attention to Illustration 19 (see Illustration19.xlsx).
This sheet simply references the Calcs – Contract 1 sheet at the bottom of the sheet in
order to present the forecast balances. Row 50 represents a check to see if the balance sheet
reconciles, that is, whether the net assets equals the total shareholder’s equity.
Row 51 checks whether the retained profit movement equals the profit and loss for
the month.

BS Contract 1 – Monthly Fcst exercise

Please link in the calculations from the Contract 1 calculations sheet to compute the monthly
calculations for balance sheet.

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Private Equity Financial Modelling and Analysis

CF Contract 1 – Monthly Fcst

We can now turn our attention to Illustration 20 (see Illustration20.xlsx) and to the CF
Contract 1 – Monthly Fcst example.
Here, we can see the contract cash flow which can also be replicated to all 40 potential
contracts for financial forecast purposes. First, the EBITDA is linked directly to the profit
and loss account for the contract.
Rows 14 to 21 are linked directly to the bottom of the Calcs Contract 1 page. More
specifically, you will notice that in row 22, new equity will be activated at the contract level
only if the equity funding mechanism is set to contract cash as required.
The net increase in cash and cash equivalent is simply the sum of all the cash flows above.
Row 27 reconciles the closing cash position generated by the forecasts to the balance
sheet accordingly.
Row 31 calculates the contracts net present value (NPV). This is calculated by using the
‘XNPV’ formula when the funds are first invested into the contract. The ‘XNPV’ references,
the monthly timeline and discounts the cash flow before financing at the specific discount rate.
Row 33, calculates the contracts internal rate of return (IRR). This is calculated by using
the ‘XIRR’ formula when the funds are first invested in the contract. The ‘XIRR’ formula
references the monthly timeline and finds the discount rate or cost of capital where the NPV
equals zero, given the cash flow before financing.
The payback date (undiscounted) is calculated in rows 37 to 39. First, the cash flow
before financing is accumulated to the month in question.
Row 38 calculates the payback flag, that is, by the use of an if statement that tests
that both the previous months cumulative cash flow is negative and the current month’s
cumulative cash flow is positive. If both conditions are met a 1 is returned. The payback
date (undiscounted) is calculated in row 39. If row 38 is equal to 1 the date in row 9 is
selected. You will notice that the formula in B39 uses the maximum of the months range.
This will help to identify the real payback date in the event of multiple payback periods.
Row 41 shows the payback duration in months. This is calculated by testing whether
row 39 has a date and if the number of blank months will be calculated.

CF Contract 1 – Monthly Fcst exercise

Please link in the calculations from the Contract 1 calculations sheet to compute the monthly
calculations for the cash flow.

CF Total Monthly Fcst

We can now turn our attention to Illustration 21 (see Illustration21.xlsx).
This is simply a summary of the cash flow projections for existing business plus the
potential 40 other contracts. Rows 13 to 24 use the sum formula across multiple and iden-
tical sheet to consolidate all of the cash flows. It is very important that the cash and cash
equivalents at the end of each period is reconciled to the balance sheet. For this purpose
the balance sheet cash number is referenced in row 27 accordingly. B28 represents a zero
indicating a reconciliation check to source.

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 Pre-investment modelling and analysis

CF Total Monthly Fcst exercise

Please sum all the monthly cash flows for all 40 contracts plus the existing position and
include a reconciliation check.

P&L Total – Annual

We can now turn our attention to Illustration 22 (see Illustration22.xlsx).
Column E onwards uses the accounting year reference in row 10 to sum the P&L
specific lines into each financial year by use of the ‘SUMIF’ formula. The profit/(loss) for
each financial year is cross checked to source, that is, P&L Total – Monthly Forecast
row 41.

P&L Total – Annual exercise

Please sum the monthly P&L total into an annual version. Include the cross check at the
net profit level.

B Sheet Total – Annual

We can now turn our attention to Illustration 23 (see Illustration23.xlsx).
Column E onwards references the year ending that is, 30-April-xxxx, in order to refer-
ence the particular balance sheet line item using the ‘SUMIF’ formula.
Row 50, simply checks that the net assets equals the total shareholder’s equity.
Row 51, checks the total shareholder’s equity to source that is, the B Sheet Total –
Monthly Fcst sheet.
Row 52 ensures that the retained profit movement equals the profit in the period of
the profit and loss.

B Sheet Total – Annual exercise

Please sum the monthly balance sheet total into an annual version. Include the cross check
at the shareholders funds.

CF Total – Annual
We can now turn our attention to Illustration 24 (see Illustration24.xlsx).
Column E onwards uses the accounting year reference in row 10 to sum the cash flow
specific lines into each financial year by the use of the ‘SUMIF’ formula.
The cash and cash equivalents at the end of the period are a cross check to the balance
sheet in row 27.
The net increase in cash and cash equivalents is cross checked to the source in the CF
Total – Monthly Fcst sheet net increases in cash as in row 28.

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Private Equity Financial Modelling and Analysis

CF Total – Annual exercise

Please sum the monthly cash flow total into an annual version. Include the cross check at
the net cash flow level.

P&L Total – Quarterly

We can now turn our attention to Illustration 25 (see Illustration25.xlsx).
Column E onwards uses the quarter number in row 8 to sum the P&L specific lines
into the financial year by using the ‘SUMIF’ formula.
In row 43 the profit/(loss) for each quarter is cross checked to source, that is, P&L
Total – Monthly Forecast in row 41.

P&L Total – Quarterly exercise

Please sum the monthly P&L total into the quarterly version. Include the cross check at the
net profit level.

B Sheet Total – Quarterly

We can now turn our attention to Illustration 26 (see Illustration26.xlsx).
Column E onwards references the year ending, that is, 30-April-xxxx in order to refer-
ence the particular balance sheet line item using the ‘SUMIF’ formula.
Row 50 simply checks that the net assets equal the total shareholder’s equity.
Row 51 checks the total shareholder’s equity to source that is, the B Sheet Total –
Monthly Fcst sheet.
Row 52 ensures that the retained profit movement equals the profit in the period of
the profit and loss.

B Sheet Total – Quarterly exercise

Please sum the monthly balance sheet total into the quarterly version. Include the cross check
at the shareholders funds level.

CF Total – Quarterly
We can now turn our attention to Illustration 27 (see Illustration27.xlsx).
Column E onwards uses the quarter number in row 8 to sum the cash flow specific lines
into the financial year by using the ‘SUMIF’ formula.
In rows 22 and 28, checks are used to reconcile to the balance sheet cash position and
secondly there is a check to source, that is, the net increase in cash is checked to the net
increase in cash in the CF Total-Monthly Fcst sheet.

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 Pre-investment modelling and analysis

CF Total – Quarterly exercise

Please sum the monthly balance sheet total into the quarterly version. Include the cross check
at the shareholders funds level.

Summary
We can now turn our attention to Illustration 28 (see Illustration28.xlsx).
The Summary dashboard represents a high level summary of the outputs for the
financial projections.
In rows 16 to 23 a high level summary P&L is referenced from the P&L Total – Annual
sheet. Cross checks are included in column O.
In rows 27 to 34 a high level summary balance sheet is referenced from the B Sheet
Total – Annual sheet. Cross checks are undertaken in column O.
In rows 37 to 50 there is a representation of the summary cash flow sourced from the
CF Total – Annual sheet.
The rising order book over the five-year period is shown in row 54.
The funding requirement, that is, the equity invested in the company, is shown in row 61.
Rows 63 to 156 show the equity on exit or the enterprise value of the total company,
partners, management team and private equity firm given a three year or five year exit and
dependent upon the valuation method used that is, revenue or EBITDA multiples over the
range 3 to 10.

Summary exercise
Please complete the Summary sheet by linking to the relevant sheets.

Contract KPIs
We can now turn our attention to Illustration 29 (see Illustration29.xlsx).
The contract KPIs Summary Sheet details the results contract by contract. Columns A
and B references the contract number and name.
The results from each CF Contract X – Monthly Fcst sheet is shown in column C to J
accordingly. These detail important measures such as NPV, IRR, payback, funding require-
ments and NPV for each pound invested. These are very important for considering whether
such projects add to shareholder value which is a key output for private equity deals.

Contract KPIs exercise

Please complete the Contract KPIs sheet by linking to the relevant sheets.

Order book
We can now turn our attention to Illustration 30 (see Illustration30.xlsx).

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Private Equity Financial Modelling and Analysis

The order book outputs are shown on a monthly, quarterly, and yearly basis.
In row 6 the order number is referenced from the order book calculation sheet.
The quarterly and annual outputs are referenced from the monthly outputs using the
‘SUMIF’ formula by referencing the dates accordingly.

Order book exercise

Please complete the order book outputs on a monthly, quarterly and annual basis include
cross checks as relevant.

Graphs
We can now turn our attention to Illustration 31 (see Illustration31.xlsx).
This sheet shows a summary sheet of critical graphs referenced from the Graph Data
sheet showing the following critical key outputs over five years:

• total turnover;
• total order book;
• EBITDA;
• net profit;
• cash flow; and
• cash balances.

Graphs exercise
Please draw the following graphs and display them on the same sheet so that they are
all visible:

• total turnover;
• total order book;
• EBITDA;
• net profit;
• cash flow; and
• cash balances.

Graphs – pre financing cash

We can now turn our attention to Illustration 32 (see Illustration32.xlsx).
A very important key output and visual aid to decision making for such an exercise
is the ability to graphically show the pre financing cash flows and the cumulative effect of
where things break-even. This will flag a completely non viable set of financial forecasts
very quickly, that is, a lack of break-even. Turning our attention to the sheet Graphs-Pre
Financing Cash we can see the two graphs that paint a very interesting story of company’s
financing needs. From my experience, each and every company and project has different cash

34
 Pre-investment modelling and analysis

requirements. On the left hand side we can see the peaks and troughs in the cash flows over
the months. When plotted cumulatively we can see when the company breaks even without
the need for funding. This is sometimes known as the J-curve for a private equity funding
perspective. The two graphs are simply plotted from the total company cash flow forecasts
using the cash flow pre financing and the cumulative thereof.

Graphs – pre financing cash exercise

Please draw the two graphs and display them on the same sheet so that they are
both visible.

Checks
We can now turn our attention to Illustration 33 (see Illustration33.xlsx) and to the
Checks sheet.
Indeed it is very useful to have a check sheet to ensure that the checks and balances
are working as intended. Row 6 checks whether the balance sheet consistently reconciles
over the forecast period, that is, whether the net assets equals the shareholders funds. Row
8 checks whether the cash flow equals the cash movement as in the balance sheet on a
monthly, quarterly and annual basis. Row 10 checks whether the profit as in the profit and
loss account equals the retained profit movement over the forecast period for the month,
annual and quarterly.
Row 12 checks whether the profit equals source, that is, does the net profit of the
calculated output equal the net profit of where it was sourced from?
Row 14 calculates whether the cash flow equals source, that is, does the net cash flow
of the calculated output equal the net cash flow of where it was sourced from?
Again, similar logic is used for row 16, does the balance sheet equal source?
Rows 18 and 19 test whether there is internal consistency between the same dates for
the order book calculation on both a monthly, quarterly and annual basis.
Rows 23 and 24 check whether the Summarised Balance Sheet and Cash flows
equal source.
There are some final checks to see if the gross margin is set to its target in row 27 and
in row 28 whether the order book calculations reconcile.

Checks exercise
Please link in the cross checks from the relevant sheets.

Scenarios
We can now turn our attention to Illustration 34 (see Illustration34.xlsx).
We have already outlined in our scope of work for this financial modelling project that
we require to run high and low revenue based scenarios.

35
Private Equity Financial Modelling and Analysis

Turning our attention to ‘Scenario.xlsx’ we can see from the General Inputs sheet that
in cell B9 we have a dropdown box called Case Selected. We can select the case required,
that is, high, low or medium as necessary.
First, let us take those that are not familiar with the set up of dropdown boxes through
the process using the case selected. From the Excel ribbon in Excel 2007/10 select Data,
then select Data Validation then select validation criteria Allow list. Select the required list
of labels for selection, that is, high, medium or low.
The sales data assumptions contained in the General Inputs sheet are those for the base
or medium case. We should now turn our attention to the Scenario – Low sheet. An impor-
tant observation is that the inputs are identical to those contained in the General Inputs
for the medium or base case. The identical input drivers or sections albeit with different
inputs represent The New Contract Names And Planning Milestones, Deal Size, Deal Type,
Account Growth and Other Income. In summary when the dropdown box in General Inputs
sheet is selected for high, medium or low the correct input area is feed into the model’s
calculations and outputs.
Essentially, if you select any yellow cell in the Scenario – Low sheet it is connected to
the calculations that drive the sales calculations in the financial model.
To test this fact, we can select Formulas then select Trace Dependents, select go to
reference and then select ok.
Each area that affects the sales has calculation logic which is simply to B17 of the Direct
Service Costs as below:

=IF(Case_Selected=”HIGH”,IFERROR(VLOOKUP(A17,ContractDataHigh,3,F
ALSE),””),IF(Case_Selected=”LOW”,IFERROR(VLOOKUP(A17,ContractData
Low,3,FALSE),””),IFERROR(VLOOKUP(A17,ContractData,3,FALSE),””)))

Each part of the logic looks at the case select to see if the case selected is equal to high,
medium or low. Dependent upon which case is selected leads to the selection of the variable
in this case the start of service delivery.

Scenarios exercise
Please set up the facility to run the high, low and medium case from the use of a dropdown
box. Ensure that the relevant sales areas change as appropriate.

Replicating the logic for the 39 additional contracts

If we build a flexible Contract 1 set of inputs, calculations and outputs sheet by
sheet we will be able to replicate this and create in this case 39 more sets of contract
financial forecasts.
Having built the logic that flexibly works for Contract 1 we will be in the position to
replicate the logic and change this for Contract 2 to 40 accordingly. So to summarise matters,
the following worksheets are unique for producing the financial projections of each of the
forecasts contracts. The sheets that require replication of logic are:

36
 Pre-investment modelling and analysis

• Calcs – Contract 1;
• P&L Contract 1 – Monthly Fcst;
• BS Contract 1 – Monthly Fcst; and
• CF Contract 1 – Monthly Fcst.

To replicate the logic for Contract 2 and subsequent contracts the following excel procedure
is required.

• Select each sheet in the required set by selecting the control button on your pc and
clicking each sheet.
• Select Home, select Format, select Move or Copy and select move to the end and check
the create copy box.
• Edit each sheet name so that they are identical to the originals with the suffix of the
contract number that is, 2 for the first.
• Once all sheet names are changed, change the contract number as appropriate in cell B2
of the Calcs – Contract x sheet.

You now have a set of financial forecasts for Contract 2. You simply repeat the process.

Replicating the logic for the 39 additional contracts exercise

Please replicate the four sheets for each of the 39 potential contracts.

• Calcs – Contract 1.
• P&L Contract 1 – Monthly Fcst.
• BS Contract 1 – Monthly Fcst.
• CF Contract 1 – Monthly Fcst.

Finalising the private equity start up business planning financial model

During the course of the private equity financial model build stage we have built a number
of specific modules.
However, there are a number of processes and menu designs that will ideally make your
financial model easier to update and more secure. These points are more useful if the model
that you are building is a template or re-useable private equity start up financial model. We
need to ensure that we protect the worksheets and workbook as appropriate.
We recommend that the workbook is appropriately protected. In terms of appropriate
protection we recommend that only the yellow input cells can be updated, the worksheets
and the workbook is protected. This will prevent any corruption to the model. The Excel/
VBA code shown in Illustration 35 can be used to serve this purpose.

37
Private Equity Financial Modelling and Analysis

Illustration 35
Unprotecting the yellow input cells in the private equity model
Sub UnProtectEachYellowInputCell()

‘==================================================
‘UNPROTECTS EACH YELLOW INPUT CELL IN THE MODEL
‘USEFUL FOR USER PROTECTION OF CALCS
‘AND UNPROTECTION OF INPUT CELLS
‘www.modellingsolutions.co.uk
‘==================================================

Application.ScreenUpdating = False
Dim Sheet As Worksheet
Dim Cell As Range

On Error Resume Next

UnProtectEachSheet

For Each Sheet In ActiveWorkbook.Sheets

Sheet.Select

For Each Cell In ActiveSheet.UsedRange.Cells

Application.ScreenUpdating = False
Cell.Select

‘If Cell is yellow then unprotect

If Selection.Interior.ColorIndex = 6 Then
Selection.Locked = False

Else
End If

Next Cell
Application.StatusBar = “Now Working On Sheet : “ & ActiveSheet.
Name
Next Sheet

ProtectEachSheet
Application.ScreenUpdating = True
Application.StatusBar = Ready

End Sub

Source: Modelling Solutions

38
 Pre-investment modelling and analysis

Illustration 36
Workbook and worksheet protection
Sub ProtectEachSheet()
Application.ScreenUpdating = False

Dim Sheet As Worksheet

On Error Resume Next
ActiveWorkbook.Protect (“xxxxxxx“)

For Each Sheet In ActiveWorkbook.Sheets

Sheet.Select
Sheet.Protect (“xxxxxxx”)

Next Sheet
Application.ScreenUpdating = True
End Sub

Sub UnProtectEachSheet()
Application.ScreenUpdating = False
Dim Sheet As Worksheet
On Error Resume Next
ActiveWorkbook.Protect (“xxxxxxx”)

For Each Sheet In ActiveWorkbook.Sheets

Sheet.Select
Sheet.Unprotect (“xxxxxxx“)

Next Sheet
Application.ScreenUpdating = True
End Sub

Source: Modelling Solutions

Once you have built a re-usable financial model such as this it is good practice to protect
it accordingly. The starting point would be to ensure that all yellow input cells are unpro-
tected as appropriate. This could be done by manual means but is often more error prone.
We recommend the use of similar VBA logic as outlined in Illustration 35.
The important part of the code for doing this is where the code starts with For each
sheet in activeworkbook.sheets and ends with next sheet. Here the code is going through
each sheet in the workbook and each cell in the sheet, if the cell’s colour index is 6 (that
is, yellow) the cell is unlocked.
After unprotecting the specific cells, we recommend protecting the workbook and sheets
accordingly. Again this can be done manually but if this task is undertaken a number of
times it is best automated through the use of a VBA macro.
We will now turn our attention to Illustration 36. In the subroutine ProtectEachSheet we
can see the workbook being protected by the use of Activeworkbook.protect (Password). Each

39
Private Equity Financial Modelling and Analysis

sheet in the financial model is protected by the use of the code embedded in the for each sheet
in activeworkbook.sheets and ending with next sheet. The subroutine UnprotectEachSheet
uses similar logic as the protection routine above with the exception of the use of unprotect
for both the worksheet and workbooks.

Exercise finalising the private equity start up model

Based upon the private equity start up model that you have built to date, please add
the final touches. Unprotect the entire financial model’s input cells and protect all
the worksheets.

Sources of error
Given our discussions outlined in this book and the nature of private equity start up models
there are several potential sources of errors. These can be summarised as follows.

• Logic error: a logic error arises due a calculation error in the formula (that is, summing
the wrong range and so on).
• Assumption/input error: if an input assumption is not as in the financial case then an
error occurs (that is, discount rate should be 22% not 12%).
• Documentation error: the debt repayment profile may not comply with the basis outlined
in the relevant legal documentation.
• Data book error: the debt repayment profile may not comply with the basis outlined in
the data book.
• Taxation compliance: if the tax treatment for certain expenses is not tax deductible and
is subtracted from the taxable profit then we have a tax compliance issue of one sort.
• Accounting compliance: if a certain item has been capitalised but under the relevant
accounting treatment (that is, UK GAAP, IFRS and so on) immediate write off is required
then we have an accounting compliance issue of one sort.

Self testing the model

Once the model builder has completed a draft model they should stand off and undertake
some self review. We recommend that the minimum amount of self-review or self-testing
should include the following methods.

Top level analytical review

This technique involves reviewing the big picture. It is good for detecting potentially large
errors for one model run for the base case or specific sensitivity cases. This is a similar
technique to the review of financial statements in a financial audit. The approach may
involve the computation of key ratios over the forecast period. Look at revenue, cost and
financing structures. Where possible you should correlate back to the inputs. Some examples
of correlating the inputs with the outputs would be trade debtor assumptions, trade creditor

40
 Pre-investment modelling and analysis

assumptions, interest rate assumptions and any other assumptions in the model that you
could relate to the models outputs.
Key areas can be graphed. This helps to review the trends and highlight any blips. You
should look for any obvious irregularities such as balance sheets not balancing, cash flows
for the period not equalling the movement in cash balance for the balance sheet, any nega-
tive debt balances and any other basic checks.
We can now turn our attention to a specific example of analytical review techniques
applied to our private equity start up financial model in Illustration 37 (see Illustration37.xlsx).

Illustration 37
Analytical review

Analytical review
Start up business plan financial projections 02/10/2012 12:24
Medium – base case

Year number
Year ending:
Comments
Balance sheet reconciles? Ok reconciles
Cash reconciles? Ok reconciles
Opening cash balance
Cash generated during the year per
the cash flow
Closing cash balance
Cash balance per the balance sheet

Profit Reconciles? Ok reconciles

Ongoing profit per balance sheet
Profit generated during the year
Closing profit balance sheet
re-performed
Cash balance per the balance sheet

Sales growth Ok reasonable as in assumptions

Gross profit margin Ok reasonable as in assumptions
EBITDA margin Ok reasonable as in assumptions
EBIT margin Ok reasonable as in assumptions
Tax to EBT Ok reasonable as in assumptions
Continued

41
Private Equity Financial Modelling and Analysis

Illustration 37 continued
Analytical review
Start up business plan financial projections 02/10/2012 12:24
Medium – base case
Equity

Per balance sheet

Opening balance Ok reconciles
Equity contributed
Equity repaid
Closing balance

Working capital
Trade debtor days Ok as in the assumptions – based upon
sales outstanding
Trade creditor days Ok as in the assumptions – based upon
purchases outstanding
Other debtors Why so low not as the assumptions
Other creditors Why so low not as the assumptions

Source: Modelling Solutions

You can see that we have created a sheet called Analytical Review – Workings. It
contains a number of key workings or calculations against the financial model’s timeline.
First, there are three checks of internal consistency, that is, does the balance sheet reconcile
over the forecast period? Does the movement in the balance sheet cash and profit for each
year equal the cash generated or the profit retained for the year?
The sales growth is calculated on a year by year basis appears reasonable with the
assumption in the General Inputs sheet (that is, contained in rows 14 to 73).
The gross profit margin to sales ratio is calculated on a year by year basis appears reason-
able with the assumption in the General Inputs sheet (that is, contained in rows 17 to 30).
The EBITDA and EBIT margin seems fairly consistent and reasonable and nothing
immediately obvious is highlighted and requires no investigation.
The tax in the P&L is zero as in the assumption to ignore it from this analysis in the
first instance.

Key output review

The key outputs ratios such as credit ratios, IRRs and so on, are likely to produce mate-
rial errors where an error exists as they are at the highest level. It is recommended that the
results and the logic behind the key outputs are reviewed as appropriately.

42
 Pre-investment modelling and analysis

We can now turn our attention to a specific example of key output review techniques
applied to our private equity start up financial model in Illustration 38 (see Illustration38.xlsx).

Illustration 38
Key output review

Distinct formulae listing: PrivateEquityStartUpModel.xlsx

Report Generated: Tuesday, October 02, 2012 11:31:27 AM
Lists distinct formulae (that is, those formulae that are not consistent with the formulae in both the cell
above and the cell to the left) in each block of cells
Note: A formula may be reported more than once if it occurs in different parts of the Worksheet.

Worksheet Address Formula

CF Contract 1 – $A$2 =’Calcs – Contract 1’!A2
Monthly Fcst
CF Contract 1 – $A$4 =Case_Selected
Monthly Fcst
CF Contract 1 – $E$8 =D8+1
Monthly Fcst
CF Contract 1 – $D$9 =IF(C9=””,EOMONTH(Current_Month_Ending,1),EOMONTH(C9,1))
Monthly Fcst
CF Contract 1 – $D$12 =VLOOKUP(D9,AccountingYearEnd,2,FALSE)
Monthly Fcst
CF Contract 1 – $D$13 =’P&L Contract 1 – Monthly Fcst’!D29
Monthly Fcst
CF Contract 1 – $D$14 =’Calcs – Contract 1’!D327
Monthly Fcst
CF Contract 1 – $D$18 =’Calcs – Contract 1’!D332
Monthly Fcst
CF Contract 1 – $D$19 =’Calcs – Contract 1’!D331
Monthly Fcst
CF Contract 1 – $D$21 =SUM(D13:D20)
Monthly Fcst
CF Contract 1 – $D$22 =IF(Equity_Funding_Mechanism=”Contract Cash As
Monthly Fcst Required”,IF(D21<0,-D21,0),0)
CF Contract 1 – $D$23 =SUM(D21:D22)
Monthly Fcst
CF Contract 1 – $E$24 =D26
Monthly Fcst
CF Contract 1 – $D$26 =D23+D24
Monthly Fcst

Continued

43
Illustration 38 continued
Worksheet Address Formula
CF Contract 1 – $D$27 =’B S Contract 1 – Monthly Fcst’!D23-D26
Monthly Fcst
CF Contract 1 – $B$31 =IFERROR(SUM(D31:GA31),0)
Monthly Fcst
CF Contract 1 – $D$31 =IF(AND(C$21=0,D$21<>0),XNPV(DISCOUNT_RATE,’CF Contract
Monthly Fcst 1 – Monthly Fcst’!D$21:$GA$21, ‘CF Contract 1 –
Monthly Fcst’!D$9:$GA$9),0)
CF Contract 1 – $B$33 =IFERROR(SUM(D33:GA33),0)
Monthly Fcst
CF Contract 1 – $D$33 =IF(AND(C$21=0,D$21<>0),XIRR(D21:$GA$21,D9:$GA$9,DISC
Monthly Fcst OUNT_RATE),0)
CF Contract 1 – $D$37 =SUM($D21:D21)
Monthly Fcst
CF Contract 1 – $D$38 =IF(AND(C37<0,D37>0),1,0)
Monthly Fcst
CF Contract 1 – $A$39 =A35
Monthly Fcst
CF Contract 1 – $B$39 =IFERROR(MAX(D39:GA39),0)
Monthly Fcst
CF Contract 1 – $D$39 =IF(D38=1,D$9,””)
Monthly Fcst
CF Contract 1 – $B$41 =IFERROR(SUM(D41:GA41),0)
Monthly Fcst
CF Contract 1 – $D$41 =IF(D39<>””,COUNTIF($D37:D37,”<>0”),””)
Monthly Fcst
CF Contract 1 – $D$45 =D21*(1/(1+DISCOUNT_RATE)^(D8/12))
Monthly Fcst
CF Contract 1 – $D$46 =SUM($D45:D45)
Monthly Fcst
CF Contract 1 – $D$47 =IF(AND(C46<0,D46>0),1,0)
Monthly Fcst
CF Contract 1 – $A$48 =A43
Monthly Fcst
CF Contract 1 – $B$48 =IFERROR(MAX(D48:GA48),0)
Monthly Fcst
CF Contract 1 – $D$48 =IF(D47=1,D$9,””)
Monthly Fcst
CF Contract 1 – $B$50 =IFERROR(SUM(D50:GA50),)
Monthly Fcst
CF Contract 1 – $D$50 =IF(D48<>””,COUNTIF($D46:D46,”<>0”),””)
Monthly Fcst

