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Investment Banking Course: Phoenix

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15 Dec

Investment Banking Course: Phoenix

15th December 2018 @ 8:00 am - 16th December 2018 @ 5:00 pm





Part I: Introduction to Monetary Value

Chapter 1: Introduction to the Capital Markets

Part II: Tracking Monetary Value via Accounting

Chapter 2: Accounting for Monetary Value

Chapter 3: From Accounts to Financial Statements

Part III: Reporting Monetary Value with Financial Statements

Chapter 4: Reading Financial Statements

Chapter 5: Gathering Historical Financial Statements

Part IV: Modeling Monetary Value in Excel

Chapter 6: From Financial Statements to the Financial Statement Model

Chapter 7: Preparing for Financial Statement Modeling

Chapter 8: Excel for Financial Statement Modeling

Chapter 9: Financial Statement Modeling

Part V: Analyzing Monetary Value in Excel

Chapter 10: Financial Statement Model Analysis

Part VI: Valuing Monetary Value in Excel

Chapter 12: Finance with Excel

Chapter 13: Public Company Valuation

Chapter 14: Comp Companies

Chapter 15: Comp Transactions

Chapter 16: Discounted Cash Flow (DCF)

Chapter 17: Triangulating Valuation with the Football Field



Part I: How to Sell a Perpetuity?

Chapter 65: Investment Banking

Chapter 65: Strategic Management & the Investment Banker

Chapter 66: How to Build a Middle Market M&A Practice

Part II: The Middle Market

Chapter 67: Middle Market Breakdown

Chapter 68: Buyer Profile: Individuals & Search Funds

Chapter 69: Buyer Profile: Lower Middle Market Private Equity

Chapter 70: Buyer Profile: Middle Market Private Equity

Chapter 71: Buyer Profile: Strategics

Part III: M&A Multiples

Chapter 72: M&A Multiples

Part IV: Investment Banking Coverage Methodology

Chapter 73: Investment Banking Coverage Methodology

Chapter 74: Index Building & Benchmarking

Chapter 75: Financial Data Sources

Chapter 76: Coverage Marketing Material

Chapter 77: Rolodex Building

Chapter 78: Industry & State Level Coverage

Part V: M&A Origination Methodology

Chapter 79: M&A Origination Methodology

Chapter 80: Building the Pitchbook

Part VI: Mandate/Target Matching Methodology

Chapter 81: Mandate/Target Matching Methodology

Part VII: M&A Fee Methodology

Chapter 82: M&A Success Fee

Chapter 83: The M&A Engagement Letter

Part VIII: Underwriting the Financial Product

Chapter 84: Gathering the Historical Financials

Chapter 85: Finding Adjusted EBITDA

Chapter 86: Building the Financial Statement Model

Chapter 87: Building the Valuation

Chapter 88: Building the Transaction Specific Model

Part IX: Packaging the Financial Product (Marketing Material)

Chapter 89: Building the Teaser

Chapter 90: Building the CIM (Confidential Information Memorandum)

Chapter 91: Building the Management Presentation

Part X: Buyer List Methodology

Chapter 92: How to Build a Buyer List

Chapter 93: Outreach to the Buyer List

Part XI: Deal Structuring

Chapter 94: Deal Structuring

Chapter 95: Asset Sale vs. Stock Sale

Part XII: M&A Process

Chapter 96: M&A Process

Chapter 97: Dealing with Sellers

Chapter 98: Dealing with Buyers

Chapter 99: The Letter of Intent (LOI)

Chapter 100: The Purchase Agreement

Part XIII: Investment Bank Management

Chapter 101: How to Build a Boutique Investment Bank?

Chapter 102: Running the Boutique Investment Bank





There are many investment banking texts out there that claim that financial modeling and valuation is the core work of the investment banker. This is simply not the truth. The core work of the investment banker is origination, mandate/target matching, and deal structuring. It should follow that a text/course on investment banking should be based upon the same. It is the good fortune that the reader has encountered such a book/course. Investment Banking: M&A Origination, Execution, Financial Modeling & Valuation explains origination, mandate/target matching, and deal structuring (i.e. how investment bankers actually make their money).


For those new to investment banking you are first going to want to clarify whether you would like to work on the sell side for a few years or pursue a career in investment banking. The skills that you will need to get started in investment banking are different than those that you will need to have a long and successful career in investment banking. The role in investment banking transforms from one that is research, financial modeling & valuation-based into one focused on origination and facilitating the M&A process. M&A (Mergers & Acquisitions) is the core product of investment banking, and the other products, advisory & capital-raising, simply support this. We founded Investment Banking University ( to prepare students for both bulge bracket and middle market investment banking career opportunities.


We see a paradigm shift occurring in the field of investment banking. The idea that you need to spend three years of your life as an analyst doing 80+ hour workweeks building financial models to become an investment banker is a faulty paradigm. The real value add of an investment banker is not financial modeling & valuation, but rather origination, mandate/target matching, and deal structuring. You don’t need Goldman Sachs’ permission to be an investment banker just like you don’t need McKinsey’s permission to be a consultant. Investment banking for private companies in the middle market and lower middle market is a great way to build your initial coverage and career as an investment banker without sacrificing a family life or your health.








In order to understand the role and work of the investment banker, we need to first have a strong understanding of the foundations of valuation. This helps us to understand why it is that the investment banking industry exists and where investment bankers fit into the bigger picture.





Part I:

Introduction to Monetary Value


As a perpetuity is built, it becomes necessary to track the financial existence of the perpetuity through time. Accounting is the set of concepts, methodologies, and models that allows us to do exactly that.





Chapter 1:

Introduction to the Capital Markets




Understanding how the global capital market is evolving is essential for CEOs and CFOs raising capital, financial institutions seeking to shape the market, policy makers tasked with regulating it, and investors seeking to profit from it.


McKinsey created a database of the financial assets of more than 100 countries since 1980. Together, these assets comprise the global financial stock, or financial capital available for intermediation.


Among the three most important types of markets—those for capital, products, and labor—the global capital market is the farthest along the road to true global integration (marked by the operation of an international law of one price) and the one of the three that could best stake a claim to being an independent, motive force. The global capital market is thus a critical driver of growth and wealth creation.


The global financial stock the total amount of capital intermediated through the world’s banks and capital markets and made available by them to households, businesses, and governments is now more than $118 trillion and will exceed $200 trillion by 2010 if current trends persist (McKinsey).


The lion’s share of this growth in the global financial stock has

come from a rapid expansion of debt



The roles that major countries and regions play in capital markets are changing. The United States plays the largest of them, attracting foreign issuers and investors alike. European markets are gaining in market share and depth, however, as they becoming more integrated. Meanwhile, Japan’s role in global capital markets is diminishing while China has become a new force (McKinsey).


First, the development and expansion of financial institutions such as banks and stock markets far outpaces the growth in underlying GDP, resulting in financial deepening. While the global financial stock was similar in size to the world’s GDP in 1980, today it is more than three times larger. Financial deepening is usually beneficial, giving households and businesses more choices for investing their savings and raising capital as well as promoting a more efficient allocation of capital and risk.


Second, debt securities are the most important asset class in the global financial stock. They hold the largest share of GFS and have been steadily expanding over time.


Financial deepening is usually beneficial, giving households and businesses more choices for investing their savings and raising capital, and enabling more efficient allocation of capital and risk.


financial deepening has been driven in the US by increased private sector intermediation


Equities have grown faster than the overall financial stock over the long run, but with considerable year-to-year volatility: in 1999, with equity markets soaring, equities were briefly the largest asset class in the global financial stock with a 38 percent share—by 2003 this share had fallen back to 27 percent. Over the past decade, growth in equities has occurred through a combination of new issues, earnings growth, and increases in the price-toearnings (P/E) ratio, with significant differences across countries. In the US, P/E increases since 1980 have been a meaningful source of equity stock growth, while in Europe growth has come mainly through increased earnings. Moreover, in the US, IPOs are a significant source of financial stock growth, while in Europe most newly floated shares come through privatizations.


Three markets account for more than 80 percent of the world’s financial

stock: the US, Japan, and Europe.




The US market is dominated by private debt and equity markets. In Europe, by contrast, banks play a larger role in finance, although European debt capital markets are growing quickly. Asian financial markets are relatively isolated from each other and display important differences. Japan has the region’s largest financial stock, but is slow-growing. China’s financial stock is among the fastest growing in the world but remains heavily reliant on bank intermediation—a concern given the fragility of China’s banking system


Patterns of financial asset growth vary across geographies. In the US, initial public offerings of small companies are a significant source of equities growth, as are increases in P/E ratios. In Europe, by contrast, increases in earnings and newly floated shares from privatizations of state-owned firms explain most equity growth. In Japan, a huge expansion of government debt is the only meaningful source of financial stock growth, while the stock of equities and private debt securities has actually declined. In China, although bank deposits account for two-thirds of the financial stock, debt securities show the fastest growth (Exhibit 7).






it is no longer accurate to think in terms of national financial markets. Instead, individual markets are becoming increasingly integrated into a single global market for funding, as cross-border holdings of financial assets and cross-border flows of capital grow.


This growth is clear evidence that despite the financial crises and anti-globalization backlash of recent years, the global capital market continues to integrate and develop.


US markets remain at the core of this rapidly integrating and evolving global capital market. The lion’s share of the world’s cross-border capital flows are intermediated through US financial markets.


the dollar continues to dominate global finance. It is the world’s most heavily traded currency and the preferred currency for issuing equities and bonds. Many other countries, including China and Malaysia, have tightly linked their domestic currencies to the US dollar. Although the euro is gaining notice among the world’s central bankers, it is a long way from matching, let alone surpassing, the role of the dollar in international finance



we broadly define the global capital market as the cumulative collection of markets where global capital supply is matched with global capital demand through bank and securities market intermediation.



We view the global capital market as the marketplace where five types of

participants meet to match the available capital supply and demand:

  1. Investors/savers: providers of capital who supply funds in exchange for

financial assets that promise return and have an inherent level of risk, and who

continuously make risk/reward trade-offs to allocate their financial assets.

  1. Borrowers: users of capital who raise funds against a promise of future

repayment (debt capital) or a share of profits, control, and residual value

(equity capital). Borrowers select their preferred source of funds from

among available alternatives.

  1. Bank intermediaries: deposit-taking institutions that pool funds from

depositors and redistribute them among borrowers. Banks assume liquidity, interest rate, and credit risk and retain a spread between the cost at which they extend credit and the price that they pay for deposits.

