Acquisition modelling; elevating strategic conversations with a credible financial model
Acquisitive strategies can be highly attractive as, when correctly executed, they provide the opportunity to generate significant shareholder value. When assessing potential opportunities, it is critical to robustly project the impact of acquisitions within an enlarged group. Clearwater’s Financial Modelling team offer clients a bespoke approach when it comes to advising them on their acquisition modelling opportunities, an area reflected on in this blog below.
Acquisitive strategies can be highly attractive
A well-crafted financial model is the keystone of a successful acquisition strategy. It guides decision-making, instils confidence in shareholders, and acts as a strategic roadmap for navigating the complexities of growth. It becomes a business’ invaluable tool when evaluating the challenges of expansion, ensuring a path to sustainable value creation.
Why a good model is essential to execute your acquisition strategy
Quantify the value of the acquisition to your business
Whilst strategic fit is paramount when thinking about acquisitions, a successful acquisition strategy must ultimately be grounded in quantifiable data for management teams, shareholders, and funders alike.
Creating a consistent profit and loss (P&L) format across the ‘core’ business and potential acquisitions gives one consistent view of the new enlarged business, enabling easy comparison across the combined businesses and helping to identify areas for value creation, via sales opportunities and cost synergies.
Consistency of presentation will also enable the assessment and quantification of risks attached to acquisitive activity. Through sensitivity analysis and stress tests, financial models help quantify potential downsides. This proactive approach enables companies to develop contingency plans and mitigate challenges before they become significant issues.
Assess available sources of funding and optimise them
Having concluded on the strategic rationale for an acquisition, including the associated operational and financial benefits, it is then important to identify how it will be funded.
Financial models assist in quantifying the funding capacity for acquisitions
Financial models assist in quantifying the funding capacity for acquisitions, utilising debt and the potential for future deferred consideration payments. A clear output showing the impact on cash generation and covenant headroom gives lenders confidence that management has clearly considered the impact of the acquisition.
For shareholders, a financial model can run different funding scenarios and quantify the impact on current ownership, helping to determine the optimal mix of debt and equity.
The Financial Modelling team have reviewed and built over 50 financial models in the LTM
What a good modelling process looks like
Within the last 12 months, Clearwater’s Financial Modelling team have reviewed and built over 50 financial models for clients and targets, so they know the importance a financial model plays in acquisitions.
There are a few core components involved to ensure a suitable model is applied, which meets the needs of the client and the goals for their business.
- A robust financial model should be flexible; unlike hardcoded assumptions that can quickly become obsolete, we design our models to accommodate changes, such as shifts in the underlying performance of a target.
- Flexibility also extends to scenario planning; our financial models allow for the exploration of various scenarios, enabling decision makers to assess the impact of different market conditions on the potential acquisition.
- Consistency is key when dealing with multiple potential acquisitions; our models ensure alignment in financial information and maintain a consistent presentation across all prospects, making it easier to compare potential deals.
- Starting early is paramount for success; early engagement with the financial model allows for thorough due diligence, helping to identify deal breakers, or areas that require special attention.
- Starting early also enables an iterative refinement process; as more information becomes available throughout the acquisition process, our financial models can be adjusted and refined. This iterative approach ensures that the model evolves in tandem with the evolving understanding of the potential deal.
Case study: Cooper Parry
Clearwater’s Financial Modelling team recently supported Cooper Parry in modelling the impact of its buy-and-build strategy. As part of Cooper Parry’s acquisition of Haines Watts and associated refinance, the team developed a comprehensive forecast model, which enabled management to forecast pipeline and longer-term acquisitions.
The model was critical to the refinance, and not only helped to show the leverage and cash flow implications of Cooper Parry’s strategy for the purpose of the acquisition but is now being used by management as part of their internal processes going forward.
Clearwater built a detailed financial model allowing us to clearly demonstrate the historical and future performance of the group
Jim Aldred, Treasury and Reporting Director, Cooper Parry commented on working with Clearwater:
“As part of supporting us with a transformational acquisition and associated refinancing, Clearwater built a detailed financial model allowing us to clearly demonstrate the historical and future performance of the group to various stakeholders. The model was critical in the refinancing process, was built with scalability in mind, and will be used by the business going forwards. The Clearwater team were very supportive throughout the whole process, going above and beyond to ensure we ended up with a powerful model tailored for our needs.”
If your business would benefit from a quality financial model to support its acquisition strategy, please reach out to a member of the team today.