Continued
Worksheet Address Formula
CF Contract 1 – $C$51 =IF(Case_Selected=”MEDIUM – BASE CASE”,EOMONTH(VLOO
Monthly Fcst KUP(A3,ContractData,3,FALSE),60-1),IF(Case_Selected=”
LOW”,EOMONTH(VLOOKUP(A3,ContractDataLow,3,FALSE),60-
1),IF(Case_Selected=”HIGH”,EOMONTH(VLOOKUP(A3,ContractDa
taHigh,3,FALSE),60-1),0)))
CF Contract 1 – $B$52 =IFERROR(SUM(D52:GA52),0)
Monthly Fcst
CF Contract 1 – $D$52 =IF(AND(D21<0,D$9<=$C51),-D21,0)
Monthly Fcst
CF Contract 1 – $B$54 =IFERROR((B31/B52),0)
Monthly Fcst
CF Contract 1 – $D$78 =IF(C78=””,YEAR(Financial_Year_Ending),C78+1)
Monthly Fcst
CF Contract 1 – $D$79 =CONCATENATE(D78,” / “,+D78+1)
Monthly Fcst
CF Contract 1 – $D$80 =SUMIF($D$12:$GA$12,D$79,$D13:$GA13)
Monthly Fcst
CF Contract 1 – $C$81 =SUM(D81:J81)
Monthly Fcst
CF Contract 1 – $D$88 =SUM(D80:D87)
Monthly Fcst
CF Contract 1 – $D$89 =SUMIF($D$12:$GA$12,D$79,$D22:$GA22)
Monthly Fcst
CF Contract 1 – $D$90 =SUM(D88:D89)
Monthly Fcst
CF Contract 1 – $C$91 =SUM(D23:GA23)-SUM(D90:R90)
Monthly Fcst
CF Contract 1 – $D$92 =IRR(D88:R88,0.1)
Monthly Fcst
CF Contract 1 – $D$93 =NPV(DISCOUNT_RATE,D88:R88)
Monthly Fcst
Contract KPIs $A$2 =’Calcs – Contract 1’!A2
Contract KPIs $A$3 =Case_Selected
Contract KPIs $B$7 =IFERROR(VLOOKUP(A7,NewContractNames,2,FALSE),0)
Contract KPIs $C$7 =’CF Contract 1 – Monthly Fcst’!B$31
Contract KPIs $D$7 =’CF Contract 1 – Monthly Fcst’!B$33
Contract KPIs $E$7 =’CF Contract 1 – Monthly Fcst’!B$39
Contract KPIs $F$7 =’CF Contract 1 – Monthly Fcst’!B$41
Contract KPIs $G$7 =’CF Contract 1 – Monthly Fcst’!B$48
Contract KPIs $H$7 =’CF Contract 1 – Monthly Fcst’!B$50
Contract KPIs $I$7 =’CF Contract 1 – Monthly Fcst’!B$52

Continued
Illustration 38 continued
Worksheet Address Formula
Contract KPIs $J$7 =IFERROR(‘CF Contract 1 – Monthly Fcst’!B$54,0)
Contract KPIs $A$8 =A7+1
Contract KPIs $C$8 =’CF Contract 2 – Monthly Fcst’!B$31
Contract KPIs $D$8 =’CF Contract 2 – Monthly Fcst’!B$33
Contract KPIs $E$8 =’CF Contract 2 – Monthly Fcst’!B$39
Contract KPIs $F$8 =’CF Contract 2 – Monthly Fcst’!B$41
Contract KPIs $G$8 =’CF Contract 2 – Monthly Fcst’!B$48
Contract KPIs $H$8 =’CF Contract 2 – Monthly Fcst’!B$50
Contract KPIs $I$8 =’CF Contract 2 – Monthly Fcst’!B$52
Contract KPIs $J$8 =IFERROR(‘CF Contract 2 – Monthly Fcst’!B$54,0)
Contract KPIs $C$9 =’CF Contract 3 – Monthly Fcst’!B$31
Contract KPIs $D$9 =’CF Contract 3 – Monthly Fcst’!B$33
Contract KPIs $E$9 =’CF Contract 3 – Monthly Fcst’!B$39
Contract KPIs $F$9 =’CF Contract 3 – Monthly Fcst’!B$41
Contract KPIs $G$9 =’CF Contract 3 – Monthly Fcst’!B$48
Contract KPIs $H$9 =’CF Contract 3 – Monthly Fcst’!B$50
Contract KPIs $I$9 =’CF Contract 3 – Monthly Fcst’!B$52
Contract KPIs $J$9 =IFERROR(‘CF Contract 3 – Monthly Fcst’!B$54,0)
Contract KPIs $C$10 =’CF Contract 4 – Monthly Fcst’!B$31
Contract KPIs $D$10 =’CF Contract 4 – Monthly Fcst’!B$33
Contract KPIs $E$10 =’CF Contract 4 – Monthly Fcst’!B$39
Contract KPIs $F$10 =’CF Contract 4 – Monthly Fcst’!B$41
Contract KPIs $G$10 =’CF Contract 4 – Monthly Fcst’!B$48
Contract KPIs $H$10 =’CF Contract 4 – Monthly Fcst’!B$50
Contract KPIs $I$10 =’CF Contract 4 – Monthly Fcst’!B$52
Contract KPIs $J$10 =IFERROR(‘CF Contract 4 – Monthly Fcst’!B$54,0)
Contract KPIs $C$11 =’CF Contract 5 – Monthly Fcst’!B$31
Contract KPIs $D$11 =’CF Contract 5 – Monthly Fcst’!B$33
Contract KPIs $E$11 =’CF Contract 5 – Monthly Fcst’!B$39
Contract KPIs $F$11 =’CF Contract 5 – Monthly Fcst’!B$41
Contract KPIs $G$11 =’CF Contract 5 – Monthly Fcst’!B$48
Contract KPIs $H$11 =’CF Contract 5 – Monthly Fcst’!B$50
Contract KPIs $I$11 =’CF Contract 5 – Monthly Fcst’!B$52
Contract KPIs $J$11 =IFERROR(‘CF Contract 5 – Monthly Fcst’!B$54,0)
Contract KPIs $C$12 =’CF Contract 6 – Monthly Fcst’!B$31
Contract KPIs $D$12 =’CF Contract 6 – Monthly Fcst’!B$33

Continued
Worksheet Address Formula
Contract KPIs $E$12 =’CF Contract 6 – Monthly Fcst’!B$39
Contract KPIs $F$12 =’CF Contract 6 – Monthly Fcst’!B$41
Contract KPIs $G$12 =’CF Contract 6 – Monthly Fcst’!B$48
Contract KPIs $H$12 =’CF Contract 6 – Monthly Fcst’!B$50
Contract KPIs $I$12 =’CF Contract 6 – Monthly Fcst’!B$52
Contract KPIs $J$12 =IFERROR(‘CF Contract 6 – Monthly Fcst’!B$54,0)
Contract KPIs $C$13 =’CF Contract 7 – Monthly Fcst’!B$31
Contract KPIs $D$13 =’CF Contract 7 – Monthly Fcst’!B$33
Contract KPIs $E$13 =’CF Contract 7 – Monthly Fcst’!B$39
Contract KPIs $F$13 =’CF Contract 7 – Monthly Fcst’!B$41
Contract KPIs $G$13 =’CF Contract 7 – Monthly Fcst’!B$48
Contract KPIs $H$13 =’CF Contract 7 – Monthly Fcst’!B$50
Contract KPIs $I$13 =’CF Contract 7 – Monthly Fcst’!B$52
Contract KPIs $J$13 =IFERROR(‘CF Contract 7 – Monthly Fcst’!B$54,0)
Contract KPIs $C$14 =’CF Contract 8 – Monthly Fcst’!B$31
Contract KPIs $D$14 =’CF Contract 8 – Monthly Fcst’!B$33
Contract KPIs $E$14 =’CF Contract 8 – Monthly Fcst’!B$39
Contract KPIs $F$14 =’CF Contract 8 – Monthly Fcst’!B$41
Contract KPIs $G$14 =’CF Contract 8 – Monthly Fcst’!B$48
Contract KPIs $H$14 =’CF Contract 8 – Monthly Fcst’!B$50
Contract KPIs $I$14 =’CF Contract 8 – Monthly Fcst’!B$52
Contract KPIs $J$14 =IFERROR(‘CF Contract 8 – Monthly Fcst’!B$54,0)
Contract KPIs $C$15 =’CF Contract 9 – Monthly Fcst’!B$31
Contract KPIs $D$15 =’CF Contract 9 – Monthly Fcst’!B$33
Contract KPIs $E$15 =’CF Contract 9 – Monthly Fcst’!B$39
Contract KPIs $F$15 =’CF Contract 9 – Monthly Fcst’!B$41
Contract KPIs $G$15 =’CF Contract 9 – Monthly Fcst’!B$48
Contract KPIs $H$15 =’CF Contract 9 – Monthly Fcst’!B$50
Contract KPIs $I$15 =’CF Contract 9 – Monthly Fcst’!B$52
Contract KPIs $J$15 =IFERROR(‘CF Contract 9 – Monthly Fcst’!B$54,0)
Contract KPIs $C$16 =’CF Contract 10 – Monthly Fcst’!B$31
Contract KPIs $D$16 =’CF Contract 10 – Monthly Fcst’!B$33
Contract KPIs $E$16 =’CF Contract 10 – Monthly Fcst’!B$39
Contract KPIs $F$16 =’CF Contract 10 – Monthly Fcst’!B$41
Contract KPIs $G$16 =’CF Contract 10 – Monthly Fcst’!B$48
Contract KPIs $H$16 =’CF Contract 10 – Monthly Fcst’!B$50
Contract KPIs $I$16 =’CF Contract 10 – Monthly Fcst’!B$52

Continued
Illustration 38 continued
Worksheet Address Formula
Contract KPIs $J$16 =IFERROR(‘CF Contract 10 – Monthly Fcst’!B$54,0)
Contract KPIs $C$17 =’CF Contract 11 – Monthly Fcst’!B$31
Contract KPIs $D$17 =’CF Contract 11 – Monthly Fcst’!B$33
Contract KPIs $E$17 =’CF Contract 11 – Monthly Fcst’!B$39
Contract KPIs $F$17 =’CF Contract 11 – Monthly Fcst’!B$41
Contract KPIs $G$17 =’CF Contract 11 – Monthly Fcst’!B$48
Contract KPIs $H$17 =’CF Contract 11 – Monthly Fcst’!B$50
Contract KPIs $I$17 =’CF Contract 11 – Monthly Fcst’!B$52
Contract KPIs $J$17 =IFERROR(‘CF Contract 11 – Monthly Fcst’!B$54,0)
Contract KPIs $C$18 =’CF Contract 12 – Monthly Fcst’!B$31
Contract KPIs $D$18 =’CF Contract 12 – Monthly Fcst’!B$33
Contract KPIs $E$18 =’CF Contract 12 – Monthly Fcst’!B$39
Contract KPIs $F$18 =’CF Contract 12 – Monthly Fcst’!B$41
Contract KPIs $G$18 =’CF Contract 12 – Monthly Fcst’!B$48
Contract KPIs $H$18 =’CF Contract 12 – Monthly Fcst’!B$50
Contract KPIs $I$18 =’CF Contract 12 – Monthly Fcst’!B$52
Contract KPIs $J$18 =IFERROR(‘CF Contract 12 – Monthly Fcst’!B$54,0)
Contract KPIs $C$19 =’CF Contract 13 – Monthly Fcst’!B$31
Contract KPIs $D$19 =’CF Contract 13 – Monthly Fcst’!B$33
Contract KPIs $E$19 =’CF Contract 13 – Monthly Fcst’!B$39
Contract KPIs $F$19 =’CF Contract 13 – Monthly Fcst’!B$41
Contract KPIs $G$19 =’CF Contract 13 – Monthly Fcst’!B$48
Contract KPIs $H$19 =’CF Contract 13 – Monthly Fcst’!B$50
Contract KPIs $I$19 =’CF Contract 13 – Monthly Fcst’!B$52
Contract KPIs $J$19 =IFERROR(‘CF Contract 13 – Monthly Fcst’!B$54,0)
Contract KPIs $C$20 =’CF Contract 14 – Monthly Fcst’!B$31
Contract KPIs $D$20 =’CF Contract 14 – Monthly Fcst’!B$33
Contract KPIs $E$20 =’CF Contract 14 – Monthly Fcst’!B$39
Contract KPIs $F$20 =’CF Contract 14 – Monthly Fcst’!B$41
Contract KPIs $G$20 =’CF Contract 14 – Monthly Fcst’!B$48
Contract KPIs $H$20 =’CF Contract 14 – Monthly Fcst’!B$50
Contract KPIs $I$20 =’CF Contract 14 – Monthly Fcst’!B$52
Contract KPIs $J$20 =IFERROR(‘CF Contract 14 – Monthly Fcst’!B$54,0)
Contract KPIs $C$21 =’CF Contract 15 – Monthly Fcst’!B$31
Contract KPIs $D$21 =’CF Contract 15 – Monthly Fcst’!B$33
Contract KPIs $E$21 =’CF Contract 15 – Monthly Fcst’!B$39

Continued
Worksheet Address Formula
Contract KPIs $F$21 =’CF Contract 15 – Monthly Fcst’!B$41
Contract KPIs $G$21 =’CF Contract 15 – Monthly Fcst’!B$48
Contract KPIs $H$21 =’CF Contract 15 – Monthly Fcst’!B$50
Contract KPIs $I$21 =’CF Contract 15 – Monthly Fcst’!B$52
Contract KPIs $J$21 =IFERROR(‘CF Contract 15 – Monthly Fcst’!B$54,0)
Contract KPIs $C$22 =’CF Contract 16 – Monthly Fcst’!B$31
Contract KPIs $D$22 =’CF Contract 16 – Monthly Fcst’!B$33
Contract KPIs $E$22 =’CF Contract 16 – Monthly Fcst’!B$39
Contract KPIs $F$22 =’CF Contract 16 – Monthly Fcst’!B$41
Contract KPIs $G$22 =’CF Contract 16 – Monthly Fcst’!B$48
Contract KPIs $H$22 =’CF Contract 16 – Monthly Fcst’!B$50
Contract KPIs $I$22 =’CF Contract 16 – Monthly Fcst’!B$52
Contract KPIs $J$22 =IFERROR(‘CF Contract 16 – Monthly Fcst’!B$54,0)
Contract KPIs $C$23 =’CF Contract 17 – Monthly Fcst’!B$31
Contract KPIs $D$23 =’CF Contract 17 – Monthly Fcst’!B$33
Contract KPIs $E$23 =’CF Contract 17 – Monthly Fcst’!B$39
Contract KPIs $F$23 =’CF Contract 17 – Monthly Fcst’!B$41
Contract KPIs $G$23 =’CF Contract 17 – Monthly Fcst’!B$48
Contract KPIs $H$23 =’CF Contract 17 – Monthly Fcst’!B$50
Contract KPIs $I$23 =’CF Contract 17 – Monthly Fcst’!B$52
Contract KPIs $J$23 =IFERROR(‘CF Contract 17 – Monthly Fcst’!B$54,0)
Contract KPIs $C$24 =’CF Contract 18 – Monthly Fcst’!B$31
Contract KPIs $D$24 =’CF Contract 18 – Monthly Fcst’!B$33
Contract KPIs $E$24 =’CF Contract 18 – Monthly Fcst’!B$39
Contract KPIs $F$24 =’CF Contract 18 – Monthly Fcst’!B$41
Contract KPIs $G$24 =’CF Contract 18 – Monthly Fcst’!B$48
Contract KPIs $H$24 =’CF Contract 18 – Monthly Fcst’!B$50
Contract KPIs $I$24 =’CF Contract 18 – Monthly Fcst’!B$52
Contract KPIs $J$24 =IFERROR(‘CF Contract 18 – Monthly Fcst’!B$54,0)
Contract KPIs $C$25 =’CF Contract 19 – Monthly Fcst’!B$31
Contract KPIs $D$25 =’CF Contract 19 – Monthly Fcst’!B$33
Contract KPIs $E$25 =’CF Contract 19 – Monthly Fcst’!B$39
Contract KPIs $F$25 =’CF Contract 19 – Monthly Fcst’!B$41
Contract KPIs $G$25 =’CF Contract 19 – Monthly Fcst’!B$48
Contract KPIs $H$25 =’CF Contract 19 – Monthly Fcst’!B$50
Contract KPIs $I$25 =’CF Contract 19 – Monthly Fcst’!B$52
Contract KPIs $J$25 =IFERROR(‘CF Contract 19 – Monthly Fcst’!B$54,0)

Continued
Illustration 38 continued
Worksheet Address Formula
Contract KPIs $C$26 =’CF Contract 20 – Monthly Fcst’!B$31
Contract KPIs $D$26 =’CF Contract 20 – Monthly Fcst’!B$33
Contract KPIs $E$26 =’CF Contract 20 – Monthly Fcst’!B$39
Contract KPIs $F$26 =’CF Contract 20 – Monthly Fcst’!B$41
Contract KPIs $G$26 =’CF Contract 20 – Monthly Fcst’!B$48
Contract KPIs $H$26 =’CF Contract 20 – Monthly Fcst’!B$50
Contract KPIs $I$26 =’CF Contract 20 – Monthly Fcst’!B$52
Contract KPIs $J$26 =IFERROR(‘CF Contract 20 – Monthly Fcst’!B$54,0)
Contract KPIs $C$27 =’CF Contract 21 – Monthly Fcst’!B$31
Contract KPIs $D$27 =’CF Contract 21 – Monthly Fcst’!B$33
Contract KPIs $E$27 =’CF Contract 21 – Monthly Fcst’!B$39
Contract KPIs $F$27 =’CF Contract 21 – Monthly Fcst’!B$41
Contract KPIs $G$27 =’CF Contract 21 – Monthly Fcst’!B$48
Contract KPIs $H$27 =’CF Contract 21 – Monthly Fcst’!B$50
Contract KPIs $I$27 =’CF Contract 21 – Monthly Fcst’!B$52
Contract KPIs $J$27 =IFERROR(‘CF Contract 21 – Monthly Fcst’!B$54,0)
Contract KPIs $C$28 =’CF Contract 22 – Monthly Fcst’!B$31
Contract KPIs $D$28 =’CF Contract 22 – Monthly Fcst’!B$33
Contract KPIs $E$28 =’CF Contract 22 – Monthly Fcst’!B$39
Contract KPIs $F$28 =’CF Contract 22 – Monthly Fcst’!B$41
Contract KPIs $G$28 =’CF Contract 22 – Monthly Fcst’!B$48
Contract KPIs $H$28 =’CF Contract 22 – Monthly Fcst’!B$50
Contract KPIs $I$28 =’CF Contract 22 – Monthly Fcst’!B$52
Contract KPIs $J$28 =IFERROR(‘CF Contract 22 – Monthly Fcst’!B$54,0)
Contract KPIs $C$29 =’CF Contract 23 – Monthly Fcst’!B$31
Contract KPIs $D$29 =’CF Contract 23 – Monthly Fcst’!B$33
Contract KPIs $E$29 =’CF Contract 23 – Monthly Fcst’!B$39
Contract KPIs $F$29 =’CF Contract 23 – Monthly Fcst’!B$41
Contract KPIs $G$29 =’CF Contract 23 – Monthly Fcst’!B$48
Contract KPIs $H$29 =’CF Contract 23 – Monthly Fcst’!B$50
Contract KPIs $I$29 =’CF Contract 23 – Monthly Fcst’!B$52
Contract KPIs $J$29 =IFERROR(‘CF Contract 23 – Monthly Fcst’!B$54,0)
Contract KPIs $C$30 =’CF Contract 24 – Monthly Fcst’!B$31
Contract KPIs $D$30 =’CF Contract 24 – Monthly Fcst’!B$33
Contract KPIs $E$30 =’CF Contract 24 – Monthly Fcst’!B$39
Contract KPIs $F$30 =’CF Contract 24 – Monthly Fcst’!B$41

Continued
Worksheet Address Formula
Contract KPIs $G$30 =’CF Contract 24 – Monthly Fcst’!B$48
Contract KPIs $H$30 =’CF Contract 24 – Monthly Fcst’!B$50
Contract KPIs $I$30 =’CF Contract 24 – Monthly Fcst’!B$52
Contract KPIs $J$30 =IFERROR(‘CF Contract 24 – Monthly Fcst’!B$54,0)
Contract KPIs $C$31 =’CF Contract 25 – Monthly Fcst’!B$31
Contract KPIs $D$31 =’CF Contract 25 – Monthly Fcst’!B$33
Contract KPIs $E$31 =’CF Contract 25 – Monthly Fcst’!B$39
Contract KPIs $F$31 =’CF Contract 25 – Monthly Fcst’!B$41
Contract KPIs $G$31 =’CF Contract 25 – Monthly Fcst’!B$48
Contract KPIs $H$31 =’CF Contract 25 – Monthly Fcst’!B$50
Contract KPIs $I$31 =’CF Contract 25 – Monthly Fcst’!B$52
Contract KPIs $J$31 =IFERROR(‘CF Contract 25 – Monthly Fcst’!B$54,0)
Contract KPIs $C$32 =’CF Contract 26 – Monthly Fcst’!B$31
Contract KPIs $D$32 =’CF Contract 26 – Monthly Fcst’!B$33
Contract KPIs $E$32 =’CF Contract 26 – Monthly Fcst’!B$39
Contract KPIs $F$32 =’CF Contract 26 – Monthly Fcst’!B$41
Contract KPIs $G$32 =’CF Contract 26 – Monthly Fcst’!B$48
Contract KPIs $H$32 =’CF Contract 26 – Monthly Fcst’!B$50
Contract KPIs $I$32 =’CF Contract 26 – Monthly Fcst’!B$52
Contract KPIs $J$32 =IFERROR(‘CF Contract 26 – Monthly Fcst’!B$54,0)
Contract KPIs $C$33 =’CF Contract 27 – Monthly Fcst’!B$31
Contract KPIs $D$33 =’CF Contract 27 – Monthly Fcst’!B$33
Contract KPIs $E$33 =’CF Contract 27 – Monthly Fcst’!B$39
Contract KPIs $F$33 =’CF Contract 27 – Monthly Fcst’!B$41
Contract KPIs $G$33 =’CF Contract 27 – Monthly Fcst’!B$48
Contract KPIs $H$33 =’CF Contract 27 – Monthly Fcst’!B$50
Contract KPIs $I$33 =’CF Contract 27 – Monthly Fcst’!B$52
Contract KPIs $J$33 =IFERROR(‘CF Contract 27 – Monthly Fcst’!B$54,0)
Contract KPIs $C$34 =’CF Contract 28 – Monthly Fcst’!B$31
Contract KPIs $D$34 =’CF Contract 28 – Monthly Fcst’!B$33
Contract KPIs $E$34 =’CF Contract 28 – Monthly Fcst’!B$39
Contract KPIs $F$34 =’CF Contract 28 – Monthly Fcst’!B$41
Contract KPIs $G$34 =’CF Contract 28 – Monthly Fcst’!B$48
Contract KPIs $H$34 =’CF Contract 28 – Monthly Fcst’!B$50
Contract KPIs $I$34 =’CF Contract 28 – Monthly Fcst’!B$52
Contract KPIs $J$34 =IFERROR(‘CF Contract 28 – Monthly Fcst’!B$54,0)
Contract KPIs $C$35 =’CF Contract 29 – Monthly Fcst’!B$31

Continued
Illustration 38 continued
Worksheet Address Formula
Contract KPIs $D$35 =’CF Contract 29 – Monthly Fcst’!B$33
Contract KPIs $E$35 =’CF Contract 29 – Monthly Fcst’!B$39
Contract KPIs $F$35 =’CF Contract 29 – Monthly Fcst’!B$41
Contract KPIs $G$35 =’CF Contract 29 – Monthly Fcst’!B$48
Contract KPIs $H$35 =’CF Contract 29 – Monthly Fcst’!B$50
Contract KPIs $I$35 =’CF Contract 29 – Monthly Fcst’!B$52
Contract KPIs $J$35 =IFERROR(‘CF Contract 29 – Monthly Fcst’!B$54,0)
Contract KPIs $C$36 =’CF Contract 30 – Monthly Fcst’!B$31
Contract KPIs $D$36 =’CF Contract 30 – Monthly Fcst’!B$33
Contract KPIs $E$36 =’CF Contract 30 – Monthly Fcst’!B$39
Contract KPIs $F$36 =’CF Contract 30 – Monthly Fcst’!B$41
Contract KPIs $G$36 =’CF Contract 30 – Monthly Fcst’!B$48
Contract KPIs $H$36 =’CF Contract 30 – Monthly Fcst’!B$50
Contract KPIs $I$36 =’CF Contract 30 – Monthly Fcst’!B$52
Contract KPIs $J$36 =IFERROR(‘CF Contract 30 – Monthly Fcst’!B$54,0)
Contract KPIs $C$37 =’CF Contract 31 – Monthly Fcst’!B$31
Contract KPIs $D$37 =’CF Contract 33 – Monthly Fcst’!B$33
Contract KPIs $E$37 =’CF Contract 33 – Monthly Fcst’!B$39
Contract KPIs $F$37 =’CF Contract 33 – Monthly Fcst’!B$41
Contract KPIs $G$37 =’CF Contract 33 – Monthly Fcst’!B$48
Contract KPIs $H$37 =’CF Contract 33 – Monthly Fcst’!B$50
Contract KPIs $I$37 =’CF Contract 31 – Monthly Fcst’!B$52
Contract KPIs $J$37 =IFERROR(‘CF Contract 31 – Monthly Fcst’!B$54,0)
Contract KPIs $C$38 =’CF Contract 32 – Monthly Fcst’!B$31
Contract KPIs $D$38 =’CF Contract 32 – Monthly Fcst’!B$33
Contract KPIs $E$38 =’CF Contract 32 – Monthly Fcst’!B$39
Contract KPIs $F$38 =’CF Contract 32 – Monthly Fcst’!B$41
Contract KPIs $G$38 =’CF Contract 32 – Monthly Fcst’!B$48
Contract KPIs $H$38 =’CF Contract 32 – Monthly Fcst’!B$50
Contract KPIs $I$38 =’CF Contract 32 – Monthly Fcst’!B$52
Contract KPIs $J$38 =IFERROR(‘CF Contract 32 – Monthly Fcst’!B$54,0)
Contract KPIs $C$39 =’CF Contract 33 – Monthly Fcst’!B$31
Contract KPIs $D$39 =’CF Contract 33 – Monthly Fcst’!B$33
Contract KPIs $E$39 =’CF Contract 33 – Monthly Fcst’!B$39
Contract KPIs $F$39 =’CF Contract 33 – Monthly Fcst’!B$41
Contract KPIs $G$39 =’CF Contract 33 – Monthly Fcst’!B$48

Continued
Worksheet Address Formula
Contract KPIs $H$39 =’CF Contract 33 – Monthly Fcst’!B$50
Contract KPIs $I$39 =’CF Contract 33 – Monthly Fcst’!B$52
Contract KPIs $J$39 =IFERROR(‘CF Contract 33 – Monthly Fcst’!B$54,0)
Contract KPIs $C$40 =’CF Contract 34 – Monthly Fcst’!B$31
Contract KPIs $D$40 =’CF Contract 34 – Monthly Fcst’!B$33
Contract KPIs $E$40 =’CF Contract 34 – Monthly Fcst’!B$39
Contract KPIs $F$40 =’CF Contract 34 – Monthly Fcst’!B$41
Contract KPIs $G$40 =’CF Contract 34 – Monthly Fcst’!B$48
Contract KPIs $H$40 =’CF Contract 34 – Monthly Fcst’!B$50
Contract KPIs $I$40 =’CF Contract 34 – Monthly Fcst’!B$52
Contract KPIs $J$40 =IFERROR(‘CF Contract 34 – Monthly Fcst’!B$54,0)
Contract KPIs $C$41 =’CF Contract 35 – Monthly Fcst’!B$31
Contract KPIs $D$41 =’CF Contract 35 – Monthly Fcst’!B$33
Contract KPIs $E$41 =’CF Contract 35 – Monthly Fcst’!B$39
Contract KPIs $F$41 =’CF Contract 35 – Monthly Fcst’!B$41
Contract KPIs $G$41 =’CF Contract 35 – Monthly Fcst’!B$48
Contract KPIs $H$41 =’CF Contract 35 – Monthly Fcst’!B$50
Contract KPIs $I$41 =’CF Contract 35 – Monthly Fcst’!B$52
Contract KPIs $J$41 =IFERROR(‘CF Contract 35 – Monthly Fcst’!B$54,0)
Contract KPIs $C$42 =’CF Contract 36 – Monthly Fcst’!B$31
Contract KPIs $D$42 =’CF Contract 36 – Monthly Fcst’!B$33
Contract KPIs $E$42 =’CF Contract 36 – Monthly Fcst’!B$39
Contract KPIs $F$42 =’CF Contract 36 – Monthly Fcst’!B$41
Contract KPIs $G$42 =’CF Contract 36 – Monthly Fcst’!B$48
Contract KPIs $H$42 =’CF Contract 36 – Monthly Fcst’!B$50
Contract KPIs $I$42 =’CF Contract 36 – Monthly Fcst’!B$52
Contract KPIs $J$42 =IFERROR(‘CF Contract 36 – Monthly Fcst’!B$54,0)
Contract KPIs $C$43 =’CF Contract 37 – Monthly Fcst’!B$31
Contract KPIs $D$43 =’CF Contract 37 – Monthly Fcst’!B$33
Contract KPIs $E$43 =’CF Contract 37 – Monthly Fcst’!B$39
Contract KPIs $F$43 =’CF Contract 37 – Monthly Fcst’!B$41
Contract KPIs $G$43 =’CF Contract 37 – Monthly Fcst’!B$48
Contract KPIs $H$43 =’CF Contract 37 – Monthly Fcst’!B$50
Contract KPIs $I$43 =’CF Contract 37 – Monthly Fcst’!B$52
Contract KPIs $J$43 =IFERROR(‘CF Contract 37 – Monthly Fcst’!B$54,0)
Contract KPIs $C$44 =’CF Contract 38 – Monthly Fcst’!B$31
Contract KPIs $D$44 =’CF Contract 38 – Monthly Fcst’!B$33

Continued
Private Equity Financial Modelling and Analysis

Illustration 38 continued
Worksheet Address Formula
Contract KPIs $E$44 =’CF Contract 38 – Monthly Fcst’!B$39
Contract KPIs $F$44 =’CF Contract 38 – Monthly Fcst’!B$41
Contract KPIs $G$44 =’CF Contract 38 – Monthly Fcst’!B$48
Contract KPIs $H$44 =’CF Contract 38 – Monthly Fcst’!B$50
Contract KPIs $I$44 =’CF Contract 38 – Monthly Fcst’!B$52
Contract KPIs $J$44 =IFERROR(‘CF Contract 38 – Monthly Fcst’!B$54,0)
Contract KPIs $C$45 =’CF Contract 39 – Monthly Fcst’!B$31
Contract KPIs $D$45 =’CF Contract 39 – Monthly Fcst’!B$33
Contract KPIs $E$45 =’CF Contract 39 – Monthly Fcst’!B$39
Contract KPIs $F$45 =’CF Contract 39 – Monthly Fcst’!B$41
Contract KPIs $G$45 =’CF Contract 39 – Monthly Fcst’!B$48
Contract KPIs $H$45 =’CF Contract 39 – Monthly Fcst’!B$50
Contract KPIs $I$45 =’CF Contract 39 – Monthly Fcst’!B$52
Contract KPIs $J$45 =IFERROR(‘CF Contract 39 – Monthly Fcst’!B$54,0)
Contract KPIs $C$46 =’CF Contract 40 – Monthly Fcst’!B$31
Contract KPIs $D$46 =’CF Contract 40 – Monthly Fcst’!B$33
Contract KPIs $E$46 =’CF Contract 40 – Monthly Fcst’!B$39
Contract KPIs $F$46 =’CF Contract 40 – Monthly Fcst’!B$41
Contract KPIs $G$46 =’CF Contract 40 – Monthly Fcst’!B$48
Contract KPIs $H$46 =’CF Contract 40 – Monthly Fcst’!B$50
Contract KPIs $I$46 =’CF Contract 40 – Monthly Fcst’!B$52
Contract KPIs $J$46 =IFERROR(‘CF Contract 40 – Monthly Fcst’!B$54,0)

Source: Modelling Solutions

Illustration 38 is a run from the Operis Analysis Kit Audit tool that has printed out all
the unique formulae which derive or calculate the key output ratios for the lender or the
shareholder. As these key outputs are a typical key risk it is advisable to use the output to
check the logical integrity of each cell reported to the Contract KPIs and the CF Contract
1 – Monthly Fcst sheet included in the example.