  1. Securities markets: broad set of financial institutions that collectively

support the issuance and trading of securities. The primary markets allow

governments and corporations to raise funds directly from investors by

issuing new securities, while the secondary markets provide liquidity for

outstanding securities by matching buyers and sellers. In contrast to banks, markets directly match investors with borrowers (that is, they

disintermediate the market for capital) and assume minimal risks.

  1. Channels and asset pools: we have chosen to view asset managers and

other asset pools as “channels,” because they manage portfolios of

deposits and securities on behalf of investors, and serve as a pass-through

vehicle of savings channeled toward borrowers. Mutual funds, pension

funds, and insurance companies are included in this category.


To size the global capital market, we have profiled the global financial stock, as defined by the sum of the global bank deposits, the market value of publicly traded equities, and the outstanding face value of debt securities


Two important distinctions underlie the findings in this report: intermediation by markets versus banks, and government debt securities versus other asset classes.


Market intermediation versus bank intermediation (also tradable versus

non-tradable instruments)


The stock of equity and debt securities represents the degree of market

intermediation in an economy, since they are the instruments used by the

financial market to directly match up those who want to invest money with those who want to raise capital. Because equity and debt securities may be traded on the markets, we often refer to them collectively as tradable instruments (although depending on their liquidity and turnover, some securities may not be actually traded).


In contrast, the stock of bank deposits represents the degree of bank

intermediation in an economy, since bank deposits are the capital that the banking system channels from savers to borrowers (simplistically speaking, bank deposits fund bank lending).10 Since capital intermediated through the banks is less easily transferable than stocks or bonds, we refer to bank deposits as non-tradable. In general, governments have greater ability to regulate the banking sector than they do the financial markets. Thus, the degree of government control over the financial system bears an important relation to the extent of bank intermediation.


Government debt securities versus other asset classes


Equity securities, private debt securities, and bank deposits (which fund bank loans) are the main classes of instruments for intermediating capital between borrowers on one hand and investors and savers on the other. As these three elements of the financial stock increase, the economy becomes more efficient at allocating capital to its best use. Government debt securities are quite different. They function more as an instrument to redistribute taxes across generations than as a means to allocate capital from savers to borrowers. Although a well-developed market for government debt securities supports the development of a private debt

securities market, government debt does not directly help firms to raise capital and grow. a large financial stock dominated by government

debt securities is a sign of a high degree of future generation liabilities, rather than a sign of more efficient capital allocation.


  1. 45 McKinsey Global Financial Stock Report




The US maintains a unique role as the hub for GCM, which bolsters its dominance in private debt and equity securities. Europe is integrating quickly and is gaining global share across all asset classes.


Notably, the US financial stock is dominated by securities—private equity and debt—to a much greater extent than other markets in the world, with a relatively limited role played by US government debt securities.

The US accounts for the largest share of the global financial stock (37 percent). The total US financial stock is now $44 trillion, more than double its size 10 years ago, a growth rate of 8.6 percent a year since 1993, in line with the overall global rate of 8.4 percent.


The size of the US financial stock relative to GDP has increased from 179 percent in 1980 to 397 percent in 2003 due to growth in private debt and equity securities.


The eurozone is now the second most important region in the global financial stock, following the monetary integration of 12 European countries and the introduction of the euro. The UK acts as Europe’s financial hub and is a global foreign exchange hub.


In contrast to the US, which is a single market, and Europe, which is in the process of integrating its capital markets, there is little cross-country capital market integration in Asia. Thus, the Asian capital market is largely a sum of the parts-a collection of distinct, national markets. The more developed of these markets have strong links with the global capital market, yet they seek only limited cooperation with one another.

Japan is a large though declining player in the global capital market while China is emerging as a force. Korea has a developed economy and India has an untold economic potential but neither of them come close to the size of China’s financial stock.




Part I:

Tracking Monetary Value (Accounting)


As a perpetuity is built, it becomes necessary to track the financial existence of the perpetuity through time. Accounting is the set of concepts, methodologies, and models that allows us to do exactly that.




Chapter 7:

Accounting for Monetary Value



What is Accounting?


Accounting standardizes financial information.


When thinking about tracking accounts, we can think in terms of an absolute number reported, a roll forward schedule that tracks a change, a driver that creates the change and a % that represents the change. Accounting logic does this for us.


Understanding the accounting logic of each line item on the financial statements along with its roll forward schedule and driver that drives the change in the roll forward


The accounting logic of each financial statement including IS, BS and SCF and the accounting logic that integrates the three financial statements.


Accounting & financial statements go hand in hand. The accounts and their roll forwards create financial statements that tell the story of how new science becomes a benefit stream and then how this benefit stream gets turned into a perpetuity


Financial statements drive sources and uses decisions inside and outside the firm


Accounting is financial figures in a standardized way allowing for comparisons across companies


Accounting is a language which was written by FASB and the rules of the language is called GAAP. Presentation of financial information. SEC monitors FASB


Accounting rules are always changing consistent with new business models. IFRS is international. US GAAP and IFRS are almost identical

Accounting assumptions, 1. Entity separate from owners 2. Entity is a going concern and will continue to exist 3. Can only show measurable phenomena with cash 4. Annual and quarterly filed, calender and fiscal year may be different



Accounting Principles:


  1. Company’s resources are reported at initial historical cost (book value). This undervalues certain assets. Is more conservative. IFRS allows for fair market value (barely any companies do this).


2&3. Accrual accounting driven by revenue recognition and accrual accounting. Dictates when you recognize revenues and expenses. Gaap is accrual. Rev rec not when cash, but when earned and measureable. Matching is for costs, costs associated with making product recorded during same period as revenue generated from product


Revenue earned when product is shipped, matching cost when revenues earned (same period)


GAAP wants to give investors a picture of profitable the business is (core profitability).


USGAAP has industry specific issues.


SCF reconciles accrual accounting to cash accounting


  1. Must disclose relevant economic information that is material. FSs, notes and supplementary information




Assumptions are made

Materiality is different across companies (subjectivity)

Prepare FSs that are consistent (ex. valuing inventory as LIFO vs. FIFO)

Always want companies to operate with conservative bias (ex. historical cost principle)




Accounts and Accounting

In order to track valuation performance of the perpetuity (i..e business), companies create accounts for each item of it’s financial existence. These accounts are the basis of valuation. Valuation is the basis of actions taken in a capitalist economy.


Accounts, Accounting & Excel

Excel is the software used to model the accounts of the enterprise and determine the valuation of the perpetuity (i.e. business).



Accounting is about tracking the changes in the sources & uses of funds hence the double entry system used in accounting where each transaction increases/decreases a source & use.


Determining the monetary value of accounts that make up the sources & uses of corporation. Each account has its own roll forward schedule detailing beginning of period, change and end of period.











Chapter 7:

From Accounts to Financial Statements




Financial Reporting Requirements:

SEC requires filings and are displayed on the website


Company websites have investor relations sections you can get financials and aggregators like yahoo finance


Must file 10k report – overview of business and finances. 60 to 90 day filings. Large filer 60 days, smaller 90 days. Specific and requires financial disclosures and is the most detailed.


Annual report that is a marketing document and is not the complete 10k vs. the 10k (sec website)


10q is quarterly first 3 quarters. Less detailed but include financials


10k stock options, fixed and intangible assets, debt, future performance expectations, MD&A.


10k audited, 10q is not. Auditors note will note any issues


8k required announcing material significant, ex. acquisition. Within 4 days of event


14A proxy required with shareholder meeting. Also when requires a shareholder vote.


S1 goes public


S4 when deal is done for acquisition


20F outside USA, file with SEC in this form




Look through a bunch of 10ks

15 items required in 10k

Part I: general information about business

Part II: MD&A and financial statements and footnotes

Part III & IV: Executive compensation and audit results


Edgar is name of SEC database


Basic share count is bottom of first page as of filing date


Table of contents itemizes the sections


Business- company background, business strategy, descriptions of products, markets and distributions, competition, suppliers


Selected financial data – most important financial highlights, not complete FSs


MD&A – what happened during the year and what expectations are even at segment level. Analyzing company, read this.


Financial statements – spend most time here, IS, BS, SCF (analysts)


Financial footnotes – disclosures


The Income Statement:



First line item on IS

Total dollar payments that are recognized by a company over a period

Also called sales, net sales, net revenues

Called ‘top-line’

Not all income is revenue. Only operating income is revenue. Anything other than operating income is called ‘Other income’ (ex. interest income)

Revenue is all about the recognition principle!


Revenue Recognition:

Accrual which is dictated by FASB & SEC states that revenue can only be recorded when it is earned and measureable. Cannot record until order is shipped and collection is reasonable.


Product and service structure determines when to recognize revenue.


Bundled Products: For companies that have bundled products, values must be assigned to each of the components and the components can either be recognized immediately or over several years evenly (ex. software)


Long Term Projects: Company has two options on how they will record:

  1. Percentage of completion – revenue recognized based upon % of work completed during the period
  2. Completed contract – only when the project is finished


Cost Matching Principle:

Expenses should be matched to revenues


Accrual accounting = Revenue recognition (when economic exchange occurs) + cost matching to associated revenues


Problem is that analysts cannot track what is going on with cash since some revenue and expenses not matched to when cash was actually received or spent. SCF allows you to address this problem.


Cash accounting not allowed under GAAP


Accrual accounting can lead to revenue manipulation. Subjective assessments to shift revenues from one period to another. Conservative recognition vs. aggressive


COGS (Cost of Goods Sold aka Cost of Sales):

Direct costs to manufacture (manufacturing) or procure (merchandisers) a good or service to generate revenues


Inventory cycles out through the income statement in COGS


  1. Manufactured goods inventory (raw material, direct labor, factory overhead associated with manufacturing directly), depreciation of fixed assets directly used in manufacturing


Costs here recognized only when associated revenue is recognized on IS so not immediate


Does not include administrative costs.


Business model determines the COGS structure (ex. manufacturing, merchandiser, service provider)


Key Question: What is the structure/components of cost of goods sold (COGS)? Determine what type of company we are dealing with and what should be going into COGS. (ex. manufacturing, merchandising, service). Look at the disclosure in the footnotes the 10-k to analyze COGS


Can also be called Cost of Revenue or Direct Costs on 10k


Management offices are SG&A while salary of factory supervisor (factory overhead) is COGS


COGS is all about the matching principle!


Revenues – direct expenses (COGS) = Gross profit

Gross profit is profit after direct costs (COGS) accounted for.


Selling, general & administrative (SG&A):

Costs not associated with the direct manufacturing or procurement of goods or services. These include marketing, payroll, wages.


Still operating expenses, simply not directly tied to manufacturing.


