We are considering 2 acquisitions over the next 2 years. The current modelling approach is
(1) Value the target companies separately. Build a historic forecast model (2 years history available, plus create a 5 year forecast). Value the target. So far simple.
(2) Build a Group historic forecast model, and then add in the 2 target companies. The target companies will each have Revenue and expense assumptions down to EBITDA level. I could do further and include Capex, depreciation, and debt (but not equity) at a target company level.
(3) Calculate working capital (debtors, inventory, creditors), capex and depn, tax, equity and debt at a consolidated level. Although I could do this at a target company level.
(4) Value the group using EBITDA module.
Issues
(1) The 2 target companies opening Balance sheet is ignored. The model will only include post acquisition working capital and fixed assets purchased. The main purpose of the Group model is to value the group.
(2) The tax rates applicable will be USA for the 2 targets, while the parent is in the UK. So this suggests that the targets income statements should go down to profit after tax instead of EBITDA level.
Any thoughts chaps?
Sounds like you've got quite an impressive modeling challenge there Nick!
This is the type of model we would spend hours/days scoping, so I think providing you with detailed input is outside the scope of this forum, but here's some big-picture comments:
If you're happy with an EBITDA-based DCF, one simple option would be to model each business completely independently, then combine their EBITDAs along with a few eliminations and synergies assumptions to get a proxy consolidated valuation. This would be exponentially simpler than building a bona fide M&A model, but also a lot less detailed/accurate.
We are currently investing resources in developing premium content, which is likely to include more advanced consolidations and M&A analysis, but as this post makes obvious it's not simple stuff so it's taking time.
Keep us posted on your battle mate. M.
Hello Mike.
Your advice is always highly valued and respected.
I like the simple option - "model each business completely independently, then combine their EBITDAs along with a few eliminations and synergies assumptions to get a proxy consolidated valuation. This would be exponentially simpler than building a bona fide M&A model, but also a lot less detailed/accurate"
I am going with the simple option. My reasoning is that the existing group is already complicated. Each of the 4 existing businesses have different currencies, different growth rates assumed in their 5 year forecasts and different historic data which can be used to assess the reasonabless of their 5 year forecasts. Further the tax rates and discount rates will vary by country due to business risk and financing structure, cost of debt and equity.
Many thanks and best wishes
Nick