Flex and sensitivity review

Flex testing is a valuable technique for finding potentially large errors in a model. It involves
the variation of inputs and the observation of the effect on the outputs. It is important to
concentrate on key risk areas.
A sensitivity can be reviewed by changing inputs required for the designated sensitivity
case and reviewing the results. However, it is better to use a sensitivity comparison to the

54
 Pre-investment modelling and analysis

base case (that is, tracking changes) between the outputs and assessing whether the model
changes in areas as expected. Both flex testing and sensitivity review should use this approach
and should collaborate each sensitivity with a high level analytical review. The final part
would be to rank each result in order and assess the relative ranking given your knowledge
of the case.

Exercise self-testing the financial model

Based upon the private equity start up model that you have built to date please undertake
a self testing and review approach. More specifically, please undertake an analytical review
of the statement forecasts, review the key outputs for the credit ratios and equity returns
and flex the key input assumptions using the flex testing approach. After you have under-
taken your self-testing or review of the financial model that you have built please make any
necessary corrections.

Using the model

From the financial model that you have built you have the capability to produce viable
projections. The company will provide adequate returns to its shareholders and have suffi-
cient cash flow and working capital and any other material output areas will be considered.

Disclaimers
It is highly recommended that given the multiple sources that can give rise to errors in finan-
cial models of this nature that liability needs to be waived as appropriate. The disclaimer
below outlines a typical disclaimer that should always be placed in a financial model before
it is distributed.

Disclaimer
This model has been prepared by Modelling Solutions Limited (MS) from data provided by
various parties. It has not been audited and recipients should use their own due diligence.
No representation, warranty or undertaking (expressed or implied) is made in relation to it.
No responsibility is taken or accepted by MS for the accuracy of the model or the assump-
tions on which it is based and all liability therefore is expressly excluded.

The example that has been outlined above regarding the outsourced finance and accounting
business had its own financing characteristics in that its outsourcing contracts were cash
hungry and required funding over the life of the investment. However, many private equity
transactions may be funded after valuing the company prior to acquisition and then fitting
the funding package. Consequently, the section below addresses the issue of how to value
the company at the entry of the private equity company.

55
Private Equity Financial Modelling and Analysis

Valuing the company

Valuing a business is an art and not a science; consequently, there are a number of potential
valuation techniques or methods at our disposal for us to attempt to place a valuation on
the target company. Given that the target is an unquoted company we will demonstrate the
following approaches.

Asset-based valuations
Illustration 39 shows an example of an asset-based valuation approach. We can see the target
company’s balance sheet at historic cost. However, upon review of the company’s balance
sheet we have found that the current value of the certain balance sheets assets is as follows.

• Fixed assets NBV £11 million.

• Accounts receivable £3 million bad debts are expected.
• Stock £3.2 million market value now higher.

Based upon the required current values we can recalculate the net assets at current value and
thus complete the double entry journal adjustments. Essentially, we have included revalu-
ation journal entries in columns C and D in order to calculate the impact on the assets
and the revaluation reserve, see Illustration 40. This results in a company valuation of £6.9
million. A rule of thumb is that the net asset valuation should always set the scene for the
lowest valuation.

Illustration 39
Pre current value

Project name Net assets valuation

Model start date – forecasts start 01 January 2011
Historic cost Current value Increase/(decrease)
Actual opening balance sheet 31 December 2010 31 December 2010 31 December 2010
£ million £ million £ million
Fixed assets – net book value 8.2 11.0 2.8
Capitalised arrangement fees 0.3
Current assets
Cash 15.3
Accounts receivable 4.5 3.0 –1.5
Stock 2.5 3.2 0.7
Other current assets 3.0
25.3

Continued

56
Project name Net assets valuation
Model start date – forecasts start 01 January 2011
Historic cost Current value Increase/(decrease)
Actual opening balance sheet 31 December 2010 31 December 2010 31 December 2010
£ million £ million £ million
Current liabilities
Accounts payable 3.4
Vat payable/(receivable) 0.6
Tax payable 4.6
8.6
Long term liabilities
Shareholder loan 8.1
Senior debt 12.1
20.2
Net assets 5.0 1.9
Financed by
Equity 5.0
Retained earnings 0.0
Shareholders funds 5.0
Checks 0.0

Source: Modelling Solutions

Illustration 40
Net assets valuation

Period ending 31 December 31 December

2010 2010
Historic cost Revaluation Revaluation Current value
journal journal
£ million £ million
DR CR
Fixed assets – net book value 8.2 2.8 11.0
Capitalised arrangement fees 0.3 0.3
Current assets
Cash 15.3 15.3
Accounts receivable 4.5 –1.5 3.0

Continued
Private Equity Financial Modelling and Analysis

Illustration 40 continued
Period ending 31 December 31 December
2010 2010
Historic cost Revaluation Revaluation Current value
journal journal
£ million £ million
DR CR
Stock 2.5 0.7 3.2
Other current assets 3.0 3.0
25.3 24.4
Current liabilities
Accounts payable 3.4 3.4
Vat payable/(receivable) 0.6 0.6
Tax payable 4.6 4.6
8.6 8.6
Long term liabilities
Shareholder loan 8.1 8.1
Senior debt 12.1 12.1
20.2 20.2
Net assets 5.0 6.9
Financed by
Equity 5.0 5.0
Retained earnings 0.0 0.0
Revaluation reserve 0.0 –1.5 3.5 1.9
Shareholders funds 5.0 6.9

Source: Modelling Solutions

Free cash flow

The free cash flow approach for valuation purposes represents the cash flow available for
distribution to all investors in corporation, that is, debt and equity sources. Free cash flow
can be defined as follows.

• EBITDA.
• Plus depreciation/amortisation.
• Plus change in working capital.
• Less capital expenditure.
• Less taxation.

58
 Pre-investment modelling and analysis

Multiples-based approaches
The exit multiple approach assumes that a business will be sold at the end of a certain year
in the forecast. The exit multiple used is usually derived by using financial analysis associated
with comparable companies. The analysis of comparable companies will help identify the
range of multiples that can be applied. The most common basis used is an EBITDA multiple
which is based upon enterprise value/EBITDA. The EBITDA multiple is then applied to the
EBITDA for the year of exit or sales of the business. A terminal value is usually calculated
at the year of exit.
Illustration 41 shows an example of an EBITDA multiple calculation that would typi-
cally be made for each comparable company usually from their latest accounts with the view
applying a mean or indeed average of these statistics.
In Illustration 41 we are required to find the enterprise value of the particular company
for the valuation date of 31 December 2010. The market price of an ordinary share is £6.78
and there are currently 16.8 million in issue.
We can derive the market price of the ordinary shares by simply multiply these two
numbers. The debt and the cash are taken from the balance sheet. Using this calculation
basis we derive an enterprise value for the company of £108.6 million.
The EBITDA for the year ending 31 December 2010 is £10 million, therefore, our
EBITDA multiple is 10.9.
For further details see the Excel example, Illustration41.xlsx.

Illustration 41
EBITDA multiple valuation

Project Name EBITDA multiple valuation

Date of valuation 31 December 2010
Market price ordinary share £6.78
Number of ordinary shares in issue (million) 16.8
Profit and loss account 2010
EBITDA multiple valuation Year ending:
Period ending 31 December 2010
Forecast £ million
Sales 99.0
Cost of sales 45.0
Gross profit 54.0
Operating expenses 44.0
EBITDA 10.0
Depreciation 3.2
Amortisation – arrangement fees 0.1

Continued

59
Illustration 41 continued
Project Name EBITDA multiple valuation
EBIT 6.7
Cash interest/(expense) 0.3
Interest – shareholder loan 1.3
Interest – senior debt 1.0
EBT 4.7
Tax 7.1
Earnings after tax –2.4
Dividends 0.0
Earning retained for the period –2.4
Balance sheet
EBITDA multiple valuation
Period ending 31 December 2010
Actual £ million
Fixed assets – net book value 31.8
Capitalised arrangement fees 0.3
Current assets
Cash 15.3
Accounts receivable 4.5
Stock 2.5
Other current assets 3.0
25.3
Current liabilities
Accounts payable 3.4
Vat payable/(receivable) 0.6
Tax payable 4.6
8.6
Long term liabilities
Senior debt 10.0
10.0
Net assets 38.8
Financed by
Equity 16.8
Retained earnings 22.0
Shareholders funds 38.8

Continued
 Pre-investment modelling and analysis

Project Name EBITDA multiple valuation

Summary
EBITDA multiple valuation

Date of valuation 31 December 2010

Ordinary shares at market value £113.9
Add debt £10.0
Less cash –£15.3
Enterprise value £108.6
EBITDA 10.0
EBITDA multiple 10.9

Source: Modelling Solutions

Terminal value
A terminal value approach is the present value based upon a point in time of all future
cash flows at a growth rate into the future. There are two main methods of terminal value
calculations, that is, EBITDA multiple approach and the perpetuity growth approach.
The calculation for a perpetuity-based terminal value is as follows:

FCF Final Year / (Discount Rate – Growth Rate)

In Illustration 42, we have a free cash flow of £25.4 million in the final year of our 10-year
financial projections, a discount rate based upon the company’s weighted average cost of
capital (WACC) of 12% and an annual growth rate of 3% a year. This derives a terminal
value of £282.1 million.

Illustration 42
Terminal Value Perpetuity Growth

Terminal value perpetuity growth

Free cash flow in the final year of the projections £ million 25.4
WACC discount rate 12.0%
Perpetuity growth 3.0%
Terminal value 282.1

Source: Modelling Solutions

61
Private Equity Financial Modelling and Analysis

The calculation for an EBITDA multiple-based terminal value is as follows:

EBITDA Final Year @ EBITDA Multiple

In Illustration 43 we have an EBITDA of £29.1 million in the final year of our 10-year financial
projections and an EBITDA multiple of 10. This derives a terminal value of £290.8 million.
These examples can be seen in further detail in the Excel example, Illustration 43 (see
Illustration43.xlsx).

Illustration 43
Terminal value EBITDA multiple

EBITDA 29.1
EBITDA multiple 10
Terminal value 290.8

Source: Modelling Solutions

So the next question which springs to mind is what are the respective limitations of the
two alternative approaches? Put simply, both basis have a limitation associated with constant
growth. In terms of popularity in the real world the EBITDA multiple is far more widely
adopted by practitioners.

Enterprise value
Enterprise value is a valuation measure that reflects the market value of the whole business
enterprise value is normally valued at market values. Enterprise value can be defined as:

• ordinary shares (equity) at market value;

• add debt at market value;
• add preferences shares at market value; and
• less cash.

In Illustration 44 we are required to find the enterprise value of the particular company for
the valuation date of 31 December 2010. The market price of an ordinary share is £4.67
and there are currently 16.8 million in issue.
We can derive the market price of the ordinary shares by simply multiply these two
numbers. The debt and the cash are taken from the balance sheet. Using this calculation
basis we derive an enterprise value for the company of £83.4 million.
For further details see the Excel example, Illustration44.xlsx.

62
Illustration 44
Enterprise value

Project name Enterprise value

Date of valuation 31 December 2010
Market price ordinary share £4.67
Number of ordinary shares in issue (million) 16.8
Date of valuation 31 December 2010
Ordinary shares at market value £78.5
Add debt £20.2
Less cash –£15.3
Enterprise value £83.4

Source: Modelling Solutions

Section 4

Leveraged buyouts

We shall now turn our attention to leveraged buyouts. A leveraged buyout can be defined
as the acquisition of a company using significant amounts of debt to finance. There was
a great deal of this type of private equity backed transaction during the early 2000s prior
to the financial crisis of the 2007 and 2008. Indeed a section of this book is dedicated to
financial modelling and analysis solutions for leveraged buyouts that have consequently found
themselves in a distressed debt position.
Despite any potential downside associated with leveraged buyouts there are a number
of advantages of using this approach. A major advantage of a leveraged buyout is the
ability to restructure the company by removing any layers of management by redundancy,
cutting out unprofitable products and service lines, eliminating excessive and unnecessary
expenditure, thus leading the company to becoming restructured, and has the potential to
earn attractive returns.
A leveraged buyout requires a high debt to equity ratio so organisations can acquire
companies with very little capital.
Leveraged buyouts are often a financing mechanism for management buyouts where both
the management teams and the shareholders objectives can be aligned. This can often lead
to management loyalty with great benefits in efficiency and performance.
However, in times of a weak economy a leveraged buyout is very high risk. If the company
has insufficient cash flows to service its high debt levels, that is, principal and interest, there
is a risk of the company entering administration and even liquidation.
We will now go through the financial model build for a leveraged buyout of a fast
moving consumer good company. The financial model build, that we are about to under-
take represents the projections that will be included in the business plan and information
memorandum for presentation to the prospective investors. The buyout will be made with
60% senior debt and 40% equity.

Illustration 45
Specification template
Specification V1
The financial model for a leveraged buyout

Contents
Objective of the model ............................................................................................................................ Page x
Users of the model .................................................................................................................................... Page x

Continued

64
Output schedules required ..................................................................................................................... Page x
Material calculations .................................................................................................................................. Page x
Input data ...................................................................................................................................................... Page x
Functionality required ................................................................................................................................ Page x
Appendices .................................................................................................................................................... Page x

Objective of the model

∑∑ The objective of the leveraged buyout financial model is to project the fast moving consumer
goods company’s financial forecasts or projections over a 10 year horizon on a yearly basis.
∑∑ The results will be used for both internal management and prospective investors.
Appendix A shows the outputs outlined above.

Users of the model

∑∑ The model will be owned and used by xxxxx xxxs and his team.
∑∑ The model will be made available to TBA private equity firm.
∑∑ The model will be made available to TBA senior lenders.

Output schedules required

The output schedule formats are outlined in Appendix A.

Material calculations
∑∑ Specify new products.
∑∑ Specify others.
∑∑ Specify others.
∑∑ Specify others.

Input data
∑∑ The inputs are as required to be derived from the models outputs and calculations and
MS will define these.
∑∑ More specifically. TBA

Functionality required
Any other areas. TBA

Appendix A
Output schedules
∑∑ Cashflow format. TBA
## Attach specimen outputs.
∑∑ Profit and loss account. TBA
## Attach specimen outputs.

Continued
Private Equity Financial Modelling and Analysis

Illustration 45 continued

∑∑ Balance sheet. TBA

## Attach specimen outputs.
∑∑ Key output summary. TBA
## Attach specimen outputs.

Appendix B
Input schedules
The inputs are as required from the models outputs and calculations and Modelling Solutions
will define these where they have not been outlined.

Source: Modelling Solutions

Designing the financial model

Again, given the discussions regarding financial modelling best practice (FMBP) outlined earlier
in this book our next stage is to define the design for our leveraged buyout financial model.
It is obvious to us that our financial model can and will be built in Excel. Any version
from Excel 2007 onwards will be suitable for our requirements. One workbook is all that
is required and we will design our model on a modular basis breaking down the key areas
of the logic.

Layout
The next stage is to define the structure of the leveraged buyout financial model in Excel,
starting with the outputs and working back to the required inputs. This enables the modeller
to complete the logic and define the inputs and collect them.
The example outlined in Illustration 46 (see Illustration46.xlsx) shows a layout of the
financial model which will allows us to complete the build.
The financial model layout includes administration sheets at the front, followed by yellow
sheets for inputs, the intermediate calculations sheets are in green, and the output sheets are
in blue. The colour scheme adopted visually presents us with an increase of colour shading
from left to right in the form of white, yellow, green and blue. This is a standardised model
layout that we adopt for all our financial model build projects. You will notice that the sheets
are organised on a modular basis given the scope and purpose of the financial model. The
sheet names are clear and self-explanatory. Where there is an exception to this rule please
refer to the model layout listing in Illustration 46, which explains the purpose of each sheet.
Essentially, the input and calculations are in worksheets where you would logically expect
to find them. You will notice that the output schedules are already included as it is quite
standard to have agreed these with the end client at this stage in the financial model build
project. In the summary output section you will see the profit and loss, balance sheet, cash
flow and summary sheet.

66
 Leveraged buyouts

Illustration 46
Layout

Worksheet name Purpose of the worksheet

Cover This is the operating model disclaimer
Version control This is the log which keeps a track between versions
Change control This is the log which keeps a track of change requests
User and technical documentation This is the sheet that contains the operating model documentation
<<<Input sheets>>> The start of the input section
General inputs The general inputs that do not fit in the other input sheets
<<<Calc sheets>>> The start of the calculation sheets
Sales – cost – accounting This represents the calculations for sales, costs and accounting
Financing and working capital This represents the long term financing and working capital
calculations
Taxation This computes the corporation tax and vat
Lenders ratios This computes the lender covenants ratios
Returns analysis This computes the shareholders IRR at difference exit years
<<<Output sheets>>> The start of the detailed output schedules
Profit and loss This is the annual forecast profit and loss account
Cash flow This is the annual forecast cash flow
Balance sheet This is the annual forecast balance sheet
Summary This is the summary dashboard
Checks This represents the cross checks

Source: Modelling Solutions

When you cross reference the narrative above to the illustration its plain to see that
the names used in our layout appear to be relatively self-explanatory and straight forward.
This is what one would expect to find from undertaking such an approach.

Layout exercise
You are now ready to start to build your leveraged buyout financial model in your copy of
Excel. Please prepare the model layout by using the same sheet layout and output schedules
as used in the example.

Timeline
We will now compute the timeline for the leveraged buyout financial model. We will now
go through the logic of this module with reference to Illustration 47 (see Illustration47.xlsx).

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Private Equity Financial Modelling and Analysis

Essentially, for the green calculation sheets and the blue output sheets you will see the
‘EOMONTH’ formula being used with a 12 month interval for timeline purposes.

Timeline exercise
Please add a timeline to each of the green calculation and blue output sheets with a 12
monthly interval where required.

Sales – Costs – Accounting

We will now go through the logic of this module with reference to Illustration 48 (see
Illustration48.xlsx).
The worksheet represents the calculations for the sales, cost and necessary accounting
entries. First, in row 7 we have the fixed asset schedule. This simply comprises an opening
balance, capital expenditure additions and the straight line depreciation charge in row 9.
The closing net book value is shown in row 10. Cell B10 represents the opening balance
sourced from the actual closing balance sheet.
Goodwill is calculated in rows 13 to 16. The opening balance is shown in row 13. The
goodwill is amortised over 10 years as in row 15. You will notice that a similar logic is
adopted for both the depreciation and amortisation for the P&L. The logic checks whether
the years for write off equals zero if so a zero is returned. Otherwise the calculation takes
the minimum of the opening balance plus additions in order to only write off the maximum
amount available and the charge for the year. The charge for the year takes the opening
balance at the beginning of the forecast periods and adds the additions to date and divides
this by the number of years.
Rows 19 to 70 represent the sales calculations. Rows 20 to 30 link the current level of
sales. Rows 34 to 43 link the sales growth for a product over the 10 year forecast period.
Rows 46 to 56 represent the sales growth index. Rows 59 to 70 multiply the current sales
levels by the growth index to compute the forecast sales. The cost of sales is calculated in
rows 73 to 95. The cost of sales assumption for each product is referenced with a dollar
fixing in order to be appropriate for each year. In rows 84 to 95, the cost of sales which
simply represents sales is multiplied by the relevant cost of sale percentage. The operating
costs in rows 97 to 121 represent the operating costs as in the general inputs sheet multiplied
by the general inflation index in row 99.
The arrangement fees for the senior debt are shown in rows 123 to 134. This is calcu-
lated as a percentage of the new debt drawn and amortised over the life of the debt term
as in row 133.
Rows 136 to 146 represent the results which are transferred to the respective
output sheets.

Sales – Costs – Accounting exercise

Please compute the sales, operating costs and accounting projections.

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 Leveraged buyouts

Financing and working capital

We will now go through the logic of this module with reference to Illustration 49 (see
Illustration49.xlsx).
In row 5 there is a need to finance the incremental amount of capital expenditure. The
debt and equity percentage is shown in rows 8 and 9. The senior debt amount is calculated
in row 13. The debt drawn is added to the senior loan schedule as in row 20. The opening
balance is linked as in the balance sheet and projected in row 22 as in the opening balance
plus draw downs less principal. The principal is calculated in row 21 by calculating the
minimum of the opening balance and the drawn debt against the respective straight line
principal amortisation. The principal amortisation takes the opening balance plus the amount
drawn divided by the number of years amortisation.
The interest in row 23 is calculated by taking the opening balance plus the average
amount of debt drawn down at the annual interest rate. Dividends are calculated in rows 25
to 42. The cash available for dividends is calculated adding the opening cash balance from the
balance sheet and the cash generated in the period prior to dividends as in rows 29 to 31.
The retained earnings available are calculated by taking the opening retained earnings
in the balance sheet and the profit in the period as in the rows 33 to 37.
The dividend declared in the profit and loss is shown in row 41.This logic calculates
the lower of cash and distributable reserves and cash. The dividend paid is simply assumed
to be equal to the declared.
Rows 46 to 49 compute the net cash interest income and expense. If the average cash
balance between the years is greater than zero then the average cash balance is multiplied
by the interest on short-term cash. If the average cash balance is negative then the average
cash balance is multiplied by the overdraft interest rate.
The capital expenditure in row 54 is calculated by multiplying the general inputs by the
general inflation index.
The trade debtors balance in row 62 is calculated by taking the sales, as in the profit
and loss, multiplied by the trade debtors and divided by 365.
The trade creditor’s balance in row 68 is calculated by taking the cost of goods sold in
the profit and loss and multiplying this by the trade creditor days and dividing this by 365.
The stock balance is calculated in row 74 by taking the cost of goods sold and multiplies
this by the stock holding days and dividing this by 365.
The other current assets balance is calculated by taking the sales and multiplying this
by the number of other current asset days dividing by 365.
Rows 85 to 100 represents the outputs that are linked to the cash flow, profit and loss
and balance sheet forecasts.

Financing and working capital exercise

Please calculate the finance and working capital projections.

Taxation
We will now go through the logic of this module with reference to Illustration 50 (see
Illustration50.xlsx).

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Private Equity Financial Modelling and Analysis

First, looking at the corporation tax side we start by calculating the tax loss memo-
randum in rows 5 to 11. This looks at the opening balance and adds the taxable loss, that
is, if the profit before loss relief is negative in order to calculate the losses available. The
tax loss is relieved against the current year’s taxable profits. The closing balance equals the
losses available less the tax losses relieved.
The capital allowance computations are split between blocks or ranges that calculate
industrial buildings and structures, plant and machinery and long life assets. The logic is iden-
tical with the exception to the charges being straight line or reducing balance. Consequently,
it is best to simply explain the first category, that is, Industrial Buildings and Structures.
Essentially, the particular company’s yearend straddles two corporation tax years. Note that
the accounting year is ending 31 December and the corporation tax (CT) assessment period
ends on 31 March.
Consequently, row 19 calculates the first CT period ending and the row 20 calculates
the second period ending. For the year ending 31 December 2011 the two CT period ends
are 31 March 2011 and 31 March 2012. Rows 21 and 22, calculates the percentage of
the taxable profits that fall into each CT year. Row 22 calculates the second CT period
percentage by the use of the ‘DAYS360’ formula using the first period and the period ending
for the financial year and dividing this by 360.
The first CT period percentage is simply 1-% calculated for the second period.
In rows 23 and 24 the applicable rates for capital allowance purposes are referenced
using the ‘HLOOKUP’ formula.
The applicable CT rate used for the accounting year is calculated in row 25 by the
use of the ‘SUMPRODUCT’ formula. This multiplies the applicable rate at the percentage
of time.
The split of the percentage capital allowance asset type is referenced. The capital allow-
ance schedule is calculated in row 27 to 30. The capital additions are calculated by the total
capital expenditure multiplied by the split. The capital allowance is calculated taking the
opening balance and additions at the applicable rate.
In rows 60 to 67 the capital allowances are summarised. The small company’s profit rate
for CT purposes uses a similar concept for the logic as explained earlier for the calculating
the first CT period ending, the second CT period ending, the first CT period percentage, the
second period percentage. In order to calculate the weighted average rate applicable by the
use of the ‘SUMPRODUCT’ formula.
The logic for each of the following sections works on a similar basis to that above, that
is, the main rate of CT, marginal relief standard fraction, upper limit small profit rate –
taxable profits and the marginal relief upper limit and the lower limits as outlined in rows
168 to 222.
The CT computation is calculated in rows 123 to 133. It simply references the profit as
in the accounts adding back the depreciation in order to find the taxable profits and deducts
the capital; allowances in order to find the profits before loss relief. The tax loss is relieved
in order to derive the profit chargeable to CT. The specific tax rate is calculated by testing
whether the profits chargeable to CT are less than the marginal relief lower limit, if so the
small companies rate is used. If the profits chargeable to are greater the main rate of CT is
used. Marginal relief is applied if the profits chargeable to CT are greater than the marginal

70
 Leveraged buyouts

relief upper limit, if so a marginal relief upper limit is deducted from the profits chargeable
to CT multiplied by the marginal relief standard fraction.
Row 133 calculates the tax charge in the P&L. This is simply the profits chargeable to
CT multiplied at the CT rate deducting any marginal relief if applicable.
The VAT is calculated in rows 138 to 172. The output VAT takes the sales and multiplies
this by applicable VAT rate. The input VAT takes the expenditure and multiplies this by the
VAT rate. For the VAT cash flow we consider the net receipt over payments for the cash
collected and paid at source and the net of any quarterly refunds or payments to HMRC.
The net receivable or payable to or from HMRC is shown in rows 171 and 172.
Rows 175 to 177 deal with the CT for the profit and loss, cash flow and balance sheet.
Essentially, the tax charge for the year is paid in the next year for cash flow purposes (row
176).
The tax payable in the balance sheet represents the opening balance plus the tax charge
less the cash paid.