Examples: salaries and commissions of sales people, marketing and advertising, executive salaries, legal expenses


May also be called Sales & Marketing or General & Administrative


Key Question: What is the structure of SG&A? Look at the disclosure in the footnotes of the 10-k to analyze SG&A


Not the engineers associated with developing the product, but rather the sales, marketing and management people. Engineers go in R&D costs


Research & development:

Costs associated with the building of new products & services (procedures).


Industries like energy, tech, and healthcare are R&D heavy so they include another line item for R&D


Industries that are not R&D heavy may include R&D in SG&A

R&D is employees, equipment and facilities in R&D process.



Proxy for cash flow. Gross profit – SG&A – R&D. Or EBIT + D&A.


Depreciation & Amortization (D&A):

Allocation of costs over a fixed asset’s useful life to match the benefits of asset (revenues) to cost.



If expense is associated with generating revenue for several years, shouldn’t that expense be spread out evenly over the useful life of the asset. This annual expense is called depreciation.


Productive assets have expenses associated with them that are expensed in the IS over the useful life of the asset due to the matching principle with revenues associated with the productive assets. Depreciation of the asset evenly.


Decrease of the book or historical value of the asset.


Ex. Fixed assets such as plants and buildings, machinery and equipment, computer software and hardware, furniture and fixtures


Land never affects the IS.


Benefits more than one year, then depreciation


Benefits more than one year, then expensed in COGS


In most 10k ISs will not see specific line item for depreciation expense. Depreciation is included in COGS or SG&A depending on whether asset is associated with manufacture/procurement or with selling or marketing.


Depreciation taken from SCF


Depreciation is a noncash expense


IS is a pool tool to track cash position


Depreciation methods that companies can use:


Straight line – cost of asset spread evenly over asset’s useful life.


SL depreciation expense = depreciable cost / useful life


Depreciable cost = original cost – salvage value (what you can sell it for at the end of its useful life)


Asset Book Value roll forward:


Beginning book value

  • Depreciation expense

= End of period book value


Accumulated depreciation tracks the sum of the roll forward changes


GAAP and IFRS allow you to use accelerated depreciation methods including:

Declining balance

Sum of years digits

Units of production


Majority of companies use straight line since it shows lower depreciation and thus higher profits on the IS



Allocation of intangible assets costs instead of fixed/tangible assets over life of the asset. Matching principle associated with benefits of the asset that generate the revenue.


Amortization expense is how it is recognized on the income statement.


Lumped into D&A since identical to depreciation but simply for intangible assets.


Ex. customer lists, franchise rights, licenses, patents, trademarks (brand name), goodwill


Goodwill and trademark has indefinite useful life, so not amortized


Look at 10K disclosures and read through to see what makes up the Goodwill & Other Intangible Assets footnote. Future amortization expenses are disclosed here as well.


Non-cash expense


Expenses associated with internally developed intangible assets such as trademarks and patents are expensed fully when incurred, thus no amortization


Not allowed to write up value of intangible assets that are developed internally, so only showing on the balance sheet for acquired intangible assets.


Key Question: Should an expense be expensed, amortized or depreciated? Does the expense go in COGS or SG&A?


What are the function of the assets (manufacturing vs. marketing)?


Trademarks never cycle out through the income statement


Other Expenses/Income:

Expenses not in COGS, SG&A, R&D or D&A

Not tied to core operations

“Below the line” (Operating income)


Operating Profit (EBIT):





Interest Expense:

Interest expense on debt owed.

Regular interest payments

Sometimes netted against interest income

Revolver cash plug derivative


Interest Income:

Interest income on cash balances and investments.

Excess cash plug derivative


Unusual income/expense:

Nonrecurring income associated with sale of business (accounting gain) Nonrecurring expenses restructuring, impairments, write-offs, legal, insurance proceeds

Analysts ignore, nonrecurring or unpredictable


Income tax expense:

Tax liability on IS


Tax expense line is not equal to cash taxes company has to pay

Because of deferring taxes, cash taxes using tax code from country. US GAAP is calculated using different book rules

Companies have to prepare two sets of books (tax and financials)

Accounting rules differences: depreciation, rev rec and how losses are treated are differences

Current taxes lower, deferred is different. Current is what is actually paid.


Net Income:

EBIT – net interest expense – nonoperating income/expense – taxes

Final measure of profitability

Bottom line

Net earnings

Net profit


Shares Outstanding:

Number of shares of common stock

One unit of ownership

Shareholders can vote on matters and receive dividends per share

Treasury shares – repurchased and nolonger outstanding

Basic vs. Diluted – Basic is actual shareholders (front cover of company’s 10k), more important and useful is diluted shares outstanding (impact of dilutive securities that expand share base, can convert into common stock, potential shareholders must be factored in)


Basic earnings per share (EPS):

Net income allocated to individual basic shares outstanding

Investors analyze net income by EPS

Total period profits belong to each shareholder

Convertible preferred


Diluted EPS:

Incorporates the impact of dilutive securities in calculated how much income per share.

More important

Diluted EPS is more real

Analysts, talking about beating EPS expectations


Weighted Average:

EPS on weighted average basis as shares from options and preferred or repurchases

During period of IS average shares

Not year ending share count



What to do with net income?

Portion of it may be returned to shareholders on quarterly basis

Dividend policy set by board of directors

Dividend policy discussed in footnotes of 10k

Dividends below EPS on IS; what % of profits?


What to do with extra cash?

Keep and reinvest (acquisitions, CAPEX for growth)

Grow cash

Pay down debt



EBIT is operating income

Analysts compare performance to other businesses, want operating performance to compare (EBIT), comparing profitability (debt and taxes skew comparability), want to isolate operations of the business (to ignore nonoperating)



Used more frequently

Way to compare company profitability

D&A is noncash (Different useful life and depreciation methods, skews comparability)

Proxy for cash flow, see more real profits

Accrual based profit (EBIT) with taking out biggest noncash measure

Not cash flow measure (FCF)

Have to go to SCF to add back to operating income

D&A buried in COGS or SG&A

Not GAAP recognized metric

Ideal income statement, D&A would be broken out, could see EBITDA right away


Profitability is a corporate arbitrage metric

Operating vs. non-operating important for IS

Net income, EBIT & EBITDA are profitability metrics


Balance Sheet

The sources & uses of capital (Double entry accounting)

Resources and how they were funded

Reports resources on date and time (snapshot), End of period

Sources must = uses

A = L + E

Balance sheet is not market value but historical cost (original)

The accounting equation and double entry accounting (sources change, uses must change to balance)

Each change on the BS has a cash impact

Each transaction has a source and use of funds (ex. cash & investment)

A framework to track movements on the balance sheet (double entry accounting) records funding source and use of capital


Double Entry Accounting:

Credit is a source of capital

Debit is a use of capital

Credit and debit happen for every transaction together (offset eachother)

Depicted in accounting as T account, looks like a T,

Debits on left as increases in assets, or decreases in L or E

Credits on right side decrease assets, or increases in L or E

T accounts consolidated into one aggregated table that lists all the transactions together

Facilitates understanding of sources & uses

BS & SCF connected BS changes over periods shown as changes in SCF items

From T accounts to aggregate net change in a line item (ex. Net change in cash, net change in all equity) will be a debit or a credit simply netted against eachother which will balance in the final T account

Take the final T accounts for each line item and use it to build a CLOSING BALANCE SHEET. Net debits and credits change each line item in the balance sheet to get CLOSING BS. Net debits and credits act as the roll forward change in the account



Historical cost reporting of assets

Asset is owned, of value and quantifiable/measurable cost


Cash – money held by company in bank account, US treasury (less than 90 days)


Marketable securities – stock or debt securities, some interest income (ST investments)

Can be aggregated with cash


Accounts receivable – already delivered products and services (expected payments), customers are invoiced, sales on credit but not received


AR is linked to revenue on the IS


Inventory – finished or unfinished goods, include direct cost of producing the goods. Goods waiting to be sold. Includes cost of producing finished inventory and work in progress (WIP).

Inventory cycles out of BS and onto IS as COGS

Inventory sits on BS, and then when revenue associated with the inventory is sold, matching principle dictates that we recognize the cost of the inventory, this is done as COGS

Inventory roll forward = Beginning inventory + purchases of new inventory – COGS = Ending Inventory

Different inventory costing methods (FIFO vs. LIFO vs. Average Cost): We are trying to figure out the value of the COGS and the amount to Credit inventory assets to decrease them.


FIFO – Remaining inventory reflects latest cost, inventory cycled through COGS reflects the cost of first inventory


LIFO – Remaining inventory reflects first cost, inventory cycled through COGS reflects the cost of the latest inventory


Average costing – (Unit sold/total) x total value of inventory


Value COGS amount of inventory depending on the method and then do the same valuing of inventory left on the balance sheet doing the same method (inventory balance after the year’s operations).


Read the footnotes to see the inventory accounting method. It is going to effect what the profitability looks like if there is a period of rising/declining prices for inventory. If prices stay the same, won’t matter. With rising prices for inputs, LIFO will show lower profitability and FIFO will show higher profitability, average costing in the middle


Doesn’t matter which inventory you sell, simply has to do with inventory valuation.


US GAAP says you have to disclose what inventories would have been under FIFO method. The difference is the LIFO reserve.


LIFO Inventory + LIFO reserve = FIFO Inventory



Subtract LIFO reserve from LIFO COGS to compare FIFO


Marking Down Inventory

Inventories cannot be marked up to market value under US GAAP due to conservatism principle. They are carried at historical cost but when the value of the inventories becomes less than the historical cost, you mark them down under the rule of lower of cost of market (LCM). It is called writing them down. The loss is recognized immediately on the IS (debit retained earnings with the expense in COGS, other operating or nonoperating expenses, and credit assets, inventory)


Prepaid expenses – insurance, utilities and rents (benefits as an assets), cash reduced, but expense not recognized, but is listed as an asset due to the accrual accounting principles

BS asset, not impact the IS right away


Property, plant & equipment – Land building machinery used in manufacturing plus transportation and installation


PP&E cycles onto IS as depreciation in COGS or SG&A



Listed in order of how quickly they can be converted into cash (liquidity) with most like cash at the top and least to the bottom. This forms categories called CURRENT (can convert within 12 months to cash) and LT ASSETS (longer than 12 months)


PP&E shows its roll forward of accumulated depreciation


PP&E beginning

+ New PP&E (CAPEX)
– Depreciation

  • Asset Sales
  • Write downs

Ending PP&E


Depreciation debits retained earnings since it decreases net income


PP&E reported net of accumulated depreciation in balance sheet so it will say Net PP&E on the BS


Contra account (negative account) is accumulated depreciation since reducing an asset, net PP&E


Write downs need to be recognized immediately on the IS and will be in COGS or SG&A. Required LCM as well like inventory


Asset sales: Gross PP&E and accumulated depreciation are removed. If there is a difference, recognize a gain on sale on the IS and thus Credit goes to the Retained Earnings for BS to balance. See this as an OTHER operating or nonoperating line item. Only book value is removed from PP&E.