Taxation exercise
Please compute the CT liability including the small company and main company logic together
with any loss relief offset against future year’s profits chargeable to CT. Include the summary
outputs to be linked to the financial statements. Please compute the VAT liability including
the links to the financial statements.

Returns analysis
We will now go through the logic of this module with reference to Illustration 51 (see
Illustration51.xlsx).
Looking at the Returns Analysis tab, we can see in row 6, the exit year number.
The exit year EBITDA multiple is referenced. This is based upon research using industry
comparable data.
The equity value on exit can be computed by multiplying the EBITDA at the multiple
after deducting the debt balance and cash balances.
In order to calculate the internal rate of return (IRR) at each exit year, we must consider
the amount of equity invested by the private equity firm at the start, that is, at time zero of
£20.7 million. Upon each year the private equity investor will receive the equity valuation
on exit plus any dividend streams up to and including the exit date.
The cash flow streams over years 1 to 10 are measured and summarised as a key output
using the ‘IRR’ formula in row 27.
Of course, you may want to undertake sensitivity analysis by considering changing
EBITDA growth and exit multiples over the life of the investment.

Returns analysis exercise

Please compute the IRRS for each of the 10 years comprising the dividend streams plus the
exit cash flow.

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Private Equity Financial Modelling and Analysis

Lender ratios
We will now go through the logic of this module with reference to Illustration 52 (see
Illustration52.xlsx).
The senior debt holders have included the following financial covenant tests in its
facility agreement.

• Debt to equity ratio: this is calculated by referencing the senior debt balance from the
balance sheet projections. This is compared with the total debt and equity as in the balance
sheet in row 16. The debt to equity ratio is calculated in row 18. The maximum debt
to equity ratio is calculated in cell B19 by using the ‘MAX’ formula across the 10 year
forecast range. The debt to equity date with the maximum ratio is referenced by the use
of the ‘INDEX’ formula which references the dates, and matches which date equals the
maximum debt to equity ratio. The debt to equity ratio is calculated in cell B21 by using
the ‘AVERAGE’ formula across the 10 year range.
• Free cash flow to debt ratio: from rows 23 to 25, the free cash flow to debt ratio is
calculated. This is simply the free cash flow divided by the debt. The minimum average
and the minimum date logic are similar to the first ratio calculated.
• Debt to EBITDA ratio: from rows 38 to 50, the debt to EBITDA ratio is calculated. This
is simply the debt divided by the EBITDA. The minimum average and the minimum date
logics similar to the first ratio calculated.
• Debt to net assets: from rows 52 to 64 the debt to net assets ratio is calculated. This is
simply the debt divided by the net assets as in the balance sheet. The minimum average
and the minimum date logics similar to the first ratio calculated.
• Interest cover ratio: from rows 66 to 79 the interest cover ratio is calculated. This is
simply the earnings before interest and tax (EBIT) in the P&L divided by the senior debt
interest as in the P&L. The minimum average and the minimum date logics are similar
to the first ratio calculated.

Lender ratios exercise

Please compute each of the lender’s ratios together with the minimum values, minimum dates
and average values over the 10 years.

Profit and loss

We will now go through the logic of this module with reference to Illustration 53 (see
Illustration53.xlsx).
The rows down to EBIT are referenced from the Sales-Costs-Accounting sheet. The
interest and dividends are referenced from the Financing and W.Capital sheet. The taxation
is referenced from the Taxation sheet. Key ratios are calculated in rows 23 to 27.

Profit and loss exercise

Please link in the profit and loss account over the 10 years as appropriate.

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 Leveraged buyouts

Balance sheet
We will now go through the logic of this module with reference to Illustration 54
(Illustration54.xlsx).
The company is purchased by the private equity firm on 31 December 2011. The entry
year EBITDA is £5.3 million valued at a multiple of 7.5 times EBITDA. In order to arrive
at the equity valuation we must deduct the debt and reduce the cash balance as follows:

Entry EBITDA 31/12/2010 – £5.3 million

Entry EBITDA multiple – 7.5 times
Subtotal – £39.75 million
Less debt – £ 2 million
Cash balance £15.3 million
Equity purchase price £53 million

Consequently, we need to acquire the equity of £53 million plus the need to repay the
existing debt balance of £2 million and pay £12 million of upfront fees for the transaction.
The total sources of funds are £67 million.
The sources of funds to finance this transaction represent the cash on hand at £15.3
million and the debt and equity at its relative percentages less the cash on hand to finance
£67 million.
Turning our attention to the Balance sheet we can see the following entries made to the
pre-acquisition balance sheet as at 31 December 2010.
First, goodwill in cell C9 represents the purchase of the equity over and above the
net assets.
The cash in cell D12 represents a source of funds and is, therefore, reduced.
The source of finance in terms of the senior debt is shown in cell C23, that is, 60% of
the equity purchase price is added to the balance accordingly.
The existing senior debt balance as at 31 December 2010 is eliminated from the balance
as pre cell D23.
The source of finance in terms of equity is shown in cell C29, that is, the equity contri-
bution at 40% less the upfront fees.
The existing equity must be eliminated as in cell D29 as well as the existing retained
earnings in order to eliminate all of the pre-acquisition shareholders funds balance.
From column F onwards the balance sheet is linked from the other sheets accordingly.
Rows 33 to 39 include a number of reconciliation checks.

Balance sheet exercise

Please use the existing actual balance sheet as at 31 December 2010 as the start point in
order to arrive at the post acquisition balance.
Please value the equity at 7.5 times the 31 December 2010 EBITDA. Ensure that you
eliminate the existing debt and equity and use the cash on hand for financing purposes. The
debt to equity ratio will be 60:40.
Please link in the balance sheet over the 10 years as appropriate.

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Private Equity Financial Modelling and Analysis

Cash flow
We will now go through the logic of this module with reference to Illustration 55 (see
Illustration55.xlsx).
The EBITDA is linked to the P&L. The movement of working capital, taxation and
financing are linked to the outputs from the specific calculation sheets.

Cash flow exercise

Please link in the cash flow over the 10 years as appropriate.

Summary
We will now go through the logic of this module with reference to Illustration 56 (see
Illustration56.xlsx).
The Summary sheet includes the equity IRRs for the exit year three to seven. The cash
position is shown at minimum and maximum levels. The equity valuation basis is shown
together with the sources and uses of the transaction. The lenders credit ratios are shown.

Summary exercise
Please link in the summary sheet thus showing a dashboard position of the company’s finances.

74
Section 5

Post-investment financial and performance

management

The post investment stage of the private equity business model is where the management
team are running the company with a primary objective of providing an adequate return to
its shareholders by maximising the value of the company (the private equity firm), servicing
the debts of its lenders, and remaining financially viable. There has been some feeling in the
financial and business community that this part of the private equity business model (post
investment financial and performance management) is a weak link in the process. Indeed
often there has been a feeling that the monitoring stage is often too weakly controlled and
that the running of the company is left to the management team with non-optimal processes
and controls. Consequently, a unique edge, which this book seeks to address, is the process
for ensuring optimal planning and control of the portfolio company.

Illustration 57
Post investment financial and performance management

Strategic plan

Budgets and targets

Actuals Performance management

Source: Modelling Solutions

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Private Equity Financial Modelling and Analysis

Illustration 57 is a process model that seeks to maximise the value of the company
invested in during the investment period up until exit. Essentially, this involves the process
of strategic planning, budgeting and target setting, monitoring against actual performance
and the management there of. We can define strategic planning as the process that defines
where the company is likely to want to go in terms of its strategic vision. This is often
defined through the use of a mission statement. A mission statement defines in summary the
fundamental purpose of an organisation.
Strategic planning also involves the process of looking at the business in terms of its
strengths–weaknesses–opportunities–threats. This is usually referred to as SWOT analysis.
A SWOT analysis can help a business to understand how it is positioned rela-
tive to its market and competition. You can use the points below in order to assess
certain factors.

• Strengths:
## advantages of the proposition in terms of the product or business;
## product capabilities given the customer requirements;
## competitive advantages in terms of competitors, for example, better distribution channels;
## innovative aspects of the product/business;
## any unique selling points;
## resources, assets, people;
## experience, knowledge and data; and
## processes, systems, IT and communications.

• Weaknesses:
## disadvantages of the proposition, product or business;
## gaps in capabilities;
## competitive weakness versus other similar businesses;
## financial constraints;
## poor processes and systems;
## lack of necessary accreditations; and
## restrictions on IT, systems or communications.

• Opportunities:
## market developments;
## competitors’ vulnerabilities;
## geographical or export opportunities;
## seasonal influences;
## current styles or trends; and
## niche markets.

• Threats:
## political factors which may affect the company;
## legislative changes such as taxation;
## environmental pressure such as emissions, pollution and so on;
## IT or computer technology that may reduce the demand for companies products and

services;
## new competitors entering the market with competitive offerings;

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 Post-investment financial and performance management

## consumer demand decrease due to recessionary impacts; and

## technological threats such as new methods of distribution, for example, e-commerce
which may act as an alternative to retail outlet distribution.

Another area to attain a competitive advantage is through leading edge budgeting techniques.
Budgets and targets can be set by traditional budgeting techniques such as zero based
budgeting and activity based costing/management.
The purpose of budgeting is to help the organisation to provide a forecast of revenues,
expenditures, profit and loss, cash flow and balance sheet over the next accounting year
usually on a monthly basis. The budgeting process will seek to set targets on a functional
and departmental level that links to the overall financial goals of the company. It is important
that the first budget year ties up with the forecast from the private equity deal’s financial
projections or financial model, that is, is translated into budgetary terms for the organisation.
The financial model should be used for reforecast purposes by the organisation.
It is advantageous for the organisation to promote efficient budgeting approaches that
avoid non incremental and are more aligned to a zero based budgeting. This is a method
of budgeting in which all expenses must be justified for each budget period. Zero-based
budgeting starts from a ‘zero base’ and each department within the company is reviewed for
its needs and costs. Budgets are then forecast around what is needed for the forthcoming
budget period. It is irrelevant whether the budget is higher or lower than what has been
spent historically or allocated as budgets for previous years. The clear advantage is that a
very lean and efficient budget is set for the organisation which will obviously help to improve
the EBITDA year on year.

Activity-based costing
A further area to gain a great advantage and improve EBITDA which we know is a critical
target for private equity investment success is the use of activity-based costing/management
(ABC/M) techniques.
ABC/M is a management accounting technique that identifies activities in an organization
and assigns the cost of each activity with resources to all products and services according
to the actual consumption of the resources. This technique attributes more indirect costs or
overheads to the direct costs compared with conventional costing models.
Consequently, ABC/M allows an organisation to have the following strategic advantages:

• allocate more resources on profitable products, departments and activities;

• control the costs at any per-product-level level and on a departmental level;
• find unnecessary costs that may be eliminated;
• set the price of a product or service more strategically and realistically; and
• identify the profitability of customers.

An example of the use of ABC/M can be seen in Illustration58.xlsx. The example shows
the use of activity based costing techniques for customer profitability purposes. The general
process that it adopted is as follows:

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Private Equity Financial Modelling and Analysis

• allocate costs to activity pools;

• compute activity rates; and
• measure customer profitability.

We will demonstrate this approach for a company that manufactures and distributes fire alarms
to retail outlets. There is the requirement to find the profitability of the Red Alert customer.
The first part of the process is to allocate costs to activity pools. From researching
a significant amount of historic data it has been found that a certain percentage of time
is attributable to certain tasks that drive the manufacturing overhead and the selling and
administration overhead. The activities that drive these costs are assembling units, processing
orders and supporting customers. The Excel worksheet 1 – Costs to Activity Pools shows
the allocation of overheads to the activity pools.
The next step is to compute the activity rates, that is, the cost of an activity unit.
This involves calculating the costs of each of the cost drivers or activity pools, that is,
assembling units, processing orders or supporting customers. By referencing the worksheet
2 – Activity Rates, we can find the total cost of each activity pool is linked in. The total
activity for each is also linked in order to compute the activity rate in pounds. In summary
we have activity rates for assembling units of £338 for a unit assembled. We have an
activity rate of £1,214 an order for the processing of orders. We have an activity rate of
£1,333 a customer.
The Customer Profitability worksheet shows the calculation of the customer profitability.
Sales are equal to the number of units purchased a year at the selling price of a fire alarm.
The direct cost of production is equal to the rate of a unit at the number of units purchased.
The Assembly Unit cost is equal to the number of orders placed by Red Alert at the
activity rate for assembling units.
The processing order cost is equal to the number of orders placed by Red Alert at the
activity rate for processing orders.
The cost of supporting customers is the activity rate for a customer.
Customer profitability is simply calculated by sales less total costs.

Activity-based costing exercise

Using the template ABCexercise.xlsx assign the costs to the activity pools, compute the
activity rates and derive the customer profitability for the Red Alert customer.

Capital budgeting
The ability for a company to make financially viable incremental business decisions involving
large amounts of capital investment is critical and can be managed and controlled through
adequate capital budgeting processes and techniques.
Capital investment appraisal techniques can be used when a company has incremental
business opportunities or projects to appraise. Capital Investment appraisal typically involves
the use of discounted cash flow (DCF) techniques to undertake the financial evaluation
of an incremental capital expenditure decision and the benefits and costs associated with

78
 Post-investment financial and performance management

that investment opportunity. Capital investment appraisals involve the entire process of
planning expenditures whose returns are expected to extend beyond one year. The very
obvious examples of capital expenditures are plant and machinery, buildings and land. The
less obvious types of investments are research and development projects, advertising and
promotional campaigns.
We refer to the example Illustration59.xlsx. Before we start to look at the example it is
best to consider the main definitions used in capital investment appraisals.
The payback period for a capital investment decision can be expressed in undiscounted
terms of DCF terms. It is simply the amount of time in years and months that it takes to
break-even in cash flow terms either discounted or undiscounted.
The internal rate of return (IRR) for a capital investment decision can be defined as
the discount rate at which the net present value (NPV) of the future stream of net cash
flows equal zero. This rate can be partnered to the firm’s weighted average cost of capital
(WACC) for financial evaluation purposes. Therefore ignoring any qualitative factors if the
project’s IRR exceeds the company’s WACC then the project will incrementally add value
to the company as a whole.
The NPV for a capital investment decision can be defined as the value of a series of
cash flows discounted at the required rate of return to derive a value in today’s money. It
accounts for the time value of money in the discounting process, that is, the opportunity
cost of the rate of return is considered. Therefore, ignoring any qualitative factors if the
project’s NPV exceeds zero then the project will incrementally add value to the company
as a whole.
For the example capital investment in question, the company is a retail company and has
raised £300 million of capital, which it is now free to invest in a number of retail outlets, that
is, buying the property’s lease of 10 years and opening and running a store in a certain area.
The project’s economic life is 10 years and the timeline and period of analysis reflect this.
For the purpose of evaluating these incremental projects the finance director of the
company in conjunction with the board of directors has formulated some capital investment
appraisal criteria as follows.
A discount rate has been set at 12%, this represents the company’s WACC and effectively
the hurdle rate for DCF analysis purposes. The investment appraisal criteria or benchmarks
can be seen in the General Inputs sheet in rows 8 to 12. Criteria are set for both discounted
and undiscounted payback years of three and two respectively.
Further criteria are made regarding the NPV for each pound invested. This is a useful
metric when a company has several capital investment appraisals to consider and has raised
limited funds for investment. In financial speak we call this capital rationing and the organ-
isation will seek to maximise the NPV for each pound of capital invested. This can be used
as a ranking mechanism for the allocation of capital subject to other evaluation criteria both
quantitative and qualitative.
The start date for the capital expenditure project is defined by the dropdown box which
is linked to a range of dates. The incremental business case projections are prepared in rows
16 to 40 of the General Inputs sheet where the sales and cost of sales assumptions are made.
The capital expenditure is entered in row 63. The operating costs for a year at today’s prices
are entered in rows 67 to 86.

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Private Equity Financial Modelling and Analysis

There is an inflation for a year assumption made. There are assumptions made regarding
working capital in rows 95 to 98. Incremental taxation assumptions are entered in rows 42
to rows 59 of the General Inputs sheets.
It is because we are looking at cash investments that the investment appraisal model
will include no accounting adjustments and the key outputs will be based upon cash flow
forecasts. However, a Profit and Loss extract is included in the Profit and Loss sheet. The
profit and loss extract is required in order to compute the cash flow timing effects of the
working capital in the Cash flow sheet.
Turning our attention to the Cash flow sheet we can see that the EBITDA is linked
from the profit and loss account. The movement in working capital, taxes paid for both
corporation tax and VAT are included in order to derive a cash flow from operating activi-
ties. The capital expenditure is also included in order to derive the net cash flow for the
project which is pre funding.
First, the NPV is calculated in cell B17. This represents the stream of cash flow over the
10 year period discounted at the 12% discount rate. Excel’s NPV function can assume that
the cash flows arise either at the beginning of the period or at the end of the period. In this
particular example the cash flows arise at the end of the period. If we wanted to make the
assumption that the cash flows arise at the beginning of the period we would simply add a
1 after the cash flow stream in the NPV formula.
The IRR is in cell B19. The formula simply takes the stream of cash flows over a 10
year period and uses the discount rate as a guess to find the discount rate at which the NPV
equals zero. In order to compute the discounted payback period metric the cash flows are
discounted using first principles the cash flow for each year is multiplied by (1(/(1+r)^n)).
Where r is the discount rate and n is the year number in row 23.
In rows 24, we can see the cumulative position, which help to identify where the cash
flows change from negative to positive. The first principle detail reconciles to the NPV using
the Excel NPV formula. The check in cell B25 shows that the check is equal to zero.
In terms of the payback year and month we can see this being calculated in rows 27
to 29. First, in row 27 a payback year flag is calculated which signifies the year of the first
positive cash position. The payback year is row 28 which extracts the year from the timeline
and multiplies it by year and the flag.
This takes the previous period’s negative cumulative cash flow and the next period’s
positive cash flows and assumes equal timings of cash flow throughout the year and calcu-
lates the months required to break-even. The payback period is the same as the logic above
except that the cash flows are not discounted.
The NPV for each pound invested is calculated by taking the NPV and simply dividing
by the capital expenditure.
The Summary sheet shows the results of the base case business compared with the
qualitative capital evaluation criteria. The base case results in column B are simply linked
to the Cash flow sheet. The capital investment evaluation criteria are shown in column C.
The IRR uses the concatenate function by joining together the greater than sign and the
discount rates.
The ‘EOMONTH’, ‘YEAR’ and ‘MONTH’ formulas are used to calculate the payback
year and month for both the discounted payback period and the undiscounted payback

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 Post-investment financial and performance management

period. The NPV for each pound invested is calculated by joining together the greater than
sign and the target metric for the NPV for each pound invested.

Capital investment appraisal exercise

Based upon the stream of net cash flows arising in the workbook CapitalInvestmentExercise.
xlsx, add logic to the cash flow outputs, increase the capital expenditure. Develop the model
further so that you calculate the payback, IRR and NPV for capital investment appraisals.
There are other areas of investment appraisal that are worthy of our attention. We shall
discuss these now with reference to relative examples.

Monthly cash flows

An example of the use of monthly cash flow timing can be seen in Illustration60.xlsx. The
General Inputs sheet simply shows the project name, the forecast start date and the discount
rate for NPV purposes.
The Cash flow – Monthly shows the period end dates using the ‘EOMONTH’ formula.
The project’s net cash flows are shown in row 7. In order to calculate the NPV based
upon the monthly cash flows we need to reference cell B10. The ‘XNPV’ formula is used
by accessing the discount rate, the net cash flows and the monthly dates. Similarly, the IRR
is calculated in cell B12 by using the ‘XIRR’ formula. The net cash flows are accessed, the
range of monthly dates, together with a given discount rate.
Row 14 and onwards represent a cross check to prove that our monthly logic is indeed
materially correct. In cell B16 we assume that on average there are 30.42 days in a month.
In row 18 we can see the discount factor for a month is simply 30.42 divided by 365 days
in a year. This is shown cumulatively in row 19.The cash flows are discounted in row 21
by taking the following calculation:

Net Cash flow multiplied by 1/(1+discount rate) ^ Discount Factor Cumulative

The sum of the DCFs gives a very minor difference to the Excel formula.

Monthly cash flows exercise

Based upon the Excel workbook NPVmonthlyexercise.xlsx, please complete the green cells
appropriately. First, add the monthly timeline, then calculate the NPV and IRR, using the
‘XNPV’ and ‘XIRR’ formulas, and also calculate the NPV from first principles as a cross check.

Capital rationing
An example of the use of capital rationing can use seen in Illustration61.xlsx. The Capital
Rationing sheet shows a methodology for the available project opportunities given that
the company has a limit of £6 million to invest. Rows 6 to 16 show the available project
opportunities available from 1 to 10.The project costs, NPV and the NPV for each pound

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Private Equity Financial Modelling and Analysis

invested is shown. We have used the ‘RANK’ formula in Excel in order to rank the projects
by relative ranking in terms of the greatest NPV for each pound of capital.
Rows 19 to 32 show the ranking by project which maximises the NPV for the company
given its £6 million capital availability. We can see in cell B21 that proposal number 10 is
allocated to the optimum plan. This formula looks to see if the cumulative costs are less
than the amount of capital available, if so the project costs are added by the use of the
‘SUMIF’ formula. Similarly, the project costs are allocated on this basis, together with the
NPV in column D.
In row 31 we can see the optimum investment plan is to invest £5.3 million which will
give a £3.2 million NPV. It is important to note that the eighth most attractive investment
proposal would take us over the £6 million capital limit and is thus not selected.

Capital rationing exercise

Using the Excel workbook CapitalRationing.xlsx, please complete the green cells in order to
calculate the optimum investment plan based upon the available investment opportunities.
Please compute the NPV/pound invested, the relative rank and prepare the optimum invest-
ment plan that maximises the company’s NPV.

Unequal project lives

An example of the use of unequal project lives can be seen in Illustration62.xlsx.
Here, we outline the evaluation technique that outlines comparing two projects with
unequal lives. The General Inputs sheet shows the project name, the start date for the time-
line, the discount rates and the relative projects’ lives.
In sheets Project A and Project B we can see the net cash flow being discounted in order
to arrive at the NPV for each project alternative. The annuity factor is calculated for each
project. The different variable being the project life of each. The NPV is divided by the
annuity factor in order to find the equivalent annual annuity. Project B has the highest and
should therefore be selected. A useful cross check for an annuity factor is the NPV less the
annuity which should always equal zero.

Unequal project lives exercise

Using the excel workbook UnequalProjectLivesexercise.xlsx, please complete the green cells in
order to calculate the NPV, the annuity factor, the equivalent annual annuity and the check.

Weighted average cost of capital

An example of the use of the WACC can be seen in Illustration63.xlsx.
Here, we can see that we have a cost of equity at 12%, cost of debt at 8% and a corpo-
ration tax rate of 27%. The capital structure exists of debt of £46 million and our market
value of the shares is £67 million. From row 18, we calculate our WACC that we will use
for capital project appraisals. In essence the relative proportions of funding are multiplied by

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 Post-investment financial and performance management

the cost of capital. However, the WACC for the debt has the benefit of the corporation tax
deductibility. The addition of the WACC equity and debt gives us our WACC discount rate.

Weighted average cost of capital exercise

Using the excel workbook WACCexercise.xlsx, please complete the green cells in order to
calculate the WACC for equity and WACC for debt leading to the WACC discount rate.

Post monitoring the private equity investment

In order to control and post monitor the investments there is a key issue to address the
problem at the highest level first. Consequently, there will be the need to control the annual
total company key financial statements, that is, profit and loss, cash flow and balance sheet.
Consequently, if we freeze these outputs as at the close of the private equity transaction and
compare the ongoing reforecast we can undertake variance analysis to this original plan.
The reforecast would comprise the actual to date plus the forecast. The forecast would have
similar logic as in the original plan.
It is normally straight forward to make the comparison at such a high level for control
purposes. So, for purposes of our post monitoring, we will keep matters at this level
and demonstrate the example. An example of the use of post monitoring can be seen in
Illustration64.xlsx.
We can now turn our attention to the post monitoring model that should be built using
the financial modelling best practice (FMBP) principles outlined earlier in this book. For this
example, we have decided to take the approach of using a single illustration to outline the
salient components.
In the General Inputs sheet we have the facility to select the current actual month ending
in B5 by the use of a dropdown box. Cell B1 shows the start date of the actual in terms
of the financial year end.
The Financial Statements – Actuals sheet includes the actual for the P&L, cash flow and
balance sheet. Note that these are collected in the same format as the original plans forecasts.
Row 7 shows the data set. Essentially, if the month ending is less than or equal to the
current month ending an Actual is displayed otherwise an N/A is displayed indicating there
is the need to enter any actual financial statements.

• CF Total – Monthly – RFCST: this sheet represents the reforecast monthly cash flow
starting from the first reforecast date in the timeline, that is, 31 July 2013. The timeline
will be updated each time the current month ending date is changed. Reconciliation checks
are included in rows 26 to 28.
• B Sheet Total – Monthly – RFCST: this sheet represents the reforecast the monthly balance
sheet starting from the first reforecast date in the timeline, that is, 31 July 2013. The time-
line will be updated each time the current month ending date is changed. Reconciliation
checks are included in rows 50 to 53.
• P&L Total – Monthly – RFCST: this sheet represents the reforecast the monthly profit
and loss starting from the first reforecast date in the timeline, that is, 31 July 2013. The

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Private Equity Financial Modelling and Analysis

timeline will be updated each time the current month ending date is changed. Reconciliation
checks are included in row 43.
• Calcs – Existing: it is very important that the correct opening balances from the balance
sheet are linked to the balance projections. For this purpose column C includes the opening
balances appropriately. Cell C697 shows the closing balance for Trade Debtors. This is
calculated by the use of the ‘SUMIF’ formula by accessing the timeline for the current
month end and reporting the particular balance. Of course, the balances would require
projecting as in the other sections of this book.
• P&L Total – Annual: this represents the P&L actual plus forecast over a 10 year period.
For each line item the actual profit and loss is referenced using the financial year end in
row 10. The specific financial year end is picked up from the General Inputs sheet.
• B Sheet Total – Annual: this represents the balance sheet actual plus forecast over a 10 year
period. For each line item the actual balance sheet is referenced using the financial year
end in row 9. The specific financial year end is picked up from the General Inputs sheet.
• CF Total – Annual: this represents the cash flow actual plus forecast over a 10 year
period. For each line item the actual cash flow is referenced using the financial year end
in row 10. The specific financial year end is picked up from the General Inputs sheet.
• P&L Total – Annual – FC: this represents a cut and paste of the original projections for
the original projections at financial close.
• B Sheet Total – Annual – FC: this represents a cut and paste of the original projections
for the original projections at financial close.
• CF Total – Annual – FC: this represents a cut and paste of the original projections for
the original projections at financial close.

Post monitoring the private equity investment exercise

Please set up a post monitoring financial model for the start up private equity transaction
that you completed earlier in this book. Please include inputs for the actual financial state-
ments profit and loss, balance sheet and cash flow. Ensure that you link in the closing actual
balance sheet to the forecast balance logic. Please compute the annual total profit and loss,
cash flow and balance sheet for the reforecast and compare these to the original financial
statements at the close of the private equity transaction.

84
Section 6

Distressed debt and the restructuring of

leveraged buyouts

In times of the pre-financial crisis era there were a lot of leveraged buyouts (LBOs) which
have been affected by the economic events of post 2008. Consequently, the deals that looked
financially viable from a forecast viewpoint at time zero are likely to look less healthy some
years later. This often leaves the company with distressed debt that may need reconstructing
or refinancing.
If a company has used all the techniques outlined in this book it is highly unlikely that
it will find itself in a distressed debt position. However, as a LBO is highly geared it may
be a fine balance that is affected by adverse market conditions. A distressed debt position is
likely to be either where the debt cannot be serviced by its cash flows either now or in the
future and/or the debt facilities are in breach of the lenders covenant targets.
We will now turn our attention to the example in Illustration 65 (see Illustration65.xlsx).

Illustration 65
Distressed debt LBO

Summary
Distressed debt LBO
Company cash position
£ million
Minimum balance –24.9
Year of minimum balance 31 December 2021
Maximum balance 15.7
Year of maximum balance 31 December 2012

Lenders credit ratios Minimum Target Year of min/max Average

OK Target maximum
Debt to equity ratio – max 78.6% 80.0% 31 December 2011 63.2%
OK Target minimum
Debt to EBITDA – max 1,486.1% 60.00% 31 December 2012 1,041.0%
OK Target maximum

Continued

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Private Equity Financial Modelling and Analysis

Illustration 65 continued
Summary
Distressed debt LBO
Company cash position
£ million
Debt to net assets – max 20.2% 90.00% 31 December 2011 16.0%
Breach Target minimum
Interest cover – min –52.7 2.0 31 December 2018 –19.0
Breach Target minimum
Debt service cover – min 0.2 1.1 31 December 2018 0.3

Source: Modelling Solutions

We can see in Illustration 65 that the debt service cover ratios are below the
minimum targets set by the lenders in their covenant tests. There is also insufficient cash
flow available to repay or service the debt obligation. We can see this by referencing the
cash flow sheet whereby the cash balance would effectively become negative at the end of
December 2015. Consequently, there is a need for a restructuring plan in order to rectify
this position.
So, if a LBO has a distressed debt position what could be the likely remedies?

Improve business performance

There are a number of ways that the business performance could be improved.
Essentially, we need to look at ways of improving the EBITDA. This could be achieved
by increasing sales, reducing cost of sales or reducing overheads through a cost
reduction program.
We will now turn our attention to the example in Illustration 66 (see Illustration66.xlsx).
The company has decided to put together an operational restructuring plan in order to
remedy the position. This comprises an improved sales and marketing strategy which will
have the effect of improving sales by the growth (percentages shown in rows 10 to 19 of
the General Inputs sheet).
The company also has a plan to outsource the products from alternative suppliers in
the Far East. The effect of this can be shown in rows 27 to 32 of the General Inputs sheet.
Finally, there is a planned cost reduction program which has identified a number of cost
savings. The effect of this can be shown in rows 108 to 127 of the General Inputs sheet.
We now need to see the effect of these plans on the financial position of the company
by looking at the Summary page in the financial model.
The operational improvements above have the effect of a positive cash balance over the
life of the forecast. The debt service cover ratio meets the minimum together with the rest
of the lenders credit ratios.

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 Distressed debt and the restructuring of leveraged buyouts

Illustration 66
Improved business performance

Summary
Improved business performance
Company cash position
£ million
Minimum balance 15.3
Year of minimum balance 31 December 2011
Maximum balance 115.9
Year of maximum balance 31 December 2021

Lenders credit ratios Minimum Target Year of min/max Average

OK Target maximum
Debt to equity ratio – max 78.6% 80.0% 31 December 2011 63.2%
OK Target minimum
Debt to EBITDA – max 163.2% 60.00% 31 December 2012 85.9%
OK Target maximum
Debt to net assets – max 20.2% 90.00% 31 December 2011 13.2%
OK Target minimum
Debt service cover – min 2.5 1.1 31 December 2013 3.4

Source: Modelling Solutions

Reschedule debts
We will now turn our attention to the example in Illustration 67 (see Illustration67.xlsx).
The company has only identified an operational improvement of the different product
sourcing strategy. The assumption behind this can be seen in the General Inputs sheet in
the range B23 to B32. Unfortunately even with this initiative the company is still left with
a position whereby the debt service cover ratio is a minimum of 0.9 which is slightly below
the minimum target of 1.1.
So, the company has agreed with the bank to extend the repayment terms of its existing
senior debt facility from 7 to 10 years. It has been agreed that no fee will be payable but
of course, extra interest will be paid due to the increase in the term of repayment. This can
be seen in cell B71 of the General Inputs Sheet.
This has had the desired effect of making the company cash positive and ensuring that
all target lenders credit ratios are met.

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Private Equity Financial Modelling and Analysis

Illustration 67
Reschedule debt

Summary
Reschedule debt 05/10/2012 13:31
Company cash position
£ million
Minimum balance 10.8
Year of minimum balance 31 December 2020
Maximum balance 24.2
Year of maximum balance 31 December 2012

Lenders credit ratios Minimum Target Year of min/max Average

OK Target maximum
Debt to equity ratio – max 78.6% 80.0% 31 December 2011 61.8%
OK Target minimum
Debt to EBITDA – max 478.6% 60.00% 31 December 2012 275.2%
OK Target maximum
Debt to net assets – max 20.2% 90.00% 31 December 2011 19.0%
OK Target minimum
Debt service cover – min 1.2 1.1 31 December 2013 1.4

Source: Modelling Solutions

Leveraged buyouts – strategic disposals

There is the option of making strategic disposals of certain companies or divisions, which
will raise cash for the possible prepayment of debt thus easing debt service obligations and/
or allowing financial covenant targets to be met.
In our example we have a company that has a group structure of three subsidiary
companies plus its central headquarters. Unfortunately, it has £80 million senior debt and
appears to be unable to service this as it falls due for repayment. Each of the subsidiaries
plus the central headquarters has submitted their financial forecasts over a 10 year period.
The example outlined in Illustration68.xlsx shows how this analysis has been completed.
The yellow sheets at the front show the submissions of the results from each of the three
subsidiaries in terms of profit and loss, cash flow and balance sheet over 10 years. The profit
and loss, cash flow and balance sheet for central is included in the next sheets. The Profit
& Loss – Calcs Sub 1 sheet and its sheets for the balance sheet and cash flow have logic
that tests if the timeline is greater than the disposal date then return a zero value otherwise
continue the forecasts as in the subsidiary submission. There is identical logic adopted for
the other two subsidiaries included in the group structure.

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 Distressed debt and the restructuring of leveraged buyouts

The sheet Disposal – Journal Entries shows the double entry treatment for a disposal of
any of the three subsidiaries. The profit or (loss) on disposal shows the difference between
the cash receipt and the net assets at the time of disposal of each subsidiary. The net assets
are identified at the date of disposal for each subsidiary by using the ‘SUMIF’ formula
to identify the net assets at the disposal date. The cash proceeds are identified from the
assumption made.
The Consolidated P&L is a straight forward summing of the four entities. However,
the profit or loss on the sale of subsidiaries is referenced from the journal entries using the
‘SUMIF’ formula to access the correct dates.
The Consolidated cash flow is a straight forward summing of the four entities. However,
the disposal receipts are referenced from the journal entries using the ‘SUMIF’ formula to
access the correct dates.
The Consolidated balance sheet is a straight forward summing of the four entities.
However, the cash is adjusted in order to recognise the cash receipts in the cash balance
and the retained earnings are removed upon disposal accordingly.
It is important to note that we have set this logic up in order to run sensitivities to
explore which subsidiary or subsidiaries to sell at what value and when to make voluntary
prepayment in order to achieve a financially viable position. Of course, at present we have
not run any scenarios we simply assume that matters are ‘as is’. Indeed, if we take a look
at the Balance Sheet – Consolidated tab we can see that the cash balance goes negative in
row 10 from the period 31 December 2013.
In our quest to find a viable solution we refer to the example outlined in Illustration68.
xlsx.
The assumptions for our viable case are shown in the General Inputs sheet. The company
plans to sell the underperforming subsidiary 1 during 2012 for a sum of £100 million and it
plans to use this cash to completely repay its senior debt balance during 2012. The Central
Debt sheet shows the principal repaid in row 11. The voluntary prepayment is shown in row
12 this uses the ‘SUMIF’ formula. If we now look at the Balance Sheet – Consolidated we
can see the debt balance is now repaid in row 22 and the cash balance is positive in row 10.

Leveraged buyouts – strategic disposals – exercise

Please use the three company projections provided in the pre disposal example as in the
yellow sheets. Consolidate these together with the central headquarters. Dispose of subsidiary
1 for £100 million during 2012 and repay £48 million of senior debt voluntarily in 2012
to achieve a debt free and cash positive set of forecasts.

89
Section 7

Maximising value through exit strategies

There are a number of exit strategies that can be taken by the private equity firm in order
to realise the cash receipt in respect of its investment. This section of the book addresses the
issue of maximising the value of the company through the appropriate exit strategy. There
are a number of options available and it is a case of evaluating which is the most financially
advantageous. We will now turn to each exit option and outline the relative pros and cons
together with the financial advantages of each.

Initial public offering

This represents the first stage of a private company selling its shares to the general public
and will usually be listed on the stock exchange.
For the first time in its history the company is subject to stock market discipline, so it
needs to ensure that its shares are attractively priced and dividend income can be paid to
its shareholders.
The advantage of going public by offering shares to members of the public will help
the company’s senior management and directors retain a large degree of control which may
not be the case with other funding sources. A well managed private limited company with
a strong balance sheet, cash position and profits is indeed in a good position to go public
and raise capital through the use of an the initial public offering (IPO) route.
Another advantage of the IPO route will include the access to capital initially and greater
access to the stock markets funds in the future. It is possible for the company’s directors
and its existing shareholders to retain shares and use these for such purposes as providing
share option benefits to key members of staff and the potential of using shares for financing
potential mergers or acquisitions.
One would usually expect that generally the company’s debt to equity ratio and valu-
ation may improve which could lead to it being able to attract much better interest rates
from lenders.
There is also a greater public relations image associated with a public limited company
to that of a private limited company.
The disadvantage of going public or an IPO includes the high professional fees involving
accountants and lawyers. In 2012 terms, a small company may be expected to pay as much
as £300,000.
In addition to these professional fees, the underwriter requires a payment which can also
be quite large and is based upon a percentage of the financing raised through the IPO route.
The underwriter’s fee is usually around the 6% to 15% range. The job of the underwriter
in an IPO transaction is to help the company to decide whether it should raise shares by
the ordinary share capital route or by the preference share route. The underwriter will help
to decide on the best price and when to take the IPO to market.

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 Maximising value through exit strategies

A prospectus is required in order to inform the prospective investors about the opportu-
nity. A prospectus is a legal document which has to be legally produced and filed with the
Securities and Exchange Commission. The prospectus will include background information
of the company, the company’s future prospects and the number of share certificates to issue
and the offer price for a share.
The example outlined in Illustration69.xlsx shows an example of a pre IPO company
with a healthy financial position regarding profits, cash and a strong balance sheet, just
right for IPO you would think (subject to market conditions).The IPO will take place at
the start of 2011. The underwriter’s fee is 6% of the ordinary share capital to be raised.
The amount of ordinary share capital to be offered to the public is £20 million; 51%
is to be retained by management for strategic purposes and 49% is to be offered to the
public. The underwriter has found the following data from researching the existing stock
market statistics. The underwriter has looked at comparable public companies in the same
industry sector.

Illustration 70
Comparable company stock market analysis

Company Private equity ratio EPS Market price (per share) Dividend (%)
A 4 3.000 £12.00 12.00
B 3 3.200 £9.60 11.00
C 3 3.200 £9.60 7.80
D 5 3.100 £15.50 11.00
E 6 3.540 £21.24 10.00
F 7 4.000 £28.00 9.00
G 8 3.450 £27.60 7.99

Average 5 £17.65

Source: Modelling Solutions

The price earnings ratio is defined as the market price of a share divided by the earn-
ings of a share.
The earnings of a share are defined as the profit after tax divided by the number of
ordinary shares in issue.
The dividend yield is defined as the dividend of a share divided by the market price of
a share.
The dividend cover is defined as the earnings of a share divided by the dividend of a
share. Given that the mean price of a share of all the comparable companies in the industry
sector is £17.65 for each share, the company has decided to issue 1,176,471 ordinary shares
at £17.00 a share. Fifty-one percent will be issued to management and 41% will be offered

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Private Equity Financial Modelling and Analysis

to the public. This means that the company will pay £10.2 million from its internal cash
resources. The public will pay the company £9.8 million given that this flotation is very
attractive and will be fully subscribed.
We will now turn our attention to our IPO example. Please refer to the company’s
financial position after the IPO in Illustration 71 (see Illustration71.xlsx).

Illustration 71
Stock market ratios

Earnings per share Price earnings ratio Market price per share

31 December 2010 £17.00

31 December 2011 £3.29 6.5 £21.36
31 December 2012 £3.47 6.5 £22.54
31 December 2013 £3.99 6.5 £25.95
31 December 2014 £4.51 6.5 £29.32
31 December 2015 £4.77 6.5 £31.04
31 December 2016 £4.97 6.5 £32.32
31 December 2017 £4.71 6.5 £30.62
31 December 2018 £4.41 6.5 £28.70
31 December 2019 £4.09 6.5 £26.58
31 December 2020 £3.73 6.5 £24.27

Source: Modelling Solutions

Initial public offering exercise

Based upon the financial model built to date please issue shares at 20% discount to the
maximum comparable company, value it at a private equity ratio of 7 and compute the
share price over the 10 year forecast period.

Sale to a corporate
The ingredient for a successful sale of a company includes the price achieved, structuring the
consideration package, company valuations, due diligence and a well prepared information
memorandum. The role of the financial adviser will be to ensure that all bidders for the
company engage in a competitive process.
When undertaking a disposal the accounting treatment that should be observed should be
IFRS. The material areas of IFRS 5 Relating to Discontinued Operations should be addressed
when accounting and planning for disposals as follows.

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 Maximising value through exit strategies

• Classification as discontinuing. A discontinued operation is a component of an entity that

either has been disposed of or is classified as held for sale, and:
## represents either a separate major line of business or a geographical area of operations;
## is part of a single co-ordinated plan to dispose of a separate major line of business or

geographical area of operations; or

## is a subsidiary acquired exclusively with a view to resale and the disposal involves

loss of control.
• Income statement. The sum of the post-tax profit or loss of the discontinued operation
and the post-tax gain or loss recognised on the measurement to fair value less cost to
sell or fair value adjustments on the disposal of the assets (or disposal group) should be
presented as a single amount on the face of the statement of comprehensive income. If
the entity presents profit or loss in a separate income statement, a section identified as
relating to discontinued operations is presented in that separate statement. This effectively
means that the discontinued profit and loss items should be shown up to the disposal
date and the gain or loss or disposal shown.
Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes
is required either in the notes or in the statement of comprehensive income in a section
distinct from continuing operations. Such detailed disclosures must cover both the current
and all prior periods presented in the financial statements. This effectively means that the
discontinued cash flow items should be shown up to the disposal date.
Detailed notes and disclosures should not bother us at the financial planning and
analysis stage.
• Cash flow statement. The net cash flows attributable to the operating, investing, and
financing activities of a discontinued operation shall be separately presented on the face
of the cash flow statement or disclosed in the notes.
Detailed notes and disclosures should not bother us at the financial planning and
analysis stage.
• Balance sheet. The net assets at fair value should be excluded from the balance sheet
from the date of disposal.

Disposal
We will now turn our attention to our Disposal example. Please refer to Illustration72.xlsx.
The example shows a group structure comprising three fully owned subsidiaries. The
group wants to consider making one or two disposals in order to strengthen its cash posi-
tion to potentially acquire a target company that will better fit into its corporate strategic
objectives. So, for this strategic need the company requires cash for acquisition purposes.
The board actually are certain that the disposal and acquisition activity will happen
within a 10 month time frame. Consequently, to this end the subsidiaries have provided
monthly financial projections from the current actual position and provided projections
on a monthly basis for the profit and loss, cash flow and balance sheet in an identical
format as required by the group for ease of consolidation and analysis. We can see the
subsidiary financial submissions in the yellow profit and loss, cash flow and balance sheet
tabs of our example. In the General Inputs tab you can see the key assumption regarding

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Private Equity Financial Modelling and Analysis

the disposal of any of the three subsidiaries, that is, the date of disposal (this is enabled
by a dropdown box which enables the selection of the disposal date) and the selling price
of the business. Of course, the company has also undertaken separate valuation exercises
that are similar to those outlined in Section 3. However, the current scenario assumes that
the company would like to explore the disposal of subsidiaries 1 and 2 at March 2012
and April 2012, at £100 million and £110 million respectively. In the green calculation
sheets the profit and loss account and cash flow forecasts are included up to the point of
disposal. The balance sheets include the removal of the net assets at the date of disposal
for subsidiary.
The Disposal – Journal Entries sheet shows the disposal date, the cash proceeds and the
net asset value of the subsidiary together with the profit or loss on disposal of the subsidiary.
The blue output sheets show the consolidated projected position of the group post
disposal. The consolidated profit and loss account includes the profit or loss on disposal of
the subsidiaries. The consolidated cash flow includes the cash receipt arising on the disposal
other subsidiaries. The Consolidated Balance sheet includes all the subsidiaries up until the
point of disposal and any adjustments for the profit or losses arising on the sale of the
subsidiaries, see row 29 of the Balance sheet – Consolidated. The Consolidated Balance
sheet also includes the cash from the sale of the subsidiaries, see row 10 of the Balance
sheet – Consolidated.
The company would now be in a position to use its cash resources with or without other
forms of long-term funding to pursue its acquisition target. Of course, the model gives the
flexibility to explore different disposal timings and amounts as necessary.

Disposal exercise
Please build a financial model for disposal analysis purposes. Use the planning outputs from
four wholly owned subsidiaries in the same format over a monthly timeline for 12 months.
Set up the input assumptions as a flexible disposal date and amount for each subsidiary.
The end objective is to prepare the consolidated projections post disposal.

Secondary private equity transaction

This occurs when a company within a buyout fund is purchased by another buyout fund
rather than a corporate buyer. Sellers of private equity investments sell not only the invest-
ments in the funds but also their remaining commitments to the funds. A simple secondary
market sale of a limited partnership fund is when the buyer exchanges a simple cash
payment to the seller for both the investments in the fund as committed and undrawn
commitments to the funds. However, other commercial and funding structures can also
be adopted.
A significant amount of funding is committed to secondary market funds from private
equity investors who seek to enhance their private equity investments.
From a financial modelling and analysis viewpoint there is the need to undertake financial
due diligence of the actual position and financial forecasts of the portfolio or fund.

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 Maximising value through exit strategies

The secondary market can typically comprise of any type of private equity transaction,
that is, venture capital, leverage buyouts, distressed debts and so on.
Essentially, similar financial modelling and analysis techniques can be applied to secondary
market transactions as outlined in Section 3.

Recapitalisation
Recapitalisation is the event when a company has more earnings and/or cash flow than
was originally envisaged, equity is repaid to the investors and replaced if funding is
required with new debt. This is an exit strategy that increases the internal rate of return
(IRR) to the private equity and allows an early exit. Some or all of the equity is released
back to the buyout fund and replaced with debt. This transaction usually has the effect
for the private equity investor of a double hit; first, a positive cash flow is received earlier
than expected, thus increasing the expected IRR, and then the multiple made on final exit
is increased.

Illustration 73
Summary pre recapitalisation

Sponsors returns Exit year IRR

3 105.3%
4 74.4%
5 59.1%
6 50.2%
7 44.6%
Equity valuation at entry
Entry year EBITDA 5.3
Entry year EBITDA multiple 7.5
39.7
Less debt –2
Plus cash 15.3
Equity price 53.0

Sources and uses of funds

Sources of funds
Debt 31.0 60.0%
Equity contribution 20.7 40.0%
Cash on hand 15.3
67.0 100.0%

Continued

95
Private Equity Financial Modelling and Analysis

Illustration 73 continued
Sponsors returns Exit year IRR
Uses of funds
Purchase of existing equity 53.0
Repayment of existing debt 2.0
Upfront fees 12.0
67.0
Check 0.0

Lenders credit ratios Target

OK Target minimum
Debt to EBITDA – max 104.7% 60.00%
OK Target maximum
Debt to net assets – max 32.0% 90.00%
OK Target minimum
Interest cover – min 13.4 2.0

Year of min/max Average

Debt to EBITDA – max 31 December 2011 57.8%
Debt to net assets – max 31 December 2011 13.6%
Interest cover – min 31 December 2012 39.8

Company cash position

£ million
Minimum balance 0.0
Year of minimum balance 31 December 2010
Maximum balance 75.4
Year of maximum balance 31 December 2020

Source: Modelling Solutions

The company in Illustration 73 has experienced great growth and consequently its financial
position is in particularly good health and looks ripe for a recapitalisation. The cash balance
is very positive and accumulating. All the lenders covenant ratios are met. Consequently, in
actual fact at the end of the third year of the transaction the company has a closing balance
of £56.2 million. Effectively, we can consider repaying the £8.7 million of equity now and
wait until around year five for the balance of the equity invested, that is, £12 million (£20.7
million less £8.7 million).
The double entry accounting for the recapitalisation transaction is as follows.

96
 Maximising value through exit strategies

1 Debt – £8.7 million debit.

2 Equity – £8.7 million credit.
3 Equity – £8.7 million debit.
4 Cash – £8.7 million credit.

The effect of this transaction being made on 31 December 2013 is shown in Illustration 74
(see Illustration74.xlsx).

Illustration 74
Summary post recapitalisation

Sponsors returns Exit year IRR

3 101.9%
4 72.5%
5 57.8%
6 49.3%
7 43.9%
Equity valuation at entry
Entry year EBITDA 5.3
Entry year EBITDA multiple 7.5
39.7
Less debt –2
Plus cash 15.3
Equity price 53.0

Sources and uses of funds

Sources of funds
Debt 31.0 60.0%
Equity contribution 20.7 40.0%
Cash on hand 15.3
67.0 100.0%

Uses of funds
Purchase of existing equity 53.0
Repayment of existing debt 2.0
Upfront fees 12.0
67.0
Check 0.0

Continued

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Private Equity Financial Modelling and Analysis

Illustration 74 continued
Sponsors returns Exit year IRR
Lenders credit ratios Target
OK Target minimum
Debt to EBITDA – max 104.7% 60.00%
OK Target maximum
Debt to net assets – max 32.0% 90.00%
OK Target minimum
Interest cover – min 13.4 2.0

Year of min/max Average

Debt to EBITDA – max 31 December 2011 63.6%
Debt to net assets – max 31 December 2011 15.5%
Interest cover – min 31 December 2012 37.4

Company cash position

£ million
Minimum balance 0.0
Year of minimum balance 31 December 2010
Maximum balance 69.4
Year of maximum balance 31 December 2020

Source: Modelling Solutions

Please see the sheet Recapitalisation Inputs where the recapitalisation date in cell B4 is
set at 31 December 2013. The assumption in cell B8 of the General Inputs increases the
debt balance by the new debt raised.
The assumption in cell B9 of the General Inputs swaps the debt for equity.
The assumption in cell C9 represents the reduction in the equity balance by repaying
the equity to the private equity firm.
Turning our attention to the sheet Cash flow, row 17 shows senior debt raised in the
year 31 December 2013 of £8.7 million. Row 18 shows the repayment of the equity of
£8.7 million.
Looking at the balance sheet tab we can see that the balance sheet consistently recon-
ciles. The cash movement reconciles to the balance sheet and the profit movement equals
the profit for the year.
Looking at the Summary sheet we can see that the lenders credit ratios from row 36
reach the required targets. The company cash position in row 52 is indeed healthy at a
minimum of 0 in 2010 and a maximum of £69.4 million.
In essence, we need to ensure that we have a financially viable company post recapitalisation.

98
Section 8

Using Excel VBA

This book is not intended as a substitute for a book dedicated to Excel VBA programming
but here we are simply outlining some value-added Excel Visual Basic for Applications (VBA)
techniques for adding further value to your private equity financial models.
In summary, Excel VBA expands and allows customisation of the Excel environment
and allows us to undertake tasks that Excel cannot do, that is, you are programming Excel.
Before we progress to demonstrating some value added routines, an overview of the Excel
VBA structure will be provided.
Essentially, the code is recorded and edited in the visual basic editor or in Excel 2007
in the Developer ribbon under the Visual Basic option. The Excel 2007 Visual Basic Editor
is shown in Illustration 75.

Illustration 75
The Visual Basic Editor

Source: Excel 2007

99
Private Equity Financial Modelling and Analysis

The code is structured in an object hierarchy, that is, object, property and method.
Examples of Excel’s objects include its workbook, sheets, ranges and cells. Properties are
something that the object has, whereas methods are actions that do something.
Properties and methods are associated with an object through dot logic. Below is an
example of a simple object, property and method relationship:

Worksheet(‘A’).Range(‘Example’).delete

This simply means that the worksheet object called ‘A’ has a property called range name
‘Example’ that will be deleted.
This will become clearer once you have followed the examples later in this section.
Excel VBA’s object model can be seen by referencing Illustration 76.
Essentially, you can select the object browser by selecting F2 on your PC keyboard. The
object browser is a very useful way of understanding Excel VBA’s object model in terms of
object, properties and methods. In Illustration 76 you will be able to understand the rela-
tionship of the sheet’s object and its properties and methods by entering the search facility.

Illustration 76
The Object Browser

Source: Excel 2007

100
 Using Excel VBA

Turning to the examples of how we can use VBA to enhance your private equity financial
models please reference Illustration 77 (see Illustration77.xlsx). This is the Excel example
that includes the VBA code for this section.

Protect functionality
Using the protect functionality for each sheet is very useful for protecting the financial model
so that in cases where other parties will populate your financial model they are unable to
alter the calculations, either intentionally or unintentionally. Illustration 78 outlines the VBA
code to do this.
Line 1 sets Excel screen updating off. Line 2 defines the worksheet object as a variable
called Sheet. Line 3 ignores any errors and avoids run time messaging. Line 4 unprotects
the workbook by using the password. Line 5 starts the loop by activating each sheet in the
workbook. Line 6 actually selects each sheet. Line 7 password protects the sheet. Line 8
activates the next sheet in the workbook. Line 9 sets the screen updating back on.

Illustration 78
Protect
Sub ProtectEachSheet()
1 Application.ScreenUpdating = False

2 Dim Sheet As Worksheet

3 On Error Resume Next
4 ActiveWorkbook.Protect (“PrivateEquity”)

5 For Each Sheet In ActiveWorkbook.Sheets

6 Sheet.Select
7 Sheet.Protect (“PrivateEquity”)

8 Next Sheet
9 Application.ScreenUpdating = True
End Sub

Source: Modelling Solutions

Unprotect functionality
Using the unprotect functionality for each sheet is very useful for unprotecting all the sheets
in the financial model in cases where you need to quickly and easily unprotect the sheets.
Illustration 79 outlines the VBA code to do this.
Line 1 sets Excel screen updating off. Line 2 defines the worksheet object as a variable
called Sheet. Line 3 ignores any errors and avoids run time messaging. Line 4 unprotects
the workbook by using the password. Line 5 starts the loop by activating each sheet in the

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Private Equity Financial Modelling and Analysis

workbook. Line 6 actually selects each sheet. Line 7 password unprotects the sheet. Line 8
activates the next sheet in the workbook. Line 9 sets the screen updating back on.

Illustration 79
Unprotect
Sub UnProtectEachSheet()
1 Application.ScreenUpdating = False
2 Dim Sheet As Worksheet
3 On Error Resume Next
4 ActiveWorkbook.Protect (“PrivateEquity”)
5 For Each Sheet In ActiveWorkbook.Sheets
6 Sheet.Select
7 Sheet.Unprotect (“PrivateEquity”)
8 Next Sheet
9 Application.ScreenUpdating = True
End Sub

Source: Modelling Solutions

Menu functionality
Menu functionality is very useful for a financial model as you can place custom menu bars
in the Excel menu or the ribbons menu bars (Excel 2007). The advantage of using menu
bars is that you or a user can easily find and run a desired operation (see Illustration 80).
The Load Menus code below ensures that in lines 1 and 2, the calculation is set to
manual and the screen updating is switched off. Lines 3 to 7 define the variables for the
menu bars accordingly. The paths for these variables are further defined in lines 8 to 12.
The rest of the lines relate to a list of captions or names of the menu bar that when selected
triggers a procedure which is referred to in the code as an action. Each of the routines is
nested between end and with statements accordingly.