Self developed trademarks are not listed as an asset on BS sheet (internally generated)


Order of liquidity

Value must be easily measurable


Intangible Assets & Goodwill

(patents, trademarks)

Non-physical acquired assets, not self-built non-physical assets

Linked to amortization on the income statement

Identical to PP&E


Accumulated amortization is the offset to intangible assets


IA Roll Forward



+ New purchases

  • Amortization expense
  • IA sales
  • Write down



Goodwill: for acquisitive companies

Amount of purchase price over Fair Market Value of the company acquired and represents the intangible value of the business related to brand value

Acts as a plug to balance the BS (Debit Goodwill)


Goodwill not amortized but tested every year for impairment. The loss is recognized immediately on the IS and Retained Earnings is debited, decreasing it. Goodwill cannot be written up, only written down. Goodwill writedowns means company overpaid for acquisition. Goodwill is an accounting assets.


Goodwill rollforward


BOP Goodwill

+ New Goodwill

  • Impairments

EOP Goodwill


Liabilities & Equity

Sources of capital, how funded resources




Liabilities are company’s obligation to others. To qualify, must be measureable and probable.


Current liabilities – 12 months or less

Long term liabilities – Greater than 12 months


Accounts payable – obligations to suppliers that have been purchased but not paid for (unpaid bills on credit)


Instead of cash credited (decreased), crediting AP liability (money owed to suppliers)


Accrued expenses – incurred but not yet paid, employee compensation (ex. year end bonus), insurance, dividends, taxes, leasing. Benefits happened, cash payouts yet to happen.


Debit retained earnings (recognize the expense), instead of cash credited, credit accrued expense liability (money owed)


Deferred revenue – unearned revenue, paid but not yet earned. Rev recognition says some now recognized, but defers the remaining as a liability (deferred revenue liability) (ex. gift cards)


Deferred revenue is a current liability if expected to be recognized within the year, otherwise a long term liability


Credit deferred revenue


Short term debt – due in 12 months (maturity of 1 year or less)


Current portion of long term debt – due within a year. Can be aggregated.


LT debt – over 12 months (maturity) –


Interest expense debit to retained earnings and cash goes down (credit)


Lenders can trigger a bankruptcy if they don’t get paid


Listed in order of how quickly they are to be paid. This forms categories of CURRENT and LT LIABILITIES (longer than 12 months)


Liabilities cycled through the IS as expenses


Capital leases – retail and office space ex. Contractual agreements allowing company to lease PP&E


US GAAP and IFRS allow leases to be treated two ways:


  1. Capital leases – liability and asset (PP&E) on BS. During every period during the year: Interest expense on IS as if debt obligation (lease fees), and amortization expense on IS from PP&E (reduced). Treats the lease as an asset as if it owns it. Cash lease payments not recognized, but recognized as two things. Qualifications that if title expected to be transferred then capital, if lessee can purchase for less than market value, exceeds 75% of economic life of asset, PV of minimum lease payments is more than 90% of assets fair value.
  2. Operating leases – if under GAAP, straightforward, no asset or liability, lease expense. Off balance sheet leasing. In order to qualify as operating, don’t want capital leases. Operating lease expense on IS.


Footnote for lease commitments breakdown between capital and operating leases. Imputed payment as if debt, accounting way to recognize payments to lessors.




Source of funds via:

Preferred – priority over common, special stock rights (preferences), capital from preferred shareholders.


Raise capital at early stages. Class of stock that has special rights. Structured to include conversion to benefit from dividend and common stock upside.


Common stock – when companies issue shares (capital received)


Accounting convention includes splitting into two:

  1. Common stock par value – arbitrary value assigned to a share of stock (ex. $.05 per share). Credit nominal par value
  2. Additional paid in capital (APIC) – excess over the par value

As analysts, don’t care that two components.


Can never write up common equity due to historical cost principle. Own equity has to stay at historical. Common stock understates true market value of equity.


Treasury stock – common stock issued then reacquired (contra account, reduction to equity) (roll forward for equity). To boost EPS due to less shares outstanding and to change company’s capital structure. Captures value of common stock:


Cash credited, treasury stock becomes more negative as it increases


Treasury stock can be larger since common stock and APIC cannot be written up while treasury stock recognizes the value of common stock now


Retained earnings – Total earnings/losses over all time of existence of business

Financing through retained earnings. Cumulative earnings recognized on IS net of dividends. All income on the income statement increases retained earnings and all expenses on IS decrease retained earnings.


Retained earnings BOP

+ NI

  • Dividends

Retained earnings EOP


Other Comprehensive Income (loss) – Equity line item captures other income, not recognized on IS. Ex. foreign currency translation, gain/loss on sale.


Not tied to core operations. 5th statement on financial statements. Hard to predict as an analyst


Total comprehensive income BOP

Other comprehensive income/loss

Total comprehensive income EOP


How IS Connects to BS

Income Statement is connected to the balance sheet through equity’s retained earnings account. Any expenses on IS reduce retained earnings (source).

Revenues increases retained earnings and thus cash

COGS – Inventories cycled through IS decrease inventories in Assets on BS, direct labor has cash go down in Assets on BS, depreciation reduces PP&E in Assets on BS

SG&A – Retained earnings goes down by employee expense, depreciation on selling PP&E reduces PP&E in Assets on BS

Interest expense – Expense reduces retained earnings, decrease to cash, increase to cash


Statement of Cash Flows:


The SCF reconciles cash changes in the balance sheet. Reconcile the accrual IS to cash change in cash balances on BS. IS requires management judgement due to accrual basis. IS is disconnected to cash. Resolve disconnect with SCF, to understand what happened to cash.


IS and SCF need to be understood together by analysts


Cash in vs. cash out


Direct method vs. Indirect method (used by almost all companies)

Cash flows from operations – solely to operations, indirect method says start with accounting net income and make adjustments to convert this to cash flows from operations. Back all noncash out to get CFO (cash in my pocket). Biggest adjustment is depreciation expense. CHANGES in working capital assets/liabilities (tied up in ordinary course of operations, that is why called working capital). When assets are increasing, this is a usage of funds so it is an outflow (-), thus subtracted from Net Income to get to CFO. Increases in liabilities/equity, this is a source of funds so it is an inflow, +, thus added to Net Income to get to CFO.


How much cash went into company’s pocket as a result of operations? Cash flow from operations answers this


NI is accounting profit vs. Cash


Other items changes – ex. asset writedowns (not cash impact since an accounting adjustment), stock based compensation, impairments, gain on sale, deferred tax assets and liabilities


Cash from investing –  CAPEX


Tracks additions and subtractions to LT assets. Intangible assets as well. Purchases and sales from equity and debt investments


Cash from financing – Associated with financing


Tracks changes in sources of company’s financing. LT liabilities and equity items.


Inflows from issuing debt, outflow repay debt, inflow from issuing stock, outflow distributing dividends


Total net change in cash from SCF and then EOP cash and equivalents. The cash flow statement is the magnifying glass on the cash line item for balance sheet. Income statement is the magnifying glass on the retained earnings line item for the balance sheet.


Statement of Cash Flows is the linkage between the income statement and the balance sheet. Retained earnings is the link between the B/S and the I/S.


Get D&A from SCF (CF from Operations) and CAPEX from SCF (CF from Investing)


From Accounts to Financial Statements:

Once monetary values for each account are determined via roll forward T accounts, the financial statements are then pulled together and are the output of the financial reporting process.


Financial Statements:

Balance sheet: Sources & uses of capital snapshot (PV outlay)

Income statement: Return on uses of capital over the period (FV inflow)

Statement of cash flows: Change in sources & uses over the period


Example of Financial Statements:

Get comfortable finding, reading, analyzing and spreading historical financial statements into financial statement models


The following is a 10-K from Berkshire Hathaway:





The following is the IS from Berkshire Hathaway:




The following is the BS from Berkshire Hathaway:






The following is the SCF from Berkshire Hathaway:




The following is the MD&A on the 10k from Berkshire Hathaway:


Part II:

Reporting Monetary Value with Financial Statements


As the economic existence of the perpetuity continues to grow, one becomes interested in the value of the perpetuity. Enter finance, whose concepts, methodologies, and models allow us to understand the valuation of the perpetuity.




Chapter 8:

Reading Financial Statements



Structure and contents of financial statements generated by corporations

Quarterly and annual reports required to be filed by SEC and other disclosures for material events

Use financial reports to apply financial analysis concepts onto real companies

Financial reports to analyze company performance

Finding financial reports: at (click find filings) or on company websites (‘Investor Relations’) or with data services like Yahoo Finance, Google finance (free), Capital IQ, Factset or Bloomberg (paid)

The financial statements that are used to build financial statement models (commonly used by analysts):

10-K: Annual financial statements, latest share count on front cover, select financial data, detailed footnotes, MD&A. Filed within 60 to 90 days. Annual report is not a required SEC filing thus it is more marketing than 10k.

Table of contents:

Part I:

Item I: Business description – Strategy, markets and distribution, competitors

Item IA: Risk factors – boilerplate how to remain competitive

Item IB: Unresolved staff comments

Item II: Properties

Item III: Legal proceedings

Item IV: Mine safety disclosures – Dodd Frank

Part II:

Item V: Market for Equity

Item VI: Selected Financial Data – important disclosures here for some companies. Think of this in correspondence with MD&A and financial statements

Item VII: MD&A – summarizes financial results and expectations, forward looking statements, this year and prior year, breakout by geography and product and unit sales. Segment data for segment modeling in FSM. ANTICIPATES means giving guidance which should be included in the financial statement model projections. Goes down the income statement and then turns to the balance sheet. Sometimes include GAAP to non-GAAP reconciliation including organic sales growth and core EPS excluding effects of acquisitions, divestitures.

Item VIIA: Disclosures about market risk

Item VIII: Financial statements – 5 financial statements; IS, BS, SCF, SSE, SCI (new). Not presented in same order.