102
 Using Excel VBA

Illustration 80
Load Menus
Sub LoadMenus()
‘=======================================================================
‘THIS PROCEDURE LOADS UP THE MENU BARS
‘=======================================================================

1 Application.ScreenUpdating = False
2 Application.Calculation = xlCalculationManual
3 Dim cbWSMenubar As CommandBar
4 Dim muCustom As CommandBarControl
5 Dim iHelpIndex As Integer
6 Dim muCustom1 As CommandBarControl
7 Dim iWindowIndex As Integer

8 Set cbWSMenubar = CommandBars(“Worksheet Menu Bar”)

9 iHelpIndex = cbWSMenubar.Controls(“Help”).Index
10 iWindowIndex = cbWSMenubar.Controls(“Window”).Index

11 Set muCustom = cbWSMenubar.Controls.Add(Type:=msoControlPopup,

Before:=iHelpIndex)
12 Set muCustom1 = cbWSMenubar.Controls.Add(Type:=msoControlPopup,
Before:=iHelpIndex)
‘=======================================================================
‘
‘=======================================================================

‘=======================================================================
‘MODEL INPUTS
‘=======================================================================

13 With muCustom1
.Caption = “&Model Inputs”
.TooltipText = “Locates Model Input Sheets”

14 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Sensitivity Inputs”
.OnAction = “SENSITIVITYINPUTS”
End With

15 With .Controls.Add(Type:=msoControlButton)
.Caption = “&General Inputs”
.OnAction = “GENERALINPUTS”
End With

16 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Financing Inputs”

Continued

103
Private Equity Financial Modelling and Analysis

Illustration 80 continued

.OnAction = “FINANCINGINPUTS”
End With

17 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Taxation Inputs”
.OnAction = “TAXATIONINPUTS”
End With

18 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Accounting Inputs”
.OnAction = “ACCOUNTINGINPUTS”
End With

‘======================================================================
‘MODEL OUTPUTS
‘======================================================================

19 With muCustom
.Caption = “&Model Outputs”
.TooltipText = “Locates Model’s Output Sheets”

20 With .Controls.Add(Type:=msoControlButton)
.Caption = “&P and L”
.OnAction = “PANDL”
End With

21 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Cash flow”
.OnAction = “CASHFLOW”
End With

22 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Balance Sheet”
.OnAction = “BALANCESHEET”
End With

23 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Summary”
.OnAction = “SUMMARY”
End With

24 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Sensitivities”
.OnAction = “SENSITIVITIES”
End With

25 With .Controls.Add(Type:=msoControlButton)
.Caption = “&Checks”

Continued

104
 Using Excel VBA

.OnAction = “CHECKS”
End With

26 End With
27 End With

‘======================================================================
‘
‘======================================================================

28 Application.ScreenUpdating = True
29 Application.Calculation = xlCalculationAutomatic

End Sub

Source: Modelling Solutions

Auto open functionality

The auto open functionality will trigger certain procedures to be run once the Excel workbook
in question is opened. Illustration 81 shows the VBA code to implement this.
The code that triggers the event is the ‘Sub Auto_Open()’ line. The lines of VBA code
have been numbered for reference purposes accordingly. Obviously, the Sub and End Sub
lines start and end the routine’s logic. Line 1 triggers the load menu routine. Line 2 selects
the cover sheet. Line 3 triggers the timeout check.

Illustration 81
Auto Open
Sub Auto_Open()
LoadMenus
Sheets(“COVER”).Select
End Sub

Source: Modelling Solutions

Auto close functionality

The auto close functionality will trigger certain procedures to be run once the Excel work-
book in question is closed. Illustration 82 shows the VBA code to implement this.
The code that triggers the event is the ‘Sub Auto_Close()’ line. The lines of VBA code
have been numbered for reference purposes. This particular Auto_Close routine removes
the menu bars upon closing the Excel workbook. Line 1 defines the variable as a menu

105
Private Equity Financial Modelling and Analysis

bar. Line 2 ignores any errors and avoids run time messaging. Line 3 sets the variable to a
worksheet menu bar. Line 4 sets the counter to zero. Line 5 controls the counter loop to a
maximum of 10 iterations. This will ensure that all open model versions can be removed.
Line 6 sets the counter to step up by one for iteration. Line 7 and 8 deletes the controls
from the menu bar. Line 9 loops back to line 5.

Illustration 82
Auto Close
Sub Auto_Close()
‘======================================================================
‘THIS ROUTINE REMOVES THE MENUS BARS WHEN THE WORKBOOK IS CLOSED
‘======================================================================
1 Dim cbWSMenubar As CommandBar
2 On Error Resume Next
3 Set cbWSMenubar = CommandBars(“Worksheet Menu Bar”)
4 I = 0
5 For I = I To 10
6 I = I + 1

7 cbWSMenubar.Controls(“MODEL Inputs”).Delete
8 cbWSMenubar.Controls(“MODEL Outputs”).Delete

9 Next I
End Sub

Source: Modelling Solutions

Using a timeout facility for demo financial models

Adding a timeout facility to your financial model may be useful where you only want to
show a financial model for a limited amount of time say for demonstration or sales purposes.
However, always ensure you have set up the timeout facility to work on the version being
used for demonstration purposes and not the original. Illustration 83 shows the VBA code
to implement this.
In order to activate the timeout please refer to the example model, that is, Illustration77.
xlsx.
Select the Summary sheet’s cell B65522, changing the issue date to today’s date and copy
and paste as a hard coded number instead of a formula. The demo licence days should be
set to the number of days you wish to provide the licence. Ensure that you protect the cells
and the whole model. It is also important to protect any unprotected functionality before
providing your demo financial model.
The XANADOO code in Illustration 83 ensures that in lines 1 and 2 the calculation is
set to manual and the screen updating is switched off. Line 3 ignores any errors and avoids

106
 Using Excel VBA

run time messaging. Line 4 defines the object worksheet as a variable called sheet. Lines 5
and 6 define variables A and B. Line 7 defines variable A as the Summary sheet and the
range name ‘CURRENTDATE’. Similarly, line 8 defines variable B as the Summary sheet and
the range name ‘EXPIRYDATE’. Line 9 tests whether the current date exceeds the expiry
date. If it does, it actions line 10 and unprotects the workbook by using the password. In
line 11 a loop begins that will ensure that procedures are actioned for each sheet, which
in lines 12 to 15 unprotects all sheets and clears all their contents, displaying a message
accordingly. Line 16 closes the loop for each sheet. Lines 18 and 19 effectively complete the
test for the expiry date ensuring that the financial model does not destruct. Lines 20 and 21
set the automatic calculations and screen updating back on.

Illustration 83
Timeout
Sub XANADOO()

‘======================================================================
‘TIMEOUT FACILITY FOR DEMO VERSIONS
‘======================================================================
1 Application.Calculation = xlCalculationManual
2 Application.ScreenUpdating = False

3 On Error Resume Next

4 Dim Sheet As Worksheet

5 Dim A
6 Dim B

7 A = Sheets(“SUMMARY”).Range(“CURRENTDATE”).Value
8 B = Sheets(“SUMMARY”).Range(“EXPIRYDATE”).Value

9 If A >= B Then

‘======================================================================
‘Delete the logic in each sheet
‘======================================================================

10 ActiveWorkbook.Unprotect (“PrivateEquity”)

11 For Each Sheet In ActiveWorkbook.Sheets

12 Sheet.Select
13 Sheet.Unprotect (“PrivateEquity”)
14 Cells.Select
15 Selection.Clear
16 Next Sheet

Continued

107
Private Equity Financial Modelling and Analysis

Illustration 83 continued

17 MsgBox “Please Contact Modelling Solutions Your Demo Licence Has

Expired”
18 Else
19 End If

20 Application.Calculation = xlCalculationAutomatic
21 Application.ScreenUpdating = True

End Sub

Source: Modelling Solutions

Unhide sheets
Using the unhide functionality for each sheet is very useful for unhiding the sheets in the
financial model without the need to unhide multiple sheets singularly. Illustration 84 shows
the VBA code. This could be a useful procedure for the need to unhide sheets of a third-
party model for review or audit purposes. Line 1 of the code sets the object worksheet as
a variable name Worksheet. Line 2 ensures that each sheet in the workbook is looked at.
Line 3 ignores any errors and avoids run time messaging. Line 4 selects the next sheet. Line
5 ensures that the sheet is visible. Line 6 selects the next sheet in the loop.

Illustration 84
Unhide
Sub UnhideSheets()
‘Unhides each sheet in the workbook
1 Dim Sheet As Worksheet
2 For Each Sheet In ActiveWorkbook.Sheets
3 On Error Resume Next
4 ActiveSheet.Select
5 Sheet.Visible = xlSheetVisible
6 Next Sheet

Source: Modelling Solutions

Hide sheets
Using the hide functionality for each sheet is very useful for hiding the financial model
so that you, as a financial modeller, can focus on particular sheets in the financial model
without the need to hide multiple sheets singularly. This has the benefit of either allowing

108
 Using Excel VBA

the developer to focus or indeed restricting sheets for presentation purposes. Illustration
85 shows the VBA code. Line 1 of the code sets the object worksheet as a variable name
Worksheet. Line 2 ensures that each sheet in the workbook is looked at. Line 3 ignores any
errors and avoids run time messaging. Line 4 selects the next sheet. Line 5 ensures that the
sheet is hidden. Line 6 selects the next sheet in the loop.

Illustration 85
Hide
Sub HideSheets()
‘hides each sheet in the workbook
1 Dim Sheet As Worksheet
2 For Each Sheet In ActiveWorkbook.Sheets
3 On Error Resume Next
4 ActiveSheet.Select
5 Sheet.Visible = xlSheetHidden
6 Next Sheet
End Sub

Source: Modelling Solutions

Exercise Excel VBA

Please use one of your completed financial models from any section of this book in order
to add the following functionality.

• Menu bars to select each input and output sheet or activate a calculation routine of
your choice.
• Unprotect each of the inputs cells in your financial model and add a VBA routine that
protects each sheet and the entire workbook with a password of your choice.
• Add a VBA routine that unprotects each sheet and the entire workbook with a password
of your choice.
• Add a timeout facility that will destruct a demonstration version of your financial model
in five days from the date of issue.

109
Section 9

Reviewing and auditing private equity financial

models

Limited scope financial model reviews

There will be certain circumstances when a limited review of the financial model is neces-
sary. This could be in times when there is not time for a full audit or indeed a full model
audit is not necessary. We often hear people confusing a limited review or a quick look at
a financial model as an audit. An audit is more definitive, looking in much fuller scope and
it is important for a reviewer to make this point apparent.
A limited scope review can be undertaken by either an individual or a professional firm.
However, due to its nature (that is, a limited scope) it is recommended that an opinion letter
is not presented regarding this type of review. It is apparent that the scope will be so limited
that it will be difficult to conclude whether the financial model materially meets its objective.
Indeed, it is normal practice to simply report a list of findings and discuss these with the
model developer based upon the agreed limited scope. A very important caveat to use at
the start of the exercise and at the reporting stage is wording such as: ‘You have asked us
to undertake a limited review of the financial model, accordingly our work is limited and
there may be errors that exist that are beyond the scope of our review.’
Getting a grip on a large and complex financial model is a real challenge, particularly
when time is of the essence. When under pressure, the techniques which we will illustrate
here can swiftly reduce, but not fully eliminate, modelling risk. However, being focused on
what is important and being creative with your testing techniques can ensure that the greatest
value is obtained from the time spent reviewing the financial model.
Understand the structure and flow of the financial model through a discussion with the
modeller. This can be supplemented by the use of a spreadsheet audit tool such as Spreadsheet
Professional. Agree with the modeller what the key outputs of the model are and whether
any areas are low risk or could even be ignored.
Consequently, it is important to reach an agreement on potential risks with the model
builder/decision maker before commencing the review.
It may be that certain components of the model carry a higher risk in terms of making
or breaking the deal or indeed complexity or risk of calculation. Other areas could be low
risk or could even be ignored.
It is from such discussions that a risk-based testing plan could be structured.
The following outlines the available tools and techniques that potentially could be used
when less time is available or a full financial model audit is not appropriate.

110
 Reviewing and auditing private equity financial models

Design review
It is necessary to make a quick assessment of whether the model appears to be fit for the
purpose and is built to an adequate standard.
A model design review is useful for a quick fit-for-purpose test and this should be
done before addressing any other areas because if the model is poorly designed it will need
significant rework – in other words spot the dogs quickly.
The approach that we suggest involves the following tasks, which are intended to
provide a basis for comparison to good practice build standards. A spreadsheet auditor
tool, such as Spreadsheet Professional, OAK and so on, can help identify certain potential
design issues. The first check is the degree of hard coded cells (that is, those which repre-
sent mere numerical inputs – obviously, these will also not change when the assumptions
are changed). The second check is the degree of separation of inputs, calculations and
outputs. The third is the degree of inconsistency in formula copying. The fourth is the
degree of embedded assumptions within formulae. It is important to distinguish between
constants and embedded assumptions. Constants are required in order to perform the
calculations from the input assumptions, for example, dividing annual cash flows by 52 in
order to calculate a weekly result. A risk exists with embedded assumptions because they
will not be updated as the model’s inputs or the scenarios change. The results from the
four key design tests can be assigned risk ratings in terms of high, medium, low design
risks. A summary risk categorisation can be made regarding the overall design or build
quality of the model.

Analytical review
This technique involves reviewing the model’s ‘big picture’. It is good for detecting poten-
tially large errors for one model run, typically the base case, but can be used when
reviewing sensitivity cases. Key areas should be graphed because this facilitates interpre-
tation and shows patterns and anomalies not visible from the numbers alone and could
indicate errors.

Degree of integration and reconciliation of financial statement

forecasts
This issue is important because the failure to properly integrate profit and loss, balance
sheet and cash flow is a common error. Financial statement forecasts should follow double
entry principles and reconciliation in terms of the cash balance in the balance sheet and cash
flow movement over the forecast period from the cash flow. We recommend a walkthrough
review of the financial statement forecasts code, checking where the balance sheet cash figure
comes from. If it is not from the cash flow, be on guard for a fudged balance sheet. Varying
the model’s input assumptions and checking that the balance sheet still balances and cash
balance reconciles to the cash flow any difference arising from the comparison should be
rationalised and investigated as appropriate.

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Private Equity Financial Modelling and Analysis

Flex testing and sensitivity review

This is a technique that is used for reviewing the reasonableness of the model’s sensitivity
runs. It is important at this stage to differentiate flex testing from sensitivity testing. Sensitivity
testing is where a stated sensitivity is reviewed (for example, a 10% increase in general
inflation a year and so on). However, there are occasions where there is the requirement
to test whether the model’s logical integrity is capable of stress testing. This will involve
the flexing of the key input drivers in the model and the risk areas which are likely to be
varied by the user. Consequently, in the case of flex testing it will not be known exactly
what the inputs values are likely to be at the review or testing stage. We recommend the
following approach is taken.

• There is the need for a transparent audit trail to be created from the financial model’s
inputs to the financial model’s outputs. This will help to remove the black box risk and
spot potential errors more easily. This can be achieved by freezing the specific financial
model’s worksheets in a reference sheet and extracting the variance and percentage vari-
ance between the test case and the model’s current results.
• The input assumptions should be varied for each flex or sensitivity case to be tested.
• The effect on the calculations and results of each test should be reviewed for reasonable-
ness given the scenario. Here, we are looking for reasonable changes where we expect to
see them and no changes where we do not expect to see them.
• It is recommended that the variances or percentage variances that do not appear logical
given the test case are investigated.
• It is advisable to also use the comparison of the logic movements together with the
analytical review of the financial statements. A further review technique would involve the
ranking of the shareholder returns and lenders ratios and investigations should be made
where the expected conditions do not hold.
• Illustration 86 (see Illustration86.xlsx) shows an example of how to set up a flex test
template for review. The sheets in Illustration 86 should be inserted in a test copy of the
existing financial model in the key outputs schedules, that is, typically the profit and loss
account, cash flow, balance sheets, lenders ratios and shareholder returns. Essentially, the
original logic sheet requires freezing through the use of a copy and paste. The original
logic will have to be kept unchanged and a variance between the original and frozen sheet
extracted. A final sheet should be inserted into the template which compares the variance
as a percentage of frozen.

Illustration 86 (Illustration86.xlsx) shows the effect of a 50% increase in the senior lenders
base interest rates. The P&L, cash flow, balance sheet and summary sheets are all analysed
by the use of a frozen, a variance and a percentage variance sheet. Each line item should
be reviewed and commented upon in terms of the variance and percentage variance to
ensure that changes are made where they are expected and to the magnitude expected. This
analysis should be supported by an analytical review of the reasonableness of the financial
statements and the summary.

112
 Reviewing and auditing private equity financial models

Looking at the General Inputs sheet B17 we can see a 50% increase in senior debt rates
has been selected.
Turning to the P&L variance and percentage variances there appears to be changes only
as expected (that is, the interest payable has increased), the corporation tax has increased
and there has been a reduction in dividends.
Looking at the cash flow variance and percentage variance there appears to be changes
only as expected (that is, the interest payable has increased), the corporation tax has increased
and there has been a reduction in dividends. The senior debt interest has increased by exactly
the 50% assumption.
Looking at the balance sheet variance and percentage variance an impact can be observed
on the overdraft, retained profit reduction and corporation tax reduction as expected.
The summary shows a relatively marginal impact on the internal rate of returns (IRRs)
and a drop in the lenders ratios at a reasonable level as expected, but the minimums cannot
be met due to the overdraft.
From an analytical review perspective the projections look reasonable from a top level.
For example, all the checks in the Checks sheet are still zero. The debt schedules in the
balance sheet reconcile to zero at the end of term.

Parallel or shadow modelling

Parallel or shadow modelling is a re-performance technique which can be used either for the
model as a whole, which we believe is an audit approach for certain professional firms, or
for the areas that are perceived as the key risk areas either due to materiality of an output
area or indeed due to the complexity behind the calculation. The following approach is
recommended:

• the re-build of the area under review;

• the comparison of the key results derived from the re-performance to the original model,
given the input assumptions are the same; and
• the differences which arise from the comparison should be rationalised and investigated
as appropriate.

Macro review
This technique is useful when the model’s key calculations are reliant on macro code. Models
are increasingly using more complex macros and to a large degree this was due to the intro-
duction of Excel’s increased programmability through Visual Basic for Applications (VBA).
We need to differentiate between low and high risk macros. Low risks typically describes a
macro or piece of Excel VBA code that is non-complex, relatively small with no program
control structure probably recorded with the objective of undertaking negative key strokes.
At the other end of the spectrum lies the high risk case which typically describes a piece
of Excel VBA code that is complex, relatively large and includes program control structures,
for example, ‘IF THEN’, ‘DO UNTIL’ and ‘FOR NEXT’ and so on.
We are primarily concerned with high risk VBA code that is complex and derives numbers.

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Private Equity Financial Modelling and Analysis

A good practice approach to reviewing VBA macro code is as follows. The first part
would be to understand the purpose of the VBA routine or macro. Second, perform a walk-
through of the code, auditing against the documented purpose.
Third, the code should be annotated at every two or three lines by placing an apostrophe
at the end of the relevant line to record your interpretation of the code as appropriate.
Where the actual logic differs from the documentation, clearly this will need investigating.
And finally, once the intentions and actual operations are understood, test runs should be
designed, the macro run and the results reviewed by reference to the test data. This is impor-
tant because the review of the macro’s code in isolation may not be completely reliable, and
so collaboration with test data provides additional assurance.

Exercise self-testing your private equity financial model

Now that you have probably followed this book from the start you will have a version of
a corporate financial model to which you will want to apply some self-tests and checks and
debug any found errors as appropriate.
Please undertake the following self-test plan for your private equity financial model.

• Undertake an analytical review of the statement forecasts.

• Undertake a key outputs review of the lenders credit ratios and shareholders returns.
• Ensure that each menu bar operates as intended.
• Ensure that each check included in the Checks module is zero.
• Ensure that each of the Cross checks built into the blue outputs modules are equal to zero.
• Colour code the financial model using a colour coding tool, ensure adequate formula
copying, and inputs are only included in the yellow modules.
• Undertake a coding review of key unique formula, looking for any potential problems,
for example, those that form key outputs or are particularly complex in nature.

Please reference Section 9 providing guidance on review techniques.

Financial model audits – private equity financial models

Prior to the close of a corporate finance transaction the parties to the project (that is, share-
holders and or lenders as the case may be) may require a full scope financial model audit.
Illustration 87 shows a typical specimen financial model audit opinion letter from a
professional services firm.
It is important to note that this section is based upon the views of the author only and
not those of any professional services firm.
A typical full scope for a financial model audit includes the wording ‘that within the
bounds of materiality that the model meets its objective’. The objective for a financial model
for a leveraged buyout is typically to produce yearly profit and loss accounts, cash flows and
balance sheets, lenders ratios and shareholder returns over the life of the forecast. Materiality
is a concept adopted in an audit that considers whether the errors inherent will greatly change
the decision (that is, where there are lenders credit ratios target of 1.20), does a known error,

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 Reviewing and auditing private equity financial models

given that we are calculating a result of 1.18, change the lending decision? In basic terms,
a corporate finance model is not perfect but should give materially accurate calculations.
Certain things can be included in the scope of the audit or excluded from the scope of
the audit as necessary.
First, the compliance of the appropriate accounting treatment can be included in or
outside the scope.
However, we need to explain why it is important that the adoption of the appropriate
accounting treatment may be important to include. Accounting treatment is what usually
drives the taxation and dividend distributions for the company or project.
The specific accounting treatment for a company can be UK GAAP, IFRS or the local
accounting treatment depending upon the circumstances.
Obviously, from an equity provider’s point of view the accounting and taxation treatment
is important in respect of their IRR. From a lender’s point of view accounting treatment is
also important as the lender needs to safeguard against any potential over – distribution of
dividends and probably ensure that the dividend is only paid after the repayment of their
interest and principal. Obviously, the taxation cash flow will impact upon the lenders ratios.
There is also the consideration of whether the data book is included within the scope
of the model audit. This involves the review of the data book in the financial model. The
book of assumptions outlines the projects input and logic assumptions and often the basis
for the key outputs. It is recommended that where the data book is included in the scope
that it is comprehensively prepared in terms of the assumption and material logic.
The project’s legal agreements can be defined as within the scope of the financial model
audit. Here, similarly to the data book review, this involves the review of the various projects
agreements such as the Credit Agreement, the Project Agreement and so on.
These are very lengthy documents and it is often recommended that specific sections are
included within the scope as necessary or critical parts included in the data book.
We often see a section on undocumented assumptions in an opinion letter. This relates
to the assumptions or logic in the financial model that are not included in the data book
or legal documentation.

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Private Equity Financial Modelling and Analysis

Illustration 87
Specimen model audit opinion
[Funder(s)] Date
Address
Street Our ref: xxxxxx Project [Name]
City
Postcode

[Sponsor(s)]
Address
Street
City
Postcode

Dear Sirs
Financial model audit: the project (the ‘Project’)

1 Introduction
This report (the ‘Report’) is addressed to the funder(s) (the ‘Funder(s)’) and the sponsor(s) (the
‘Sponsor(s)’), (together the ‘Client’, the ‘Addressee’ or ‘you’), and its contents will be solely for
your use and may not be disclosed to any other parties except in accordance with the terms
of our engagement and as noted in this Report.
In accordance with the scope of professional services, as detailed in Appendix A of our
engagement letter (‘Engagement Letter’) dated [the date], we have completed a review of the
Project’s financial model (the ‘Model’) that was prepared using Excel spreadsheets.

1.1 Models
Following initial review of the Model, an updated version reflecting agreed changes to the Model
was reviewed. The final version of the Model (the ‘Final Model’) was updated for inputs at
financial close (the ‘Financial Close Model’). The Financial Close Model, on which our Report
is based, is identified below:

Description File name File size (kb) Date and time

Initial Model [File Name] x,xxx [Date and Time]
Final Model [File Name] x,xxx [Date and Time]
Financial Close Model [If applicable] x,xxx [Date and Time]

1.2 Documentation
We were provided with the following of the Project’s financing documentation in the course
of our work:

Continued

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 Reviewing and auditing private equity financial models

Description File name File size (kb) Date and time

Credit Agreement [File Name] x,xxx [Date and Time]
Project Agreement [File Name] x,xxx [Date and Time]
Payment Mechanism [File Name] x,xxx [Date and Time]

2 Model AUDIT Objectives

The objective of the model audit was to assist you in confirming, within the bounds of materiality:
(a) that the calculations in the model are arithmetically correct and that the results are materi-
ally reliable, accurate, complete and consistent with the assumptions contained in the model;
(b) that the credit ratios are calculated correctly and in line with the definitions from the
credit agreement;
(c) that the accounting treatments and assumptions applied within the Model are consistent
with current [LOCAL] GAAP [or IFRS] and with key provisions of the Project’s financing
documentation as provided;
(d) that the tax assumptions applied within the Model are consistent with current [LOCAL] tax
legislation and with key provisions of the Project’s financing documentation as provided;
(e) that any unexplained trends or variations in key financial and banking indicators in Model
outputs are identified through analytical review;
(f) that any unexplained inconsistent or unintuitive cash-flow trends (including revenues, costs,
taxes, depreciation) or variations in key financial indicators based on the inputs and the
Project’s commercial structure are identified through analytical review of Model outputs;
(g) that the results produced from changes to underlying assumptions accurately and completely
reflect the potential impact of those changes; and
(h) [FOR OPERATIONAL MODEL AUDITS] that the model is consistent with latest statutory and
management accounts.

3 Findings
Based on our review of the Models we raised issues for all exceptions that came to our atten-
tion with regards to the objectives set out above and discussed these issues with you.
We note the following matters:
∑∑ [Matters that require documenting in the report].
A summary of the undocumented assumptions noted and representations received during the
review are included in Appendix A. A full list of issues raised during the course of our review
is available upon request as an Annex to this report.
It should be noted that:
∑∑ it is not practicable to test a computer model to an extent whereby it can be guaranteed
that all errors have been detected and, accordingly, we can only give assurance on the
Model within the bounds of materiality and for defined scenarios;
∑∑ our work did not include any work in the nature of a financial audit and we did not verify
any of the assets or liabilities of the companies involved in the Project; and
∑∑ we make no comment on the validity of the assumptions, and express no opinion as to
how closely the results actually achieved will compare with the Model’s projections.

Continued

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Private Equity Financial Modelling and Analysis

Illustration 87 continued

4 Conclusion
On the basis of the work performed [subject to the matters noted in paragraph 4], the model
audit objectives referred to in paragraph 2 have been met.

5 Distribution
Unless expressly agreed the reports are intended for exclusive use by you unless specified in
the terms of our engagement.

Yours faithfully,
[Signatory]
For and on behalf of xxxxxxxxx xxxxxxxxxx xxxxxxx

APPENDIX A: Undocumented assumptions and representations

We note the following undocumented assumptions and representations received:
∑∑ [Note undocumented assumptions and representations received].

Source: Modelling Solutions

We will assume that most lenders and shareholders will only care that they get an opinion
letter to their required scope with respect to their corporate finance project. However, there
will be others amongst us who will really want to know exactly how does a financial model
auditor form the opinion such as that outlined in Illustration 87.
What type of work are they carrying out to get here? Based, upon our knowledge and
experience of financial model audits, the following type of approach is typically taken.

Scoping
When a professional firm receives a financial model from a bank or a sponsor for a private
equity it will have to go through a scoping exercise. This typically involves a relatively quick
inspection of the financial model. The scoping inspection will involve a high level look at
the model very similar to a shorter version of an Analytical Review. A review of the model’s
design may also be undertaken which may be similar to the ‘design review’ outlined in
Section 9. We would also expect that the model auditor runs his spreadsheet audit software
(Spreadsheet Professional, OAK and so on), which will help to identify the model’s formula,
size and complexity amongst other things. Based upon the financial close model that we have
built, we will go through a typical financial model auditor’s scoping exercise with reference
to some outputs generated by the Spreadsheet Professional spreadsheet audit add-in and the
use of the in-house built colour coding tool.
Formula complexity is a key area when considering the size of a model audit task
facing a model auditor. It is pretty obvious that the more complex a formula the longer
it will take to understand. The recommended approach for this task is to use a similar

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 Reviewing and auditing private equity financial models

tool, such as Operis Analysis Kit to provide a listing of the entire financial model’s unique
formula on a sheet by sheet basis and make an assessment of the average degree of formula
complexity for each worksheet. An example is shown in Illustration 88 of such a formula
listing obtained from the Operis Analysis Kit software. An electronic example is shown in
Illustration88.xlsx.

Illustration 88
Formula complexity

Distinct Formulae Listing: LeveragedBuyout.xlsx

Report Generated: Thursday, October 04, 2012 12:00:18 PM
Worksheet Address Formula
Cover No formulae
Version Control $A$53 =A52+1
Change Control $A$53 =A52+1
User & Technical Guide $A$1 =Cover!H32
General Inputs $AI$1 =EOMONTH(Model_Start_Date,0)
General Inputs $A$2 =NOW()
General Inputs $AI$2 =EOMONTH(AI1,11)
General Inputs $AI$3 =EOMONTH(AI2,12)
General Inputs $AI$6 =EOMONTH(AI3,12)
General Inputs $AI$7 =EOMONTH(AI6,12)
General Inputs $C$9 =EOMONTH(Model_Start_Date,23)
General Inputs $D$9 =EOMONTH(C9,12)
General Inputs $B$20 =SUM(B10:B19)
General Inputs $A$23 =A10
General Inputs $C$35 =EOMONTH(B35,11)+1
General Inputs $B$36 =EOMONTH(B35,11)
General Inputs $AI$37 =EOMONTH(AI34,12)
General Inputs $B$41 =7/400
General Inputs $B$44 =B35
General Inputs $B$56 =EOMONTH(Model_Start_Date,-1)
General Inputs $B$66 =SUM(B64:B65)
General Inputs $B$80 =EOMONTH(Model_Start_Date,11)
General Inputs $C$80 =EOMONTH(B80,12)
General Inputs $B$103 =EOMONTH(Model_Start_Date,11)
General Inputs $C$103 =C9
General Inputs $B$128 =SUM(B108:B127)

Continued

119
Illustration 88 continued
Worksheet Address Formula
General Inputs $B$151 =SUM(B147:B150)
General Inputs $B$156 =SUM(B153:B155)
General Inputs $B$160 =SUM(B158:B159)
General Inputs $B$161 =+B144+B145+B151-B156-B160
General Inputs $B$167 =SUM(B165:B166)
General Inputs $B$168 =B161-B167
General Inputs $B$173 =EOMONTH(C173,-12)
General Inputs $D$173 =B142
General Inputs $B$176 =B174-B175
General Inputs $B$178 =B176-B177
General Inputs $B$181 =B178-SUM(B179:B180)
Sales – Costs – Accounting $C$2 =NOW()
Sales – Costs – Accounting $C$4 =EOMONTH(Model_Start_Date,11)
Sales – Costs – Accounting $D$4 =EOMONTH(C4,12)
Sales – Costs – Accounting $C$7 =B10
Sales – Costs – Accounting $C$8 =’Financing & W.Capital’!C54
Sales – Costs – Accounting $C$9 =IF(Depreciation____Depreciation_Straight_
Line___Years=0,0,MIN(C7+C8,(+$C$7+SUM($C8:C8))/
(Depreciation____Depreciation_Straight_Line___
Years)))
Sales – Costs – Accounting $B$10 =’Balance Sheet’!E7
Sales – Costs – Accounting $C$10 =C7+C8-C9
Sales – Costs – Accounting $C$13 =B16
Sales – Costs – Accounting $C$15 =IF(Goodwill_Amortisation___Straight_Line___
Years=0,0,MIN(C13+C14,(+$C$13+SUM($C14:C14))/
(Goodwill_Amortisation___Straight_Line___
Years)))
Sales – Costs – Accounting $B$16 =’Balance Sheet’!E9
Sales – Costs – Accounting $C$16 =C13+C14-C15
Sales – Costs – Accounting $A$20 =IF(‘General Inputs’!A10=””,””,’General
Inputs’!A10)
Sales – Costs – Accounting $C$20 =’General Inputs’!$B10
Sales – Costs – Accounting $C$30 =SUM(C20:C29)
Sales – Costs – Accounting $B$31 =SUM(C31:L31)
Sales – Costs – Accounting $C$31 =’General Inputs’!$B20-C30
Sales – Costs – Accounting $A$34 =IF(‘General Inputs’!A10=””,””,’General
Inputs’!A10)
Sales – Costs – Accounting $D$34 =’General Inputs’!C10
Continued
Worksheet Address Formula
Sales – Costs – Accounting $B$44 =SUM(C44:L44)
Sales – Costs – Accounting $D$44 =SUM(D34:D43)-SUM(‘General Inputs’!C10:C19)
Sales – Costs – Accounting $A$47 =IF(‘General Inputs’!A10=””,””,’General
Inputs’!A10)
Sales – Costs – Accounting $D$47 =C47*(1+D34)
Sales – Costs – Accounting $A$60 =IF(‘General Inputs’!A10=””,””,’General
Inputs’!A10)
Sales – Costs – Accounting $C$60 =C20*C47
Sales – Costs – Accounting $C$70 =SUM(C60:C69)
Sales – Costs – Accounting $A$73 =IF(‘General Inputs’!A10=””,””,’General
Inputs’!A10)
Sales – Costs – Accounting $C$73 =’General Inputs’!$B23
Sales – Costs – Accounting $A$85 =IF(‘General Inputs’!A10=””,””,’General
Inputs’!A10)
Sales – Costs – Accounting $C$85 =C60*C73
Sales – Costs – Accounting $C$95 =SUM(C85:C94)
Sales – Costs – Accounting $A$96 =IF(‘General Inputs’!A21=””,””,’General
Inputs’!A21)
Sales – Costs – Accounting $C$99 =B99*(1+Inflation_Per_Annum)
Sales – Costs – Accounting $A$101 =IF(‘General Inputs’!A108=””,””,’General
Inputs’!A108)
Sales – Costs – Accounting $C$101 =’General Inputs’!$B108*C$99
Sales – Costs – Accounting $C$121 =SUM(C101:C120)
Sales – Costs – Accounting $C$125 =Term_Years___Senior_Debt
Sales – Costs – Accounting $C$127 =’Financing & W.Capital’!C13
Sales – Costs – Accounting $A$128 =’General Inputs’!A74
Sales – Costs – Accounting $C$128 =Arrangement_Fees___Senior_Debt
Sales – Costs – Accounting $A$130 =’General Inputs’!A73
Sales – Costs – Accounting $C$130 =Arrangement_Fees___Sub_Debt
Sales – Costs – Accounting $C$133 =B136
Sales – Costs – Accounting $C$134 =C127*C128
Sales – Costs – Accounting $C$135 =MIN(C133+C134,(+$C$133+SUM($C134:C134))/(C125))
Sales – Costs – Accounting $B$136 =’Balance Sheet’!E8
Sales – Costs – Accounting $C$136 =C133+C134-C135
Sales – Costs – Accounting $C$138 =C9
Sales – Costs – Accounting $C$140 =C10
Sales – Costs – Accounting $C$142 =C136
Sales – Costs – Accounting $C$144 =C135+C15

Continued
Illustration 88 continued
Worksheet Address Formula
Sales – Costs – Accounting $C$146 =C134
Sales – Costs – Accounting $C$148 =C16
Financing & W.Capital $C$1 =NOW()
Financing & W.Capital $C$3 =EOMONTH(Model_Start_Date,11)
Financing & W.Capital $D$3 =EOMONTH(C3,12)
Financing & W.Capital $C$5 =’Sales – Costs – Accounting’!C8
Financing & W.Capital $C$6 =SUM(C5:C5)
Financing & W.Capital $C$8 =Equity
Financing & W.Capital $C$9 =Senior_Debt
Financing & W.Capital $C$10 =SUM(C8:C9)
Financing & W.Capital $C$13 =C$6*C9
Financing & W.Capital $C$14 =SUM(C13:C13)
Financing & W.Capital $C$15 =C6-C14
Financing & W.Capital $C$18 =Interest_Rate___Senior_Debt
Financing & W.Capital $C$19 =B22
Financing & W.Capital $C$20 =C13
Financing & W.Capital $C$21 =MIN(C19+C20,(+$C$19+SUM($C$20:C20))/
(Term_Years___Senior_Debt))
Financing & W.Capital $B$22 =’Balance Sheet’!E23
Financing & W.Capital $C$22 =C19+C20-C21
Financing & W.Capital $C$23 =(C19+C20/2)*C18
Financing & W.Capital $C$29 =’Balance Sheet’!B11
Financing & W.Capital $D$29 =’Balance Sheet’!F11
Financing & W.Capital $C$30 =Cashflow!C22
Financing & W.Capital $C$31 =SUM(C29:C30)
Financing & W.Capital $C$35 =’Balance Sheet’!B30
Financing & W.Capital $D$35 =’Balance Sheet’!F30
Financing & W.Capital $C$36 =’Profit & Loss’!C18
Financing & W.Capital $C$37 =SUM(C35:C36)
Financing & W.Capital $C$39 =’General Inputs’!B81
Financing & W.Capital $C$41 =(IF(OR(C31<0,C37<0),0,MIN(MAX(C31,0),C37)))*C39
Financing & W.Capital $C$42 =C41
Financing & W.Capital $C$46 =’Balance Sheet’!B11
Financing & W.Capital $D$46 =’Balance Sheet’!F11
Financing & W.Capital $C$47 =Interest_On_Short_Term_Cash
Financing & W.Capital $C$48 =Overdraft_Interest_Rate

Continued
Worksheet Address Formula
Financing & W.Capital $A$49 =A44
Financing & W.Capital $C$49 =IF(C46>0,C46*C47,C46*C48)
Financing & W.Capital $C$52 =B52*(1+Inflation_Per_Annum)
Financing & W.Capital $C$54 =’General Inputs’!B104*C52
Financing & W.Capital $C$60 =’Sales – Costs – Accounting’!C70
Financing & W.Capital $C$61 =Trade_Debtor_Days
Financing & W.Capital $B$62 =’Balance Sheet’!E12
Financing & W.Capital $C$62 =C60*(C61/365)
Financing & W.Capital $C$66 =’Sales – Costs – Accounting’!C95
Financing & W.Capital $C$67 =Trade_Creditor_Days
Financing & W.Capital $B$68 =’Balance Sheet’!E17
Financing & W.Capital $C$68 =C66*(C67/365)
Financing & W.Capital $C$72 =’Sales – Costs – Accounting’!C95
Financing & W.Capital $C$73 =Stock_Holding_Days
Financing & W.Capital $B$74 =’Balance Sheet’!E13
Financing & W.Capital $C$74 =C72*(C73/365)
Financing & W.Capital $A$79 =A60
Financing & W.Capital $C$79 =C60
Financing & W.Capital $C$80 =Other_Current_Asset_Days
Financing & W.Capital $B$81 =’Balance Sheet’!E14
Financing & W.Capital $C$81 =C79*(C80/365)
Financing & W.Capital $C$85 =C54
Financing & W.Capital $C$86 =C62
Financing & W.Capital $C$87 =C74
Financing & W.Capital $C$88 =C81
Financing & W.Capital $C$89 =C68
Financing & W.Capital $C$90 =C23
Financing & W.Capital $C$91 =C41
Financing & W.Capital $C$93 =B62-C62+B74-C74+B81-C81+C68-B68
Financing & W.Capital $C$94 =C49
Financing & W.Capital $C$95 =C13
Financing & W.Capital $C$97 =C23
Financing & W.Capital $C$98 =’Sales – Costs – Accounting’!C134
Financing & W.Capital $C$99 =C22
Financing & W.Capital $C$100 =C21
Taxation $D$1 =NOW()
Taxation $D$3 =EOMONTH(Model_Start_Date,11)

Continued
Illustration 88 continued
Worksheet Address Formula
Taxation $E$3 =EOMONTH(D3,12)
Taxation $D$7 =B11
Taxation $E$7 =D11
Taxation $D$8 =IF(D128<0,-D128,0)

Taxation $D$9 =D7+D8

Taxation $D$10 =IF(D128<=0,MAX(MIN(D128),0),D9)
Taxation $D$11 =D9-D10
Taxation $B$15 =SUM(D15:BP15)+SUM(Cashflow!C12:BO12)
Taxation $D$15 =-Cashflow!C12
Taxation $D$19 =’General Inputs’!$B$36
Taxation $E$19 =D20
Taxation $D$20 =EOMONTH(D19,12)
Taxation $D$21 =1-D22
Taxation $D$22 =DAYS360(D19,D$3)/360
Taxation $D$23 =HLOOKUP(D19,CapitalAllowances,2,FALSE)
Taxation $D$25 =SUMPRODUCT(D21:D22,D23:D24)
Taxation $D$26 =’General Inputs’!$B$51
Taxation $D$27 =C30
Taxation $D$28 =D$15*D26
Taxation $D$29 =IF(D24=0,0,MIN(D27+D28,SUM($D$28:D28))/((1/
D25)))
Taxation $C$30 =’General Inputs’!B57
Taxation $D$30 =D27+D28-D29
Taxation $D$33 =’General Inputs’!$B$36
Taxation $E$33 =D34
Taxation $D$34 =EOMONTH(D33,12)
Taxation $D$35 =1-D36
Taxation $D$36 =DAYS360(D33,D$3)/360
Taxation $D$37 =HLOOKUP(D33,CapitalAllowances,3,FALSE)
Taxation $D$39 =SUMPRODUCT(D35:D36,D37:D38)
Taxation $D$40 =’General Inputs’!$B$52
Taxation $D$41 =C44
Taxation $D$42 =D$15*D40
Taxation $D$43 =MIN(D41+D42,(D41+D42)/((1/D39)))
Taxation $C$44 =’General Inputs’!B58

Continued
Worksheet Address Formula
Taxation $D$44 =D41+D42-D43
Taxation $D$47 =’General Inputs’!$B$36
Taxation $E$47 =D48
Taxation $D$48 =EOMONTH(D47,12)
Taxation $D$49 =1-D50
Taxation $D$50 =DAYS360(D47,D$3)/360
Taxation $D$51 =HLOOKUP(D47,CapitalAllowances,4,FALSE)
Taxation $D$53 =SUMPRODUCT(D49:D50,D51:D52)
Taxation $D$54 =’General Inputs’!$B$53
Taxation $D$55 =C58
Taxation $D$56 =D$15*D54
Taxation $D$57 =MIN(D55+D56,(D55+D56)/((1/D53)))
Taxation $C$58 =’General Inputs’!B59
Taxation $D$58 =D55+D56-D57
Taxation $D$62 =D27+D41+D55
Taxation $B$67 =SUM(D67:BP67)
Taxation $D$67 =D30+D44+D58-D65

Taxation $D$70 =’General Inputs’!$B$36

Taxation $E$70 =D71
Taxation $D$71 =EOMONTH(D70,12)
Taxation $D$72 =1-D73
Taxation $D$73 =DAYS360(D70,D$3)/360
Taxation $D$74 =HLOOKUP(D70,CorporationTaxRates,2,FALSE)
Taxation $A$76 =A69
Taxation $D$76 =SUMPRODUCT(D72:D73,D74:D75)
Taxation $D$79 =’General Inputs’!$B$36
Taxation $E$79 =D80
Taxation $D$80 =EOMONTH(D79,12)
Taxation $D$81 =1-D82
Taxation $D$82 =DAYS360(D79,D$3)/360
Taxation $D$83 =HLOOKUP(D79,CorporationTaxRates,7,FALSE)
Taxation $A$85 =A78
Taxation $D$85 =SUMPRODUCT(D81:D82,D83:D84)
Taxation $D$88 =’General Inputs’!$B$36
Taxation $E$88 =D89
Taxation $D$89 =EOMONTH(D88,12)

Continued
Illustration 88 continued
Worksheet Address Formula
Taxation $D$90 =1-D91
Taxation $D$91 =DAYS360(D88,D$3)/360
Taxation $D$92 =HLOOKUP(D88,CorporationTaxRates,6,FALSE)
Taxation $A$94 =A87
Taxation $D$94 =SUMPRODUCT(D90:D91,D92:D93)
Taxation $D$97 =’General Inputs’!$B$36
Taxation $E$97 =D98
Taxation $D$98 =EOMONTH(D97,12)
Taxation $D$99 =1-D100
Taxation $D$100 =DAYS360(D97,D$3)/360
Taxation $D$101 =HLOOKUP(D97,CorporationTaxRates,3,FALSE)
Taxation $A$103 =A96
Taxation $D$103 =SUMPRODUCT(D99:D100,D101:D102)
Taxation $D$106 =’General Inputs’!$B$36
Taxation $E$106 =D107
Taxation $D$107 =EOMONTH(D106,12)
Taxation $D$108 =1-D109
Taxation $D$109 =DAYS360(D106,D$3)/360
Taxation $D$110 =HLOOKUP(D106,CorporationTaxRates,4,FALSE)
Taxation $A$112 =A105
Taxation $D$112 =SUMPRODUCT(D108:D109,D110:D111)
Taxation $D$115 =’General Inputs’!$B$36
Taxation $E$115 =D116
Taxation $D$116 =EOMONTH(D115,12)
Taxation $D$117 =1-D118
Taxation $D$118 =DAYS360(D115,D$3)/360
Taxation $D$119 =HLOOKUP(D115,CorporationTaxRates,5,FALSE)
Taxation $A$121 =A114
Taxation $D$121 =SUMPRODUCT(D117:D118,D119:D120)
Taxation $D$124 =’Profit & Loss’!C16
Taxation $D$125 =’Profit & Loss’!C11

Taxation $D$126 =SUM(D124:D125)

Taxation $D$127 =D64
Taxation $D$128 =D126-D127
Taxation $D$129 =D10

Continued
Worksheet Address Formula
Taxation $D$130 =D128-D129
Taxation $D$131 =IF(D130<=D112/1000000,D76,D85)
Taxation $D$132 =IF(D130<(D121/1000000)
,((D121/1000000)-D130)*D94,0)
Taxation $D$133 =IF(D130<0,0,D130*D131)-D132
Taxation $D$138 =’Sales – Costs – Accounting’!C70
Taxation $D$140 =’Sales – Costs – Accounting’!C95
Taxation $D$142 =’Sales – Costs – Accounting’!C121
Taxation $D$144 =’Sales – Costs – Accounting’!C8
Taxation $D$146 =VAT_Rate
Taxation $D$149 =D138*D146
Taxation $D$152 =(D140+D142+D144)*D146
Taxation $D$155 =D149
Taxation $D$156 =D152
Taxation $D$157 =D155-D156
Taxation $D$160 =C163
Taxation $D$161 =D155
Taxation $D$162 =D161*((12-4)/12)
Taxation $C$163 =IF(‘General Inputs’!$B$154>0,’General
Inputs’!$B$154,0)
Taxation $D$163 =D160+D161-D162
Taxation $D$165 =C168
Taxation $D$166 =D156
Taxation $D$167 =D166*((12-4)/12)
Taxation $C$168 =IF(‘General Inputs’!$B$154<0,-’General
Inputs’!$B$154,0)
Taxation $D$168 =D165+D166-D167
Taxation $D$170 =-D162-D166+D161+D167
Taxation $D$171 =IF(D168>D163,D168-D163,0)
Taxation $D$172 =IF(D163>D168,D163-D168,0)
Taxation $C$175 =C177
Taxation $D$175 =D133
Taxation $D$176 =C175
Taxation $C$177 =’Balance Sheet’!E19
Taxation $D$177 =C177+D175-D176
Lenders Ratios $B$1 =NOW()
Lenders Ratios $C$1 =YEAR(C3)
Lenders Ratios $A$2 =IF(Project_Name=””,””,Project_Name)

Continued
Illustration 88 continued
Worksheet Address Formula
Lenders Ratios $B$3 =EOMONTH(C3,-12)

Lenders Ratios $C$3 =EOMONTH(Model_Start_Date,11)

Lenders Ratios $D$3 =EOMONTH(C3,12)
Lenders Ratios $A$10 =’Balance Sheet’!A23
Lenders Ratios $C$10 =’Balance Sheet’!F23
Lenders Ratios $M$10 =SUM(‘Balance Sheet’!B23:O23)-SUM(B10:L10)
Lenders Ratios $B$13 =’Balance Sheet’!B23
Lenders Ratios $C$13 =’Balance Sheet’!F23
Lenders Ratios $M$13 =SUM(‘Balance Sheet’!B23:O23)-SUM(B13:L13)
Lenders Ratios $B$14 =’Balance Sheet’!B29
Lenders Ratios $C$14 =’Balance Sheet’!F29
Lenders Ratios $M$14 =SUM(‘Balance Sheet’!B29:O29)-SUM(B14:L14)
Lenders Ratios $B$15 =’Balance Sheet’!B22
Lenders Ratios $C$15 =’Balance Sheet’!F22
Lenders Ratios $B$16 =SUM(B13:B15)
Lenders Ratios $B$18 =IF(ROUND(B10,0)=0,”N/A”,B10/B16)
Lenders Ratios $B$19 =MAX(B18:L18)
Lenders Ratios $B$20 =INDEX($B$3:$L$3,MATCH(Debt_to_Equity_Ratio_
Maximum,$B$18:$L$18,0))
Lenders Ratios $B$21 =AVERAGE(B18:L18)
Lenders Ratios $C$25 =Cashflow!C13
Lenders Ratios $M$25 =SUM(Cashflow!C13:L13)-SUM(C25:L25)
Lenders Ratios $B$26 =SUM(B24:B25)
Lenders Ratios $C$29 =’Balance Sheet’!F23
Lenders Ratios $M$29 =SUM(‘Balance Sheet’!F23:O23)-SUM(C29:L29)
Lenders Ratios $B$30 =SUM(B29:B29)
Lenders Ratios $B$32 =IF(ROUND(B30,0)=0,”N/A”,B26/B30)
Lenders Ratios $B$33 =MIN(B32:L32)
Lenders Ratios $B$34 =INDEX($B$3:$L$3,MATCH(Free_Cashflow_to_Debt_
Ratio_Minimum,$B$32:$L$32,0))
Lenders Ratios $B$35 =AVERAGE(B32:L32)
Lenders Ratios $C$40 =’Balance Sheet’!F23
Lenders Ratios $M$40 =SUM(‘Balance Sheet’!F23:O23)-SUM(C40:L40)
Lenders Ratios $C$41 =SUM(C39:C40)
Lenders Ratios $C$44 =’Profit & Loss’!C10
Lenders Ratios $M$44 =SUM(‘Profit & Loss’!C10:L10)-SUM(C44:L44)

Continued
Worksheet Address Formula
Lenders Ratios $C$45 =SUM(C44:C44)
Lenders Ratios $C$47 =IF(ROUND(C41,0)=0,”N/A”,C41/C45)
Lenders Ratios $B$48 =MAX(B47:L47)
Lenders Ratios $B$49 =INDEX($B$3:$L$3,MATCH(B48,$B$47:$L$47,0))
Lenders Ratios $B$50 =AVERAGE(B47:L47)
Lenders Ratios $B$54 =’Balance Sheet’!B23
Lenders Ratios $C$54 =’Balance Sheet’!F23
Lenders Ratios $M$54 =SUM(‘Balance Sheet’!F23:O23)-SUM(C54:L54)
Lenders Ratios $B$55 =SUM(B53:B54)
Lenders Ratios $B$58 =’Balance Sheet’!B25
Lenders Ratios $C$58 =’Balance Sheet’!F25
Lenders Ratios $M$58 =SUM(‘Balance Sheet’!F25:O25)-SUM(C58:L58)
Lenders Ratios $B$59 =SUM(B58:B58)
Lenders Ratios $B$61 =IF(ROUND(B55,0)=0,”N/A”,B55/B59)
Lenders Ratios $B$62 =MAX(B61:L61)
Lenders Ratios $B$63 =INDEX($B$3:$L$3,MATCH(Debt_to_Net_Assets_Ratio_
Maximum,$B$61:$L$61,0))
Lenders Ratios $B$64 =AVERAGE(B61:L61)
Lenders Ratios $C$68 =’Profit & Loss’!C13
Lenders Ratios $M$68 =SUM(‘Profit & Loss’!C13:L13)-SUM(C68:L68)
Lenders Ratios $B$70 =SUM(B68:B69)
Lenders Ratios $C$73 =’Profit & Loss’!C15
Lenders Ratios $M$73 =SUM(‘Profit & Loss’!C15:L15)-SUM(C73:L73)
Lenders Ratios $B$74 =SUM(B73:B73)
Lenders Ratios $B$76 =IF(ROUND(B73,1)=0,”N/A”,B70/B74)
Lenders Ratios $B$77 =MIN(B76:L76)
Lenders Ratios $B$78 =INDEX($B$3:$L$3,MATCH(Interest_Cover_Ratio_
Minimum,$B$76:$L$76,0))
Lenders Ratios $B$79 =AVERAGE(B76:L76)
Returns Analysis $B$1 =NOW()
Returns Analysis $C$1 =YEAR(C3)
Returns Analysis $A$2 =IF(Project_Name=””,””,Project_Name)
Returns Analysis $B$3 =EOMONTH(C3,-12)

Returns Analysis $C$3 =EOMONTH(Model_Start_Date,11)

Returns Analysis $D$3 =EOMONTH(C3,12)
Returns Analysis $D$6 =C6+1

Continued
Illustration 88 continued
Worksheet Address Formula
Returns Analysis $C$7 =’Profit & Loss’!C10
Returns Analysis $M$7 =SUM(‘Profit & Loss’!C10:L10)-SUM(C7:L7)
Returns Analysis $C$8 =ENTRY___EXIT_MULTIPLE__EBITDA
Returns Analysis $C$9 =C7*C8
Returns Analysis $C$10 =-’Balance Sheet’!F23
Returns Analysis $M$10 =-SUM(‘Balance Sheet’!F23:O23)-SUM(C10:L10)
Returns Analysis $C$11 =-’Balance Sheet’!F11
Returns Analysis $M$11 =-SUM(‘Balance Sheet’!F11:O11)-SUM(C11:L11)
Returns Analysis $C$12 =SUM(C9:C11)
Returns Analysis $D$13 =C13+1
Returns Analysis $C$14 =-Cashflow!C23
Returns Analysis $M$14 =-SUM(Cashflow!C23:L23)-SUM(C14:L14)
Returns Analysis $C$16 =-Summary!$B$25
Returns Analysis $C$17 =HLOOKUP($B17,Dividends,2,FALSE)+C12
Returns Analysis $D$17 =HLOOKUP($B17,Dividends,2,FALSE)
Returns Analysis $B$18 =B17+1
Returns Analysis $D$18 =HLOOKUP($B18,Dividends,2,FALSE)+D12
Returns Analysis $E$19 =HLOOKUP($B19,Dividends,2,FALSE)+E12
Returns Analysis $F$20 =HLOOKUP($B20,Dividends,2,FALSE)+F12
Returns Analysis $G$21 =HLOOKUP($B21,Dividends,2,FALSE)+G12
Returns Analysis $H$22 =HLOOKUP($B22,Dividends,2,FALSE)+H12
Returns Analysis $I$23 =HLOOKUP($B23,Dividends,2,FALSE)+I12
Returns Analysis $J$24 =HLOOKUP($B24,Dividends,2,FALSE)+J12
Returns Analysis $K$25 =HLOOKUP($B25,Dividends,2,FALSE)+K12
Returns Analysis $L$26 =HLOOKUP($B26,Dividends,2,FALSE)+L12
Returns Analysis $C$27 =IF(ISERROR(IRR(C$16:C$26,0.1)
),”N/A”,IRR(C$16:C$26,0.1))

Profit & Loss $B$1 =NOW()

Profit & Loss $C$1 =YEAR(C3)
Profit & Loss $A$2 =IF(Project_Name=””,””,Project_Name)
Profit & Loss $C$3 =EOMONTH(Model_Start_Date,11)
Profit & Loss $D$3 =EOMONTH(C3,12)
Profit & Loss $C$6 =’Sales – Costs – Accounting’!C70
Profit & Loss $C$7 =’Sales – Costs – Accounting’!C95
Profit & Loss $C$8 =C6-C7
Continued
Worksheet Address Formula
Profit & Loss $C$9 =’Sales – Costs – Accounting’!C121
Profit & Loss $C$10 =C8-C9
Profit & Loss $C$11 =’Sales – Costs – Accounting’!C138
Profit & Loss $C$12 =’Sales – Costs – Accounting’!C144
Profit & Loss $C$13 =C10-C11-C12
Profit & Loss $C$14 =’Financing & W.Capital’!C94
Profit & Loss $C$15 =’Financing & W.Capital’!C90
Profit & Loss $C$16 =C13+C14-SUM(C15:C15)
Profit & Loss $C$17 =Taxation!D175
Profit & Loss $C$18 =C16-C17
Profit & Loss $C$19 =’Financing & W.Capital’!C91
Profit & Loss $C$20 =C18-C19
Profit & Loss $C$23 =IF(B6=0,0,(C6-B6)/B6)
Profit & Loss $C$24 =IF(C$8=0,0,C8/C6)
Profit & Loss $C$25 =IF(C6=0,0,C10/C6)
Profit & Loss $C$26 =IF(C6=0,0,C13/C6)
Profit & Loss $C$27 =C17/C16
Cash flow $B$1 =NOW()
Cash flow $C$1 =YEAR(C3)
Cash flow $A$2 =IF(Project_Name=””,””,Project_Name)
Cash flow $B$3 =’General Inputs’!$B$142
Cash flow $C$3 =EOMONTH(Model_Start_Date,11)
Cash flow $D$3 =EOMONTH(C3,12)
Cash flow $C$7 =’Profit & Loss’!C10
Cash flow $C$8 =’Financing & W.Capital’!C93
Cash flow $C$9 =-Taxation!D176
Cash flow $C$10 =Taxation!D170
Cash flow $C$11 =SUM(C7:C10)
Cash flow $C$12 =-’Financing & W.Capital’!C85
Cash flow $C$13 =SUM(C11:C12)
Cash flow $C$14 =’Financing & W.Capital’!C94
Cash flow $C$15 =SUM(C13:C14)
Cash flow $C$17 =’Financing & W.Capital’!C95
Cash flow $C$19 =-’Financing & W.Capital’!C100
Cash flow $C$20 =-’Financing & W.Capital’!C97
Cash flow $C$22 =SUM(C15:C21)
Cash flow $C$23 =-’Financing & W.Capital’!C92