IS – Called statement of operations

SSE – puts magnifying glass for line items for shareholders equity, taking line items and explaining the change in each line item like the SCF explains the change in the line item of cash

SCI – magnifying glass on comprehensive income, nonoperating income under US GAAP

Item IX: Changes & Disagreements with Accountants

Item IXA: Controls and procedures

Item IXB: Other info

Part III:

Item X: Directors, executive officers and corporate governance

Item XI: Executive compensation

Item XII: Beneficial owners

Item XIII: Certain relationships

Item XIV: Principal accounting fees and services

Item XV: Exhibits and schedules


Certain disclosures for common analyses by analysts.

Accounting policies – Revenue recognition policies (deferred revenue), inventory methods (valuing using FIFO vs LIFO), depreciation method

Expense and income breakdowns – Income statement items, specific income and expense items (ex. advertising, leasing (capital vs. operating leases),

Taxes – Current vs deferred expense (note 5), deferred tax asset vs. deferred tax liablity

EPS – EPS disclosure, disconnect net income divided by diluted will not give you EPS due to changes to it. Have to look at note on EPS, gives you numerator and denominator

Restructuring – embedded within operating line items to exclude these, refer to the note

Non-GAAP reconciliations – include vs. exclude from financial performance

Discontinued operations – Net gain or loss from operations that are to be discontinued. REITS have discont. Operations as a part of normal operations.

PP&E – Straight line and useful life range, for new purchases, portion of land to be excluded. To project PP&E need gross PP&E (remove accumulated depreciation) in disclosure.

Intangibles – Historical and future amortization expenses, useful for forecasting amortization in future periods

Other assets and liabilties -Breakout of the line items from BS into components

Debt: Contains weighted average interest rate, tranches, when they are due, effective rate, revolver terms and balance

Equity: Share repurchases, issuances, guidance for future repurchases and issuances.

Stock options: most widely used by financial analysts, have to use to get diluted share count with stock options, warrants, and convertible securities. Search for exercisable and use exercisable, only available in 10k

Convertible securities: Conversion criteria to calculate diluted share count, Search for ‘convertible’ to see if they have convertible securities. Assume conversion.

Leases – critical disclosures for current and future lease commitments to normalize earnings, ‘rent expense’, ‘commitments’. Capital leases treated as payments in a debt capacity with interest

Segment data: at end of footnotes, products and geographies

Industry specific disclosures: Oil & gas industry, REITs

Not enough to look at the IS, want to look at the income and expense breakouts in the notes. Not enough to look at the BS, want to look at the asset and liability/equity breakouts.


10Q: Less detailed in footnotes and MD&A and missing option tranches, missing stock options (have to go to 10k), fixed and intangible assets, and debt disclosures. Not audited. Focus is financial statements & MD&A which are right in the front. Same financial statements. Differences in footnotes and M&DA sections.

8K aka Current Report: Material event filing. Filed for quarterly earnings. Coincides with a press release. Precedes 10Q by several weeks. Contain unusual charges and GAAP to Non-GAAP reconciliation which is used by analysts. Also filed for asset sales or restructuring. Can be more detailed than footnotes than 10K or 10Q.

S1: IPO with detailed financials and includes prospectus, more detailed than a 10K. S1 amended the day prior to the IPO itself S1A.

S3 or S4: S3 is shortform registration, similar to S1, proceeds use, financial statements not required since public

S4: Merger – peer groups and similar precedent transactions, background of the merger (history), comps analyses detailed along with certain multiples, the merger agreement and the form of consideration

Proxy aka Form 14A: Contains latest share count and management compensation and major shareholders. Useful when analyzing an acquisition. Corporate governance section about management compensation

20F: Foreign issuers. Annual report that conforms to US GAAP. Want to use 20F in conjunction with annual report filed by company in home country.


Primary M&A filings:

For the target:

10k, 10Q, and 8k (earnings release) – need targets most recent financials as of announcement date to calculate deal multiples

8K for the deal – terms to the deal, announcement data

Proxy with a 14 – target or acquirer to vote on the deal, contains deal information.

S-4 – Registration for securities issued in M&A (acquirer)

14-D, Schedule TO – When an acquirer makes a tender offer; will have deal terms

S-1 – Information becomes known through an IPO registration or high yield debt offering

Analysis is year over year comparisons and comparisons across companies from financial statement model





Chapter 8:

From Financial Statements to the Financial Statement Model



From Accounts to Models

To go from accounts (accounting) to a finance number we first need to gather historical financial performance of the company in financial statements and then spread the historical financial statements into a model and then use the projected model in excel interlink the accounting logic of the corporation.


Modeling in Excel

Just like our account statements, our models are built and exist in Excel






Chapter 8:

Time Value of Money



Time value of money means that a dollar today is worth more than a dollar tomorrow. Money can earn interest, so in order to move monetary value through time or assess monetary value at different time periods, we need to incorporate this interest rate. If we are moving values forward through time, we are future valuing the amount by compounding it. If we are moving values back in time, we are present valuing the amount by discounting it. The rate at which we move, r, is referred to as the discount rate, and resembles the risk associated with the monetary amounts (cash flows, CFs).

PV = present value

FV = future value

Interest rate (r) = discount rate

Perpetuity = type of investment with variable interest rate r (IRR)

NPV – total increase in today’s dollars by undertaking a project, corporate arbitrage amount

IRR – implied interest rate between a PV payment and FV receipt, when compared to the discount rate, also shows the arbitrage amount


Chapter 8:

Analyzing Monetary Value with Models



Analyzing Value

Strategics, financials, and entrepreneurs undertake investment with the expectation of NPV & IRR. They accept projects that have positive NPV and IRR higher than the cost of capital. They actively find and structure positive NPV projects and then match financial products to them.


The positive NPV project is ideally a perpetuity with the value of the business being the perpetuity value:


Perpetuity value =  CF / Discount rate


Calculating NPV & IRR is the main analytical work of finance.


*Growth statistic CAGR (Compound Annual Growth Rate) is yearly IRR


Analysis of Account Statements

Analysis of account statements (ratio of analysis) has various uses including from a liquidity perspective, commercial bank perspective, activity perspective, profitability perspective, and growth perspective.


Ex. 4x-7x debt multiple for lending purposes


The following is the adjusted financials for Berkshire Hathaway:


We only use Free Cash Flow to determine valuation for major transactions in a capitalist economy including restructuring, growth, M&A, and capital raising.


To go from account filings to models, we need to “clean the numbers”, “scrub the financials”, “normalize the financials”. This amounts to recasting accounts to get to a finance number. We try to get to a finance number to get to a valuation. We get to a valuation to then take actions in a capitalist economy.


*We want more add backs to get to a higher valuation



After getting valuation, we can then model the different actions we can take in a capitalist economy to increase the valuation of the strategic, financial or entrepreneurial firm.






Part III:

Modeling Monetary Value


Continuing deeper into the field of finance we now discuss the actual work associated with understanding the value of a perpetuity. The work is done by modeling the perpetuity in Excel.




Chapter 9:

Excel for Finance





Express your decisions using Excel. Excel is the premier business computational tool


Implement financial analysis using the tool for financial analysis, Excel


Valuation process


Heart of finance is time value of money and discounting


Excel Concepts Needed for Finance

Write down variables (defining the parameters of the decision)

Absolute or relative values copying (=A1) (=$A$1) and formulas

Functions (=fx(    ))

Data tables (“sensitivity tables”)


Express Decisions with Excel

Implement financial analysis with Excel




Using a Financial Model for Decision Making: The Investment Decision

Ability to get financing from financial institutions depends on ability to make a financial model for the new or existing business


The financial model projects future earnings from the organization


Predict the future performance of a firm.


Accounting statements report what happened to the firm in the past. A financial model predicts what the firm’s accounting statements will look like in the future. Start by taking the initial accounting statements and inputting them into Excel


Difference between accounting and financial model is in the current assets and current liabilities. In financial model we are concerned only with operating assets and operating liabilities. We exclude financing related


Financial model has three components:


Model parameters (value drivers)

Financing decision assumptions (i.e. Mix between debt and equity, what does firm do with excess cash? Repay debt, payments to shareholders, or as cash balance)

Pro forma financial statements


Cash in the financial model is a plug. The plug is so that the balance sheet balances.


Cash = total liabilities and equity – current assets – net fixed assets


The plug is the balance sheet item that guarantees the equality of the future projected total assets and future projected total liabilities and equity. Every financial model has a plug and the plug is almost always cash, debt, or stock.


Financial Model and Valuation Process:


Assumptions (value drivers)

Existing accounting statements (IS and BS)

Projected financial statements

Free cash flow calculation (FCFs)

Terminal value calculation

Valuation calculation

Sensitivity table for major value drivers to see range of valuation


Once the financial model is complete (i.e. accounting statements have been projected), we can use the model to:


Value the firm by projecting free cash flows (FCFs)

Determine ability of firm to pay it’s debts (i.e. credit analysis)


Using a Financial Model for Decision Making: The Financing Decision

All companies must decide how to finance their activities


Proportion of debt and equity


The discount rate should be appropriate to the riskiness (i.e. variability or beta) of the cash flows being discounted.


Discount rate is also called interest rate, cost of capital, opportunity cost.


Compute annualized IRR


The cost of capital of an investment is related to the risk of the cash flows of the investment. The relationship of individual asset returns to the risk is called the security market line (SML). You can use SML to get the discount rate for individual investments. The SML is used for private companies.


The cost of capital of an organization is related to the risk of the combined riskiness of the investments in the portfolio. The relationship of portfolio returns to the risk is called the capital asset pricing model (CAPM). You use CAPM to get the discount rate (i.e. cost of capital). When the investment is a public security, you use CAPM since the buyer of the security will have a portfolio to diversify away risk.


Portfolio risk is associated with statistics.


Wealth Maximizing Decisions

Investment decision – What is it worth? NPV of strategic alternative

Financing decision – What does it cost? IRR of financing alternative


Cash is King

Wealth maximization has to do with maximizing cash. Cash in the context or organizations is known as cash flow.


Return is a word for cash flows


Cash Flow Definition (FCF)

Profit after taxes

+ Depreciation (noncash expense)

+ Change in net working capital (- increase in current assets and + increase in current liabilities)

Capital expenditures (CAPEX)

+ After-tax interest payments

= Free Cash Flow (FCF)


Role of the Finance Professional

The role of the financial professional is to quantify the cash flows and risk of strategic alternatives available to the individual or organization.


Investment bankers compute the IRR and NPV of strategic alternatives.


Capital Markets

The capital markets is made up of cash flows and discounts


Capital Markets and Information

Information is valuable in determining investment and financing decisions in the capital markets. Overall, markets are weak form efficient meaning that their valuations reflect previous stock price performance (i.e. stock price data) and are sometimes semistrong meaning that valuations incorporate all public information. Capital markets are not strong form efficient meaning that valuations do not reflect private information.


Multiple Investment and Financing Decisions: Portfolio

When there is multiple investment and financing decisions, we have something called a portfolio. The discount rate can be decreased by diversifying with a portfolio. When the discount rate is decreased, the valuation of the portfolio increases as cash flows have maintained more value.


A corporation/organization is simply a portfolio of sources and uses


Modeling a Strategic Alternative

Put all variables (“value drivers”) at the top of the spreadsheet

Never use a number where a formula will also work

Blue for hard codes

Black for links and outputs



Finance: Exchanging Value Through Time

Assets have a time dimension


Future value function =FV( )

Value in the future of a sum of money compounded into the future


Present value =PV( )

Value today of future payments discounted to present


Net present value (NPV) =-First payment + NPV( )

Incremental wealth increase earned by a strategic alternative. NPV tells you economic value of an investment today. Always use NPV in the investment decision.


Internal rate of return (IRR) =IRR( )

Compound rate of return earned by a strategic alternative

VIII. Rate of Return vs. Cost of Capital

What is the asset’s IRR?


Compare to the cost of capital (Effective annual interest rate – which is the annualized IRR used to compare financing alternatives aka Compound Annual Growth Rate (CAGR))



Cost of Capital

Calculate IRR of financing alternatives to determine cost of capital


Need to get IRR in annual terms to facilitate comparison. May have to start with monthly IRR then annualize


Annualized IRR = (1 + Monthly IRR)^n-1


Finding a Value in a Financial Model

When we want to find a value by setting a particular value to another cell, we use:


Goal seek – Alt, A, G



Financing Alternatives: Loan Amortization

=PMT( )

To calculate the debt payment per period


=IPMT( )

To calculate the interest portion of the payment of debt


=PPMT( )

To calculate the principal portion of the payment

VIII. Financing Alternatives: Direct Comparison

IRR of differential cash flows tells you the cost of the option


IRR tells you the cost of the financing alternative


CAGR is Effective Annual Interest Rate (EAIR) to allow for comparison


Analyzing the Strategic Alternative: Sensitivity Table

Data Table is Alt, A, W, T


Tells you how output changes with incremental changes in the inputs (i.e. variables)


The Financing Alternative: Nominal vs. Real Cost

In determining the true cost of a financing alternative, it is important to use the real rate of interest which incorporates inflation. The real rate of interest is determined by using the real cash flows.


Inflation acts as a discount rate


Strategic Alternatives Analysis

For each strategic alternative, compute the NPV and IRR, then have decision rules for investing including:


Minimum NPV

Hurdle rate (IRR)


You are using NPV and IRR to make investment decisions but you need the discount rate. The discount rate is associated with the financing decision


Cash Flows and Risk

Are cash flows riskless (i.e. treasury bills) or are they risky (i.e. market portfolio)


Cost of Capital and Opportunity Cost

The returns of similar investments should be used as the cost of capital


The Discount Rate

An organization’s discount rate is the cost of equity and cost of debt. The cost of the total capital structure is known as the Weighted Average Cost of Capital (WACC):


WACC = rE* (E/(E+D)) + rD (1-Tc)*(D/(E+D))


Value of Equity

The value of equity is the present value of all future dividends

Sources & Uses

Uses                        Sources

Free Cash Flows        WACC

CAPM to get cost of equity


Accounting Statements: Statement of Cash Flows

The purpose of the statement of cash flow is to explain the increase in the cash accounts on the balance sheet as a function of the firm’s operating, investing, and financing activities.


Valuation Methods: Total Enterprise Value (TEV) vs. DCF

Market valuation:


Total Enterprise Value (TEV) = MVE + MVD + Preferred – Cash


  1. DCF Method (intrinsic value) = PV(FCFs) @ WACC + liquid assets


Accounting Value vs. Finance Value

Accounting value of firm is backward looking and thus incorrect to use in valuation. Finance value is forward looking and consistent with the fact that the owner of an organization or security has claims on the future cash flows of the business.



Free cash flow (FCF) calculations is DCF


Portfolio Analysis and the Capital Asset Pricing Model (CAPM)

Discount rate is a measure of risk associated with:





We get the discount rate by analyzing the distribution of an investment’s returns. We get the standard deviation which is a measure of variance in returns. Standard deviation is a component to finding the discount rate:




What does the frequency distribution look like?


Determine risk measure known as beta and plug this into CAPM to get the discount rate of equity. Derive the cost of debt and then calculate WACC to get the discount rate of the firm.


Ex Ante vs. Ex Post Returns

Ex Ante is the expected return


Ex Post is the actual return

VIII. Statistics for Portfolios

=Average( )

To get mean return


=Varp( )

To get variance of returns


=Stdevp( )

To get standard deviation of returns


=Covar( )

To get covariance between two sets of returns


=Correl( )

To get correlation between two sets of returns


Trendline (regression) – click on points of XY graph and right click to Add Trendline with linear regression and display equation and R-squared on chart


Portfolio Returns and The Efficient Frontier

Statistics are used to determine acceptable and unacceptable portfolios


Diversification lowers standard deviation of the portfolio


Are the returns correlated? If no, then add security to the portfolio (i.e. diversify)


The efficient frontier is the set of all portfolios that are on the upward-sloping part of the graph starting with the minimum variance portfolio (i.e. the market portfolio). Choose the portfolio that is on the efficient frontier.


The Efficient Frontier and the Optimal Portfolio

The best investment portfolio is made up of the risk free asset and a risky asset representing the market (i.e. the market portfolio)


Determine the market portfolio (the portfolio with the highest attainable sharpe ratio)


Market portfolio is the best combination of risky assets available to the investor


Security Market Line & CAPM

The security market line says that the expected return of an asset is a function of the asset’s beta (i.e. sensitivity to the market).


Only relevant risk is systematic risk since the investors will all be diversified


Security Market Line & Investment Performance

The security market line says that the expected return of an asset is a function of the asset’s beta (i.e. sensitivity to the market).


Only relevant risk is systematic risk since the investors will all be diversified


Security Market Line & Investment Performance

The security market line says that the expected return of an asset is a function of the asset’s beta (i.e. sensitivity to the market).


Only relevant risk is systematic risk since the investors will all be diversified

VIII. Security Market Line & Investment Performance Continued

Investment performance:


Risk adjusted performance; excess returns?



Risk Adjusted Performance

Market portfolio proxy is S&P 500


Beta is measure of riskiness of security


Alpha measures excess return


Market portfolio proxy is S&P 500


Beta is measure of riskiness of security


Alpha measures excess return


It is about investment performance versus the risk involved in the investment


CAPM & Investment Performance

Use CAPM to get the discount rate of equity and compare to cost of financing alternatives


Is there risk adjusted overperformance or underperformance?


Is performance commensurate with risk?


Excess Return

Excess return is the investment’s spread over the one year treasury (i.e. risk free rate)


Use regression equation to determine if underperformance (negative alpha) or overperformance (positive alpha)


When regressing asset’s returns against the market portfolio, alpha measures excess returns over the market portfolio


Beta & R^2

High beta is an aggressive stock


Low beta is a defensive stock


R^2 is percentage of variability that is market related risk when returns are regressed on the market portfolio


Diversification increases R^2 of the portfolio and decreases nonsystematic risk


Alpha and Efficient Markets

In efficient markets, there is no alpha and investments earn their risk-adjusted return


CAPM and the Cost of Capital

CAPM = rf + Beta [ E(rm) – rf]


In CAPM, use Beta of asset to calculate cost of equity


WACC is the discount rate based upon the capital structure of the investment


Valuing Securities in Efficient Markets

Market efficiency and the role of information in determining asset prices


Publicly available information should be reflected in market price




Chapter 9:

Preparing for Financial Statement Modeling





The income statement, the balance sheet, and the cash flow statement—inter- linked by accounting logic through Excel formulas.

The IS links to the balance sheet through Equity, retained earnings roll forward. The SCF links to the BS through Assets, cash roll forward from last period to now.

Each change in each balance sheet account represents a source of cash (e.g., a sale of an asset or an increase in borrowing means there is more cash on hand) or a use of cash (e.g., an inventory increase or a repayment of debt means less cash on hand). At the end of the cash flow state- ment, we have a combined net source or net use of cash, equiva- lent to the change in cash between the current year and the prior year.

Because the cash flow statement needs to look at the cur- rent period’s balance sheet and the prior period’s to determine the changes, the first year column in the cash flow statement is typically left blank, since there is no “prior period” at the begin- ning of the modeling periods.

The IS links to the SCF through net income at the top of the SCF

For each year’s cash flow statement, information from the prior year is needed, since we would need to look at the changes between the current year’s balance sheet and the prior year ’s.


Once the three statements are in place and working together, we have a modeling engine that can be put to good use to drive other forms of analysis, such as credit analysis, discounted cash flow valuation, and leveraged buyout (LBO) analysis. (Having two fi- nancial models to represent two companies, we can also combine them for an merger model.)


Financial statement models primary utility is it is a way to test what needs to happen for one or more performance goals to be reached.


If the forecasts use conservative assumptions based on recent historical performance (although historical performance, as the investment fund advertisements always remind us, is no guarantee of future performance), the company’s current reputation and position in the industry, then it might be a valid statement.


This role as a testing tool means that a financial model is best when we can change the inputs quickly for a series of sen- sitivity tests. What would the cash flow from operations be like if revenue went up by 8%, or 3%, instead of 5%, while mar- gins: (a) held steady, (b) improved, or (c) worsened?


One good way to extend the reach of a template model is to enable additional sheets to the mod- eling engine (Fig. 1-2). The sheets can be added to the front of the model (in the sense of the inputs, so that they can be made more granular) and the back of the model (to organize and supplement the output that the model is capable of producing on its own).

For example, a standard financial model will have only one revenue input. What happens if you need to work with a


company that has multiple business segments? This approach of adding scratchpad sheets becomes useful in this case. On the new sheet, you can lay out the detailed assumptions and drivers for each of the business lines. Once you have a total for the rev- enue line, simply reference that back to the revenue input in the standard model. This approach can be repeated for other input lines in the financial model.

Analytical methodologies built on top of the financial statement model (accounting logic)

Accounting logic in the financial statement model + analytical tools of finance depending on the side of the perpetuity we are on

Positive NPV is the amount of the corporate arbitrage


A model needs to tell a “story”: it must have a beginning (inputs aka accounting data), a middle (accounting logic of the FSM + analytical methodologies of finance), and an end (outputs of analytical methodologies) of the analytical steps that it is designed to perform.