Continued
Illustration 88 continued
Worksheet Address Formula
Cash flow $C$24 =SUM(C22:C23)
Cash flow $C$26 =B27
Cash flow $B$27 =’Balance Sheet’!E11
Cash flow $C$27 =C24+C26
Balance Sheet $E$1 =YEAR(E3)
Balance Sheet $A$2 =IF(Project_Name=””,””,Project_Name)
Balance Sheet $B$3 =’General Inputs’!$B$142
Balance Sheet $E$3 =EOMONTH(F3,-12)
Balance Sheet $F$3 =EOMONTH(Model_Start_Date,11)
Balance Sheet $G$3 =EOMONTH(F3,12)
Balance Sheet $B$7 =’General Inputs’!B144
Balance Sheet $E$7 =B7+SUM(C7:D7)
Balance Sheet $F$7 =’Sales – Costs – Accounting’!C140
Balance Sheet $F$8 =’Sales – Costs – Accounting’!C142
Balance Sheet $C$9 =Summary!B30-’Balance Sheet’!B25
Balance Sheet $F$9 =’Sales – Costs – Accounting’!C148
Balance Sheet $B$11 =’General Inputs’!B147
Balance Sheet $D$11 =-Summary!B26
Balance Sheet $E$11 =B11+SUM(C11:D11)
Balance Sheet $F$11 =E11+Cashflow!C24
Balance Sheet $F$12 =’Financing & W.Capital’!C86
Balance Sheet $B$15 =SUM(B11:B14)
Balance Sheet $B$17 =’General Inputs’!B153
Balance Sheet $E$17 =B17+SUM(C17:D17)
Balance Sheet $F$17 =’Financing & W.Capital’!C89
Balance Sheet $F$18 =-Taxation!D171+Taxation!D172
Balance Sheet $F$19 =Taxation!D177
Balance Sheet $B$20 =SUM(B17:B19)
Balance Sheet $B$22 =’General Inputs’!B158
Balance Sheet $E$22 =B22+SUM(C22:D22)

Balance Sheet $F$22 =E22

Balance Sheet $C$23 =Summary!B24
Balance Sheet $D$23 =-Summary!B31
Balance Sheet $F$23 =’Financing & W.Capital’!C99
Balance Sheet $B$24 =SUM(B22:B23)

Continued
Worksheet Address Formula
Balance Sheet $B$25 =+B7+B8+B9+B15-B20-B24
Balance Sheet $B$29 =’General Inputs’!B165
Balance Sheet $C$29 =Summary!B25-Summary!B32
Balance Sheet $D$29 =-B29
Balance Sheet $E$29 =B29+SUM(C29:D29)
Balance Sheet $F$29 =E29+Cashflow!C18
Balance Sheet $F$30 =E30+’Profit & Loss’!C20

Balance Sheet $B$31 =SUM(B29:B30)

Balance Sheet $B$33 =SUM(E33:BR33)
Balance Sheet $E$33 =E25-E31
Balance Sheet $B$35 =SUM(E35:BR35)
Balance Sheet $E$35 =E11-Cashflow!B27
Balance Sheet $B$37 =SUM(E37:BR37)
Balance Sheet $F$37 =F30-E30-’Profit & Loss’!C20
Balance Sheet $G$39 =G33-F33
Balance Sheet $F$41 =(F12/’Profit & Loss’!C6)*365
Balance Sheet $F$42 =(F17/’Profit & Loss’!C7)*365
Balance Sheet $F$43 =(F13/’Profit & Loss’!C7)*365
Balance Sheet $F$44 =(F14/’Profit & Loss’!C6)*365
Summary $A$2 =IF(Project_Name=””,””,Project_Name)
Summary $A$3 =NOW()
Summary $C$6 =HLOOKUP(B6,’Returns
Analysis’!$C$13:$L$27,15,FALSE)
Summary $B$7 =+B6+1
Summary $E$7 =MIN(Cash flow!$B$27:$L$27)
Summary $E$8 =INDEX(Cash flow!$B$3:$L$3,MATCH(E7,Cashflow!$B$2
7:$L$27,0))
Summary $E$10 =MAX(Cash flow!$B$27:$L$27)
Summary $E$11 =INDEX(Cash flow!$B$3:$L$3,MATCH(E10,Cashflow!$B$
27:$L$27,0))

Summary $B$13 =’General Inputs’!D178

Summary $B$14 =ENTRY___EXIT_MULTIPLE__EBITDA
Summary $B$15 =B13*B14
Summary $B$16 =-’Balance Sheet’!B23
Summary $B$17 =’Balance Sheet’!B11
Summary $B$18 =SUM(B15:B17)

Continued
Illustration 88 continued
Worksheet Address Formula
Summary $B$24 =(SUM($B$30:$B$32)-$B$26)*Senior_Debt
Summary $C$24 =B24/SUM($B$24:$B$25)
Summary $B$25 =(SUM($B$30:$B$32)-$B$26)*Equity
Summary $B$26 =’Balance Sheet’!B11
Summary $B$27 =SUM(B24:B26)
Summary $C$27 =SUM(C24:C25)
Summary $B$30 =B18
Summary $B$31 =’Balance Sheet’!B23
Summary $B$32 =Upfront_Fees
Summary $B$33 =SUM(B30:B32)
Summary $B$34 =B27-B33
Summary $B$37 =IF(B38>C38,”Breach”,”OK”)
Summary $B$38 =Debt_to_Equity_Ratio_Maximum
Summary $C$38 =’General Inputs’!B85
Summary $D$38 =’Lenders Ratios’!B20
Summary $E$38 =’Lenders Ratios’!B21
Summary $B$39 =IF(B40>C40,”OK”,”Breach”)
Summary $B$40 =’Lenders Ratios’!B48
Summary $C$40 =’General Inputs’!B89
Summary $D$40 =’Lenders Ratios’!B49
Summary $E$40 =’Lenders Ratios’!B50
Summary $B$41 =IF(B42>C42,”Breach”,”OK”)
Summary $B$42 =Debt_to_Net_Assets_Ratio_Maximum
Summary $C$42 =’General Inputs’!B91
Summary $D$42 =’Lenders Ratios’!B63
Summary $E$42 =’Lenders Ratios’!B64
Summary $B$43 =IF(B44<C44,”Breach”,”OK”)
Summary $B$44 =Interest_Cover_Ratio_Minimum
Summary $C$44 =’General Inputs’!B93
Summary $D$44 =’Lenders Ratios’!B78
Summary $E$44 =’Lenders Ratios’!B79
Checks $C$1 =IF(ROUND(SUM(C3:C363),0)<>0,”Please Check
Model Logic”,”CHECKS OK”)
Checks $C$3 =’Balance Sheet’!B33
Checks $C$5 =’Balance Sheet’!B35
Checks $C$7 =’Balance Sheet’!B37

Continued
 Reviewing and auditing private equity financial models

Worksheet Address Formula

Checks $C$9 =AVERAGE(‘Balance
Sheet’!F41:O41)-Trade_Debtor_Days
Checks $C$10 =AVERAGE(‘Balance
Sheet’!F42:O42)-Trade_Creditor_Days
Checks $C$11 =AVERAGE(‘Balance
Sheet’!F43:O43)-Stock_Holding_Days
Checks $C$12 =AVERAGE(‘Balance
Sheet’!F44:O44)-Other_Current_Asset_Days

Source: Operis Analysis Kit Software

Based upon the type of output in Illustration 88 we can very quickly assess the complexity
of each worksheet.
The number of unique formula is a key area when considering the size of a model audit
task facing a model auditor. It is pretty obvious that the more formulae that a model has
the longer it will take to understand. A unique formula can be defined as an Excel formula
that holds when copied across the columns and down the rows which have identical logic. In
terms of the need to understand the financial model, all things being equal the more unique
formula a model has the longer it will take to understand. The recommended approach
for this task is use a similar tool such as Operis Analysis Kit to provide a count of all the
financial model’s unique formula on a sheet by sheet basis, see Illustration 89.

Illustration 89
Unique formula count

Workbook summary: LeveragedBuyout.xlsx

Report generated: Thursday, October 04, 2012 12:00:18 PM
Sheet Distinct formulae
Cover 0
Version control 1
Change control 1
User and technical guide 1
General Inputs 34
Sales – Costs – Accounting 53
Financing & W.Capital 68
Taxation 139
Lenders Ratios 64
Returns analysis 33

Continued

135
Private Equity Financial Modelling and Analysis

Illustration 89 continued
Sheet Distinct formulae
Profit & Loss 25
Cash flow 24
Balance sheet 50
Summary 45
Checks 8
Total distinct formulae 546

Source: Operis Analysis Kit Software

You can see from the report in Illustration 89 that although the specific worksheet
has 468 formulae only 546 are unique. Note that the OAK software uses the terminology
‘distinct’ instead of ‘unique’.

VBA macros
The auditor would review the size, complexity and general nature of any macros or VBA
code included in the financial model. Those of particular interest will be those that drive
the numbers and not those that change the model’s presentation, unless, of course, the client
has a particular need to place emphasis upon presentational macros.
The auditor will then discuss the scope of work and the type of opinion ideally required
with the lender and or the equity providers.

Work plan
Based upon the required scope for the financial model audit the auditor will prepare a work
plan. The work will reflect the hours required for each activity and the staff allocated to
the tasks. The plan and the resources required to deliver this will obviously be tied in to
the overall deliverables of the opinion letter.
The recommended approach for preparing a work plan for a financial model audit is
shown in Illustration 90.

136
Illustration 90
Financial model audit work plan

Workbook summary: LeveragedBuyout.xlsx

Report generated: Thursday, October 04, 2012 12:00:18 PM
Formula complexity Mins/UF
Low 1.0
Medium 1.5
High 2.0

Sheet Distinct Average Mins per UF Hours

formulae complexity
Cover 0 Low 1.0 0.0
Version Control 1 Low 1.0 0.0
Change Control 1 Low 1.0 0.0
User & Technical Guide 1 Low 1.0 0.0
General Inputs 34 Low 1.0 0.6
Sales – Costs – Accounting 53 Medium 1.5 1.3
Financing & W.Capital 68 Medium 1.5 1.7
Taxation 139 Medium 1.5 3.5
Lenders Ratios 64 High 2.0 2.1
Returns Analysis 33 High 2.0 1.1
Profit & Loss 25 Medium 1.5 0.6
Cash flow 24 Medium 1.5 0.6
Balance Sheet 50 Medium 1.5 1.3
Summary 45 Medium 1.5 1.1
Checks 8 Low 1.0 0.1
Total distinct formulae 546 14.1
Analytical review Number of Hours each 7.0
sensitivities
Sensitivity review 5 3 15.0
Databook and legal agreements 25.0
Tax review 7.0
Accounting review 7.0
Senior review 14.0
Partner review 7.0
Total planned man hours 96.1

Source: Modelling Solutions

Private Equity Financial Modelling and Analysis

We can see above the information drawn out from the scope required from the discus-
sion with the sponsor or the lenders and the inspection of the financial model provided for
scoping purposes that we have been able to work out the number of man hours required
to complete the financial model audit task. In this particular case a fair amount of the 96
man hours are spent on the coding review which has been calculated by taking into account
the size and complexity of the financial model. More specifically, we have taken account of
the number of unique formulae, the complexity of these and, using a number of minutes in
each unique formula, computed the man hours for the coding review. You will also notice
that the man hours to complete the other tasks have also been estimated. These include the
review of the data book and legal agreements, tax and accounting, sensitivity review and
other senior review time. The above plan will typically be used to allocate the grade and
specialism to the model audit project given the agreed timescales and for general project
management purposes. It will also be used as a basis for setting the fee quote with the client.
An electronic example is shown in Illustration 90 (see Illustration90.xlsx).

Coding review
A coding review is the process of reviewing every unique formula in terms of the underlying
logic. You can either use the maps or the colour coding of the model derived by spreadsheet
audit software.
A section of the private equity financial model is shown in Illustration 91.

Illustration 91
Coding review

Lenders ratios 04/10/2012 13:14 2011

Leveraged buy out Year ending: Year ending:
Period ending 31 December 2010 31 December 2011
Actual Forecast
£ million £ million
Lenders ratios
Debt to equity ratio
Senior debt 2.0 26.8

Total debt and equity

Senior debt 2.0 26.8
Equity 12.8 8.7
Shareholder loan 0.0 0.0
Total debt and equity 14.8 35.5
Debt to equity ratio 13.5% 75.6%

Continued

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Lenders ratios 04/10/2012 13:14 2011
Leveraged buy out Year ending: Year ending:
Period ending 31 December 2010 31 December 2011
Actual Forecast
£ million £ million
Debt to equity ratio maximum 75.6%
Debt to equity maximum date 31 December 2011
Debt to equity average 53.4%

Free cash flow to debt

32.6
Free cash flow 0.0 32.6
Total debt
Senior debt 26.8
Total debt 0.0 26.8
Free cash flow to debt ratio N/A 121.4%
Free cash flow to debt ratio minimum 121.4%
Free cash flow to debt ratio minimum date 31 December 2011
Free cash flow to debt ratio average 270.5%

Debt to EBITDA
Senior debt 26.8
Total debt 26.8
EBITDA 34.6
EBITDA 34.6
Debt to EBITDA ratio 77.7%
Debt to EBITDA ratio maximum 77.7%
Debt to EBITDA ratio minimum date 31 December 2011
Debt to EBITDA average 45.0%

Debt to net assets

Senior debt 2.0 26.8
Total debt 2.0 26.8
Net assets 49.1 30.1
Net assets 49.1 30.1
Debt to net assets ratio 4.1% 89.3%
Debt to net assets ratio maximum 89.3%
Debt to net assets ratio maximum date 31 December 2011
Debt to net assets average 30.9%

Continued
Private Equity Financial Modelling and Analysis

Illustration 91 continued
Lenders ratios 04/10/2012 13:14 2011
Leveraged buy out Year ending: Year ending:
Period ending 31 December 2010 31 December 2011
Actual Forecast
£ million £ million

Interest cover
EBIT 32.0
Cash interest/(expense) 0.3
EBIT 0.0 32.3
Interest – senior debt 2.1
0.0 2.1
Interest cover ratio N/A 15.3
Interest cover ratio minimum 15.3
Interest cover ratio minimum date 31 December 2011
Interest cover ratio average 42.9

Source: Modelling Solutions

The extract from the financial model in Illustration 91 shows each unique formula in
dark grey. Each dark grey formula would have to be inspected. The colour coding shows a
unique formula as a dark grey cell and copy down or across the unique formula is a lighter
shade of grey. Mid grey cells are labels and lightest grey is an input or hard coded cell. In
general different proprietary tools will have a different colour code key but the principal of
the unique formula should remain the same regardless of the tool used.

Analytical review
The process for an analytical review has been outlined in Section 1. A relatively senior
member of the team will undertake the analytical review, possibly making the other members
of the team aware of areas that look unreasonable and that may require further attention.

Data book and legal documentation

The process for reviewing the data book or legal documentation in the final model is to
cross reference each of the specific documentation sections in terms of where the text can
be found in the financial model (that is, Range B4 to C6 Funding sheet). Where areas of
the documentation can be quantified and the financial model does not comply with or is
not reflected in the financial model an issue or comment should be logged and raised with
the financial modeller.

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 Reviewing and auditing private equity financial models

Tax
A tax specialist from the professional firm will review the tax treatment in the model against
the treatment for the required model audit. For example, does the corporation tax and value
added tax treatment materially comply with UK tax treatment? Comments or issues will be
raised by the tax specialist given clear guidance of the nature of the financial models calcula-
tions outlined to them by a member of the financial model audit team.

Accounting
An accounting specialist from the professional firm will review the accounting treatment
in the model against the treatment for the required model audit. For example, does the
accounting treatment materially comply with UK GAAP, IFRS, or local accounting treatment?
Comments or issues will be raised by the accounting specialist given clear guidance of the
nature of the financial model’s calculations outlined to them by a member of the financial
model audit team.

Review comments
Review comments will be provided to the modeller by the financial model audit team.

Iterations and base case clearance process

The audit team will present the review comments to the financial model builder based upon
the current version of the model until the base case comments are cleared.

Sensitivities
It is standard practice that after the clearance of the base case projections that each sensi-
tivity case is reviewed on a case by case basis. This will be a similar methodology to that
adopted in the sensitivity or flex testing approach outlined in Section 9 (that is, the use of
flex testing techniques).
If there are any issues arising from the sensitivity review these will be raised as review
comments and the model or the definition of the sensitivity in the data book would even
amend the sensitivity logic to reflect the issues and gain overall clearance.

Second senior review

Once the engagement manager is happy that he is ready for sign off on the opinion letter,
it is normal that a second senior reviewer looks at the review work performed, carries out
some further analytical review. It is also critical that he double checks the basis of the lenders
ratios and shareholder returns against the facility agreement or data book as appropriate.
The double checking of the key outputs is critical given that any error at the highest level
can often produce one of the most material sources of error.

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Private Equity Financial Modelling and Analysis

Partner sign off

Once the financial model audit team have satisfactorily completed their work and the profes-
sional services firm can support their opinion the partner will be able to sign the opinion
letter. Of course, an opinion letter can be issued prior to all the review comments being
cleared, but the outstanding points will clearly have to be attached as findings or qualifica-
tions to an opinion.

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Section 10

Sensitivity analysis

There are certain approaches that can be taken to measure financial and business risk that
can be undertaken using Excel modelling techniques.
In this section we will discuss the various approaches to risk that can be taken.

Data tables
This is a method in Excel that shows a combination of results for a key output for a combi-
nation of variable or input changes. In summary, a data table is simply a range of cells that
shows the results of substituting different values in to the logic of the financial model. The
limitation of this technique for risk analysis is that you can only have a 1 or 2 variable
data table at the most. An example of the use of data tables can be seen in Illustration 92
(see Illustration92.xlsx). For this purpose we will use the leveraged buyout financial model
to review the effect of the third year exit internal rate of return (IRR) across a range of
percentage debt and EBITDA multiples. If we look at sheet General Inputs, rows 186 to
198, we can see the data table which has been constructed in order to do this analysis. We
place the key output at the corner of our table, calculated from first principles. In this case
the IRR is in cell C188.
The possible range of debt percentage is shown below the IRR from B189 to B197. The
EBITDA multiple and its range is shown to the right of the IRR calculation in row 188.
In order to calculate each of the results for the table of outcomes, we must select the
full range B188 to K197. Next we must select ‘Data’, then ‘What If Analysis’ and then
‘Data Table’. Select the EBITDA multiple, that is, B184 as the row input cell. Select the
debt percentage, that is, B65 as the column input cell.
You will now see a fully populated set of IRRs. In order to prove that we have calculated
this correctly we can see that in cell H194 we have the same result as our current IRR at
120.3% given a 7.5 times multiple and 60% debt.

Scenario manager
Excel’s scenario manager allows us to create multiple scenarios in order to measure risk for
a variety of outcomes with ease. Illustration 93 (see Illustration93.xlsx) provides us with an
example of two scenarios as follows.

• Inflation – looks at the effect of changing inflation to 5% on the real equity IRR.
• Inflation increase and trade debtor increase – looks at the effect of changing inflation to
5% and trade debtor days to 40 days.

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Private Equity Financial Modelling and Analysis

In order to implement the scenarios, we must always ensure that the key outputs that we
want to run the scenario against are in the same sheet as the inputs that are being changed
for the specific scenario. Please see cell E136 of the General Inputs sheet, here you will see
that this key output measure has been linked to the result in our financial model.
In order to set up a scenario in Excel 2007 you simply select the ribbons in the following
order: ‘Data’, ‘What Ifs’, and ‘Scenario Manager’.
You select ‘Add’ to enter the scenario name, the cells to change and enter the descrip-
tion in the comments box. We recommend that all of the inputs used for your scenario
planning are given a logical range name which is similar to the labels of the input variable
or the key output.
The Summary button is selected in order to produce the scenario report as in the Scenario
Summary sheet in the financial modelling example.
The advantages of using the scenario manager for risk analysis can be summarised
as follows.

• We can run and store a vast number of scenarios with ease that can be seen at any time.
• It prompts the financial modeller to define and document the scenario.

The disadvantages of using the scenario manager for risk analysis can be summarised
as follows.

• The outputs to run the scenario against must be performed on the same worksheet as
the original inputs that need to change. This is not compliant with recognised best prac-
tice financial model design standards of keeping a separation between inputs calculations
and outputs.
• We cannot see the underlying schedules that support the key outputs , that is, the profit
and loss, cash flow and balance sheet forecasts which would be useful to review for
reasonableness using analytical review techniques.

Goal seek
Excel’s ‘Goal Seek’ formula allows the financial modeller to work backwards to find a desired
result. This is useful in a decision making or negotiating scenario.
In order to run a goal seek in Excel 2007 you simply select the ribbons in the following
order: ‘Data’, ‘What Ifs’, and ‘Goal Seek’. You simply set the target to the required value
by changing a defined assumption.
Illustration 94 (see Illustration94.xlsx) provides us with an example of a goal seek deci-
sion making scenario: What is the level of turnover or sales for 2011 in order to achieve a
100% real return on equity given the planned sales mix for the company’s product range?
In order to implement this goal seek calculation you will notice that an input assump-
tion has been created in cell B8 of the General Inputs sheet that has been called revenue
for 2011 in pound millions. We can see we have shared out the sales in accordance with
an equal product mix, but it could, of course, be a different mix which equals 100% across
all products.

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 Sensitivity analysis

In order to run the goal seek for this you simply target the real equity IRR (see C8 of
the Summary Sheet) to equal 1 (that is, 100%) by changing the sales value in the General
Inputs sheet B8. Note that the annual revenue for 2011 is 81.2 million in order to achieve
a 100% real return on equity.

Risk exercise
Based upon the leveraged buyout financial model built to date, add functionality using data
tables and the scenario manager to compute changes in the senior debt interest rates. Use
the goal seek functionality to see what minimum sales are required in the first forecast year
to achieve a zero cash balance.

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Conclusion

During the course of this book we have covered the relevant areas by providing examples
with the reader undertaking practical exercises which address private equity financial model-
ling and analysis needs. This ranges from the planning and analysis of the portfolio to the
exit strategy for each company.
We would like to wish you every success in applying such skills in your organisation.

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Glossary

Acquisition The takeover of a portfolio company by another organisation.

Balance sheet A financial statement that shows the financial position of a company at a
point in time, that is, its assets liabilities and its net worth.
Business plan This is a document that is prepared by the management of the company
perhaps with the support of its business advisers outlining its historic and future perfor-
mance. It will detail the company’s history, its competitive position relative to the market,
its financial forecasts. It will outline its strategy thus defining its key performance indi-
cators that will be used as targets. It should be rolled out to the organisation and used
to measure actual performance.
Buy-in management buyout A leveraged buyout, which includes the new management and
the organisations existing management.
Buyout drivers   There are three main drivers underpinning buyout returns; EBITDA, leverage
and earnings multiples.
BVCA British Venture Capital Association.

Committed capital The total amount of capital currently committed to that fund by
all investors.
Covenant Lender’s contractual requirements that need to be followed by the borrower. These
represent financial ratio levels and perhaps certain cash holdings.

Development capital This is when a private equity firm invests in a mature business.
Distribution The payment made by a fund to an investor after exiting the investment.
Divestment This is the opposite to investment. It represents the action of disposing of a
company’s asset through sale.
Drawn down capital The total amount of committed capital which it has been actually
drawn down from its investors.
Due diligence This is an independent review of a target company on behalf of its potential
investors. The scope of such a review includes the review of the business plan, material
financial information and opinions.

Early stage This represents the seed investments and first round of funding for a company.
EBIT This stands for earnings before interest and tax. It is a profit and loss account measure.
EBITDA This stands for earnings before interest tax depreciation and amortisation. It is a
fairly popular measure in corporate finance as it is the starting point for calculating
certain cash flow numbers.
Enterprise value Enterprise value is a valuation measure that reflects the market value of
the whole business enterprise value is normally valued at market values. Enterprise value
can be defined as:
• ordinary shares (equity) at market value;

149
Glossary

• add debt at market value;

• add preferences shares at market value; and
• less cash.

Equity Equity represents the sum of capital provided by a company by its shareholders plus
the retained profits in the company’s balance sheet.
Exit The method by which the shareholders in a portfolio company sell part or all of their
holding. There are numerous methods of exit which are available such as initial public
offering, sale to a corporate, secondary leveraged buyouts, and recapitalisations.
EVCA European Venture Capital Association.

Fund A private equity fund is an investment vehicle which has been created to raise capital
from investors which in turn invest in portfolio companies.
Fundraising This is a process by which the general partner raises funding to create a private
equity fund. The funds are raised from pensions, companies which become investors or
limited partners.
Fund size The total of all funding committed by investors.

General partner A group of partners together with their staff who manage a fund. This is
likely to be a limited liability partnership.
Gearing This is a measure of the degree of long-term debt to a company’s net assets. It is
used as potential risk indicator for both shareholders and lenders.
Goodwill This represents the amount of value attributed to a business for its brand, employees
and clientele, which has built up over time. It also relates to the excess of purchase price
of a business over the net assets of the target company.
Growth capital  Funding provided to companies in established markets that need funding
to grow.

Hockey stick This is an alternative name given for the typical J-curve growth that is seen
in private equity forecasts.

IPO Initial public offering, or the first time that a private company has issued shares to the
general public. Of course, such shares will be issued on the stock exchange.
IRR This relates to a discounted cash flow technique which finds the discount rate where
the Net Present Value equals zero. Thus the name: internal rate of return. The IRR is
a result that arises from a series of cash flows which can be compared to the weighted
average cost of capital (WACC) that is, where the IRR is greater than the WACC then
accept the NPV is likely to add to the company valuation.
Investment capital The total amount of drawn down capital which has actually been
invested in companies.

J-curve  This is the shape of all private equity funds over time. When the cash flows are
plotted on a graph over time on a cumulative basis shows a J shape. This is the negatives
in early years as the funds are drawn down and the positives as the distributions are made.

150
 Glossary

Leverage This is terminology describing the effect of debt on the company or private
equity transaction.
Leveraged buyout (LBO) The acquisition of a company by an investor at a high percentage
debt to equity ratio. This is typically at least 70%.
Limited partnership This is the legal structure typically used by most private equity vehicles.

Management buy-in This is when an existing company is acquired by a new

management team.
Management buyout This is when a management team acquires the company that they
are originally employed by.
Mezzanine debt This is convertible debt which ranks between equity and senior debt in a
financial structure for a private equity transaction.
Monitoring This is when the performance of the portfolio company is measured by the
private equity firm. This would include a member of the private equity investor on the
board, regular reporting and meetings.
Multiple This is the basis of valuation for a private equity company.

Offering memorandum This is a document issued by the private equity firm which has the
objective of raising capital from investors.

Payback The amount of time it takes to recover the initial capital investment. This can be
applied to a portfolio company or a private equity fund as a whole.
Portfolio company A private limited company in which a fund invests.

Recapitalisation This is where a company has generated more cash than originally planned.
Equity is repaid and additional debt is raised.

Seed investing This is the preliminary funding used to develop the product or service
concept and often used to undertake market research, write a business plan and
study feasibility.
Senior debt This is debt that takes priority over other forms of debt in the transaction
structure both as to repayment and on the event of liquidation.
Special purpose vehicle A limited company, which has been created specifically as a holding
company for a buyout transaction.

Turnaround The buyout of a company which is struggling and possibly even loss making
and has a distressed debt position.

Un-invested Capital This is capital which is available for investment but has not yet
been utilised.
Upper quartile This is a typically used as a measure of vintage year returns in the private
equity industry. The upper quartile return sits at a quarter from the top of the highest
ranked returns.

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Glossary

Vintage year This is the year in which a fund was formed. This is useful for comparison
and benchmarking performance.
Vintage year returns This is a return statistic for all the funds formed in a certain vintage
year and the returns to date.

Write down This is the need to reduce the stated valuation of a portfolio company. There are
guidelines under the private equity guidelines whereby certain guidelines are mandatory.
Write up This is the need to increase the stated valuation of a portfolio company. There are
guidelines under the private equity guidelines whereby certain guidelines are mandatory.

152