Input, accounting logic (interlinked relationships among variables) + analytical tools of finance, output

Accounting logic of each line item & financial statement linkages + excel knowledge & analytical functions + analytical tools of finance


in which case cash on the balance sheet may drop to zero, and even to “negative cash.” This means the need for more debt.


The cash flow statement puts the sources and uses of cash into three categories:

􏰀 Cash from operating activities

􏰀 Cash from investing activities

􏰀 Cash from financing activities

The full layout looks something like this:

Net income

+ Cash sources (uses) from operating activities

+ Cash sources (uses) from investing activities

+ Cash sources (uses) from financing activities

= Total cash sources (uses)

+ Beginning cash on the balance sheet = Ending cash on the balance sheet

Double entry accounting to account for sources and uses of cash within a corporation


in the balance sheet, changes must happen in a one-two sequence; for every source, there is a corresponding use and vice versa expressed through various accounts. Thus, sources and uses always balances


In accounting terms, increases in the liabilities and equity side are sources of cash.

Likewise, decreases in the liabilities and equity side will re- quire cash. So such decreases are uses of cash.

Each new science transacted with a customer can be thought of as a project

Assets increase with a use of cash and decrease with a source of cash. Liabilities & equity increases with a source of cash and decreases with a use of cash

On bs

when an account transaction is a “debit,” it always means a use of cash. Likewise a “credit” always means a source of cash.

the second action in double-entry bookkeeping can be said to be in essence a change in cash, because any change in an asset, liability, or equity is either a source or a use of cash.

second action is a change in cash”:

financial modeling, the next step to take is simply to make the model do the second action in the double-entry bookkeep- ing—keeping track of the change in cash.


In modeling, balancing the balance sheet uses “plugs” (Fig. 4-8). Just to be clear, this term does not mean a manually hard-coded number that is entered in the spreadsheet to balance the balance sheet. The term “plug” as used in this book means a dynamic number automati- cally calculated by the formulas we write in Excel. This number is Excel in action as the second step in double-entry bookkeeping.


The plug on the asset side is called “excess cash” and is assumed be cash. Historical numbers have only one cash line, but in forecasts we can also continue to assume a level of cash required for operational purposes; this line would then be called “cash” or “minimum cash.” Any cash produced by the inter- actions of the forecast assumptions above this minimum cash would be “excess,” which is why this is called “excess cash.”

Excess cash comes into play when the modeling assump- tions produce a liabilities and equity side that outpaces the as- sets side. In other words, there is more cash than can be used in buying assets. We saw this in our entrepreneur’s balance sheet for Day 1 (Fig. 4-4). The cash would be the “excess cash” plug.


The plug on the liabilities side is called a “revolver” and is generally assumed to be debt. A revolver is a credit line that a

company has with a financial institution: the company can borrow on it when required and then repay it if it has cash on hand. The credit line is renewed regularly, so it “revolves” from year to year, and that is why it is called a revolver.

Excess cash for assets that havent been bought yet (plug). Revolver for excess assets that havent been paid yet (plug).

Regarding the statement of cash flows: If the change in cash is positive, then the model adds that to the existing excess cash number. If the model has a revolver, then the positive cash reduces that revolver.

To build the cash flow statement in this approach requires the current year’s income statement and both the current and prior year’s balance sheets.

Plugs are not going to be in historical financial statements, nor are roll forward schedules for working capital, debt, capital expenditures


The income statement plays a role in both cases because the net income flows into the retained earnings on the balance sheet, and net income is the first item in the cash flow statement. How- ever, its importance in the balancing depends on how we wish to calculate the interest from the excess cash and the revolver. If we wish to calculate the interest on the average levels of the plugs, then the income statement will be a part of the balancing system, since the net income will change depending on the ef- fects of the plug interest. (However, this approach brings us into the issue of circular references. See Chapter 8 for more on this.) If the interest is based on the prior levels of the plugs, then the income statement is not part of the balancing system.


The balancing formula excludes excess cash and revolver (both of which are the plugs that the formula is seeking to de- termine) to avoid circular references.


A financial statement model allows us to understand the dynamics of the business in terms of the corporate arbitrage, sources & uses, and perpetuity


A successful business will have a circular flow shown in the dotted lines between its balance sheet and income statement:

  1. Acompany’sproductiveassets,whetherafactoryproducing physical widgets or office space with smart employees providing intellectual services, produce revenue.
  2. The revenue is reduced by operating expenses, interest, taxes, and dividends.


Net income, after dividends, flows into the balance sheet’s retained earnings account.

  1. The increase in equity adds more cash to a company’s balance sheet. Any additional increases in debt financing or any equity issuances also add cash.
  2. The cash can be used to purchase more productive assets to add to its capacity to produce revenue and support working capital needs. The remaining unused cash is useful as a cash account for general day-to-day operations.
  3. With more productive assets, more revenue is produced.


Number one priority of the business: use productive assets to produce revenue. Use excess cash to fund daily operations and buy more capacity to generate revenue or new positive NPV projects to generate new revenue streams. Excess cash produces more and more revenue which produces more and more excess cash


This amounts to establishing your perpetual profit cycle aka building the perpetuity.

By financial statement modeling we can then arrive at a conclusion on whether the company is on a feasible path toward a positive cash generation cycle. Goal is to get to perpetual cash generation cycle. There are management levers that can be utilized in order to get the corporation there


Management levers can be measured with ratios in ratio analysis

Working towards the perpetual cash cycle independent of owners involvement is perpetuity


The ISERROR Function for Trapping Errors

Errors in a spreadsheet are generally easy to find and correct. Under- standing what the error messages mean allows us to get an idea of what kind of error to look for and make the necessary corrections.

When we build a model, however, errors can be a little more troublesome. As you will see when we start developing the formulas in the model, we will be using circular references.

A circular reference occurs when a formula refers to it- self, whether directly or indirectly. For example, if you enter =SUM(A1:A10) in cell A10, you would get a circular reference because every time A10 is calculated, it must include itself in the SUM calculation, in a never-ending cycle.

When you create such a circular reference, Excel will give you a warning message (Fig. 6-20):

There are two ways of dealing with circular references and Excel’s attempts to warn you about them:

  1. One way is to correct the inadvertent circular references. Clicking on the OK on this message form will get Excel’s circular reference toolbar to show, which will help you to start to zero in on where the troublesome reference is.
  2. The second way, and this is only if you actually want to have circular references, is to set Excel’s calculation to the iteration mode by the following sequence: Tools>Options >Calculation>Iteration. This will set Excel to allow circular references. An iteration is simply a cycle of calculation in which you can imagine a “wave” of calculation sweeping through the whole model, sheet by sheet.


Why do we want iterative circular references? Simply put, it is a simple way to get the model to converge on its calcula- tions of interest expense. As you will see in the next chapters, in the forecast years the model will be creating “plug” numbers to balance the balance sheet. A plug number that is assumed to be debt will create an additional interest expense, which will affect the plug number itself. The model then has to recalculate (or iterate) to adjust for this increase, which in turn will create another, but incrementally smaller, increase. The iteration will go through several more cycles before there is convergence within the limits set in the model.

So, circular references can be used to good advantage. The dangerous thing is that as there is now a calculation loop in the model, if there is an error that gets inadvertently introduced into the calculations, this error message will continue to cycle around in the loop. Even after the source of the error has been removed, the error message continues to be caught in the loop! In this case, there are two ways to correct the situation:

  1. Manually change one of the formulas in order to “break” the calculation loop. Make sure that the source of the original error is corrected, and recalculate the model again to clear out the error message. Once this is done, restore the formula again.
  2. A more elegant way is to use the ISERROR function to trap the error. Simply put, at a location in the calculation loop, we write a formula that returns a 0 when it encounters an error condition. Let’s say we put this in cell C51:


Cell C50 is a cell that is part of the loop, as is Cell C51. If there is an error in the loop, this formula in Cell C51 will revert to a 0, which is then read by the rest of the calculations. The 0 breaks the circular loop and gives the error message a chance to be cleared out, so that when C51 calculates again, it does not see the error sign and automatically reconnects to C50. The loop is restored.


There is interest on plugs, excess cash and revolver, hence the circularity


We first calculate what the excess cash/revolver plug number should be in order to balance the balance sheet. The labels indicate the rows are assets without the excess cash and liabilities + equity without the revolver. We then write the latter minus the former to get a value that is the excess cash if it is positive, or a revolver if it is negative (Row 33). It is important to exclude the plug values in order to arrive at the excess cash/revolver number, in order to avoid a circular reference. See Chapter 8 for a fuller description of circular references. As a side note, rather than [liabilities + equity] – assets, we could have done the reverse: asset – [liabilities + equity]. The resulting value would then be excess cash if negative, and revolver if positive.


The excess cash/revolver result in Row 33 (“Excess cash (revolver) as calculated”) is then referenced back to the balance sheet. We see in Row 18 (“Excess cash”) the formula:

The MAX function simply returns the greater (the maximum) of the value in E33 or 0. If E33 is negative, then it returns a 0.

This brings Row 33 into Row 23 only if it is negative, but the minus sign in front of the MIN means that this negative number as calculated in Row 33 appears in Row 23 as a positive.

The excess cash or revolver plug does not show interest in the same IS year, but the next year, pro forma


Now we have to connect the interest income and interest expense from the excess cash and the revolver. This is done in Row 8 (“Interest: Excess cash”) and Row 9 (“Interest: Revolver”). The interest at this point looks to the prior period, not the current period, in order to avoid circular references.


The interest for debt is set as an average of the outstanding in the first projected year and the prior (historical) year. In the absence of any other information, it is assumed that the debt outstanding amount changed at the mid-point

of the year, and this is captured by the average function for the interest expense calculation.


Make sure you connect the income statement to the balance sheet by adding the net income line (Row 14) to the retained earnings line (Row 26) for the formula for the projected year. The formula in Row 26 takes the prior year’s retained earnings and adds that to the current year’s net income number.


Net income is added to BS retained earnings in the same year

Revolver needs analysis yield revolver in the same year on the balance sheet, not future year


Total change in cash from SCF netted against prior year’s ending excess cash to get plug for this year as either more excess cash or revolver (-)

Circular references, specifically for to calculate the average interest on balance sheet plugs is used in IB.


Average interest calculations do not yield a circular reference of average interest from previous and current period accounts. This is most common on cash and investments and debt accounts other than excess cash and revolver plugs


The roll forward for excess cash and the revolver


Revolver uses a negative min function. Excess cash uses max function


Plug is a dynamic number created by the balancing formulas on BS or SCF, not a hardcoded number


SCF convention is positive is a source of cash and negative is a use of cash


Once integtrated FSs modeled, can add additional modules for ratio analysis, DCF, LBO, Merger


Layout with assumptions on the same spreadsheet or on previous spreadsheet (tab). Options on the layout are many

To add debt, insert row, copy debt row existing and paste in new row, rename the row and make sure the results are included in total liabilities and balancing formulas


Total cash flow on SCF is for that year, and it is netted against excess cash which brings down excess cash if negative during the period


Historical numbers should balance, if they do not, will have a balancing error in forecast years


All BS accounts are stock accounts. SCF is roll forward, flow, of the changes in the BS accounts


Roll forward schedules for each line item show the reconciliation to ensure all flows accounted for



Revolver needs analysis yield revolver in the same year on the balance sheet, not future year


Total change in cash from SCF netted against prior year’s ending excess cash to get plug for this year as either more excess cash or revolver (-)

Circular references, specifically for to calculate the average interest on balance sheet plugs is used in IB.

Average interest calculations do not yield a circular reference of average interest from previous and current period accounts. This is most common on cash and investments and debt accounts other than excess cash and revolver plugs

The roll forward for excess cash and the revolver

Revolver uses a negative min function. Excess cash uses max function

Plug is a dynamic number created by the balancing formulas on BS or SCF, not a hardcoded number


SCF convention is positive is a source of cash and negative is a use of cash


Once integtrated FSs modeled, can add additional modules for ratio analysis, DCF, LBO, Merger


Layout with assumptions on the same spreadsheet or on previous spreadsheet (tab). Options on the layout are many


To add debt, insert row, copy debt row existing and paste in new row, rename the row and make sure the results are included in total liabilities and balancing formulaa

Total cash flow on SCF is for that year, and it is netted against excess cash which brings down excess cash if negative during the period

Historical numbers should balance, if they do not, will have a balancing error in forecast years

All BS accounts are stock accounts. SCF is roll forward, flow, of the changes in the BS accounts

Roll forward schedules for each line item show the reconciliation to ensure all flows accounted for






Chapter 9:

Excel for Financial Statement Modeling





Excel Settings:

Alt T O

Formulas > Enable iterative calculations (to deal with circularities) & Workbook calculation automatic except for data tables (calculation heavy on computer in data tables)

Keyboard Shortcuts:

Use them, will be much more efficient than the mouse

Can build 3 statement model with no mouse

Will be a power user of excel when you learn the shortcuts


Formatting shortcuts      

Bold        CTRL + B

Italic       CTRL + I

Underline CTRL + U

Format Box      CTRL + 1

Copy       CTRL + C

Paste      CTRL + V

Paste Only Formats   ALT + E + S + T

Paste Only Formulas  ALT + E + S + F

Paste Only Values     ALT + E + S + V

Cut CTRL + X

Repeat    CTRL + Y

Undo       CTRL + Z

Delete cell contents  Delete

Delete all cell attributes   ALT + H + E + A

Delete cell comment ALT + H + E + M

Outline border  SHIFT + CTRL + &

Remove border SHIFT + CTRL + _

Insert a comment     SHIFT + F2


Workbook navigation shortcuts

Toggle Excel workbooks     CTRL + TAB

Split Screen      ALT + W + S (F6 to jump from pane to pane)

Freeze pane     ALT + W + F + F

New workbook CTRL + N

Print       CTRL + P

Open workbook CTRL + O (CTRL + F12)

Save workbook CTRL + S

Activate menu bar    ALT or F10

Min / Restore Ribbon CTRL + F1

Print preview   CTRL F2

Close window   CTRL + F4

Close program  ALT + F4


Other useful shortcuts    

Excel Options   ALT + F + T

Recalculate all workbooks F9

Get inside a drop-down list ALT + up/down arrow keys

Display “Insert Function” box     ALT + I + F (SHIFT F3)

Display “Name” box  CTRL F3

Enter array formula   SHIFT + CTRL + Enter


Auditing shortcuts  

Trace immediate precedents      ALT + M + P

Trace immediate dependents     ALT + M + D

Remove tracing arrows      ALT + M + A + A

Evaluate formula      ALT + M + V

Track changes  ALT + R + G

Zoom to selection     ALT + W + G

Go to precedent cells        CTRL + [

Go to dependent cells        CTRL + ]

Go back to original cell      F5 + Enter

“Go to”   F5


Tab navigation

Move/ Copy a tab     ALT + H + O + M

Change tab name      ALT + H + O + R

Moving to left/right tabs   CTRL + Pg Up/Down

New tab  SHIFT + F11

Insert worksheet       ALT + I + W


Row / column shortcuts   

Select column   CTRL + Space

Select row       Shift + Space

Delete row(s) / column(s)  CTRL + ‘minus sign’

Add row(s) / column(s)      CTRL + SHIFT + ‘plus sign’

Group / ungroup rows and columns     SHIFT + ALT + left / right arrow key

Fit column width      ALT + H + O + I


Data editing shortcuts     

Select All CTRL + A

Fill Down CTRL + D

Fill right  CTRL + R

Find CTRL + F

Replace   CTRL + H

Flash Fill  CTRL + E

Edit cells F2

Start a formula = (equal sign)

Insert AutoSum formula     ALT + “+“ (hold down ALT)


Cell navigation shortcuts 

Go to end of contiguous range    CTRL + Arrow keys

Select a cell range    SHIFT + Arrow keys

Highlight contiguous range SHIFT + CTRL + Arrow keys

Move to beginning of line   Home

Move to cell “A1”     CTRL + Home

Move to cell above    SHIFT + ENTER

Move to cell to the right    TAB

Move to cell to the left      SHIFT + TAB

Delete cell and get inside  BACKSPACE

Delete cell/selection DELETE

Show formulas/values       CTRL + ~

Fill selection w/ entry       CTRL + Enter


Data editing shortcuts when inside cell    

Start new line in same cell ALT + ENTER

Highlight within cells SHIFT + Arrow keys

Highlight contiguous items SHIFT + CTRL + Arrow keys

Delete preceding character        BACKSPACE

Delete character to the right      DELETE

Anchor “Fix” Cells     F4

Cancel a cell entry    ESC

Inspect cell values in cell edit mode    F9


Excel Utilities

Insert a pivot table   ALT + N + V

Insert a data table    ALT + D + T

Sort a table      ALT + D + S

Autofilter selection   ALT + A + T

Record a Macro ALT + L + R


Universal Shortcuts in Windows vs. Excel Shortcuts:


Universal Shortcuts in Windows

Open up windows is Microsoft sign + E

Microsoft sign + up arrow makes it bigger, down arrow smaller

In window hit tab key, cycles clockwise

Shift tab to cycle counter clockwise

Enter gets you inside file


Universal applications shortcuts      

Switching between applications  Alt Tab

“Right-click” with keyboard       Shift F10 or ‘Right click’ key

Save file  Ctrl s

Minimize all windows Windows key d

Find Ctrl f

Activate the start menu     Windows key


Windows explorer shortcuts    

Opening windows explorer Windows key + e

Closing windows explorer   Alt F4

Moving clockwise to next form field    Tab

Moving counterclockwise to next form field  Shift tab

Highlighting a folder First folder letter or arrow keys

Getting into a folder Enter

Move back up a folder level        Backspace


Adobe acrobat shortcuts 

Go to specific page   Ctrl shift n

Find Ctrl f


Office forms (dialog boxes) navigation     

To go from tab to tab        Alt tab

Go to a particular form element Alt underlined letter

Move in a list    Up and down arrow keys

To move to the next form field clockwise     Tab

To move counter clockwise Shift tab

Select ‘OK’        Enter

Select ‘Cancel’  Esc


Excel Shortcuts:

Formatting a cell

Ctrl + 1, use arrow keys to move around the tabs, when you want to dive into a tab you hit tab and then you are in the tab, can jump to an area when it is underlines by hitting Alt + the underlined letter, Shift + tab to get back to tabs, and Esc to get out of formatting


Modeling Best Practices:








Chapter 9:

Gathering Historical Financials





Gather the relevant reports for Financial statement modeling means building the PIB, public information book

Industry and company knowledge for a financial statement model is garnered from equity research reports for forecast rates, margins, ratios

Leave a blank column in A for elevator drops

Have to change the row headers for each model depending on the accounts of the company

What is the purpose of the model? Valuation (annual model) vs borrowing needs (quarterly model)

Equity research models are quarterly (catalyst is corporate earnings)

For annual model, need latest 10K and 4th quarter press release (announces results with financials with important non-Gaap disclosures including EBITDA and nonrecurrings, and management guidance) and conference call transcript, latest sell side equity research (framing forecasts, industry and company knowledge embedded within forecast assumptions (drivers), reports published within a few days following latest quarter press release, look for full model reports, initiating coverage reports for industry knowledge) and EPS consensus estimates for target, last six months of news for stock split, acquisition or material changes. For quarterly models and LTM calculations, also get 3 latests 10Qs in addition to (Q1, Q2, Q3, 10K) and press releases and conference call transcripts

For digital PIBs, use ctrl F or ctrl shift n for page number

For private companies, wont have 10k or 10q and will need historicals as well as management guidance for projections





Chapter 10:

Financial Statement Modeling




Financial Statements & Financial Statement Modeling

Financial statements are the formatting of accounts to allow for analysis. The structure for the financial statement model is copied from the financial statements into excel. Historicals are inputted and then we build our fully linked financial statement model for future years and we can run analyses on the projections. Pro formas are financial planning based upon assumptions that drive the corporation’s performance.


Modeling Process:

Start with IS historicals and forecast, but have to skip interest expense/income since it depends on BS items. Then BS historicals and forecast, separate schedules for each line item. BS has IS drivers, ratios in relation to IS line items, that cause the BS monetary value. Finally, the cash flow statement, allows us to plug the model, depending on whether the company has a cash surplus, excess cash plug, or cash shortfall, revolver plug, which is determined in the statement of cash flows. Finally, we error proof the model and build on scenario analyses and sensitivity analyses.

Financial Statement Modeling Process:

  1. Identify whether company displays data in thousands, millions or billions and list this at the top of the spreadsheet
  2. Identify company name, ticker, share price as of last close, close date, latest fiscal year end, and circuit breaker
  3. Create IS row headers
    1. Company specific row headers from the 10k
      1. Break out other interest income/expense into its three components so have row headers for each (footnotes in 10k)
    2. Diluted shares outstanding roll forward
    3. EPS row headers
    4. EBITDA reconciliation
      1. Add back D&A.
        1. Locate D&A from SCF
      2. Add back stock based compensation
    5. Growth rates and margins for line items other than revenue for the IS
      1. Implied growth rates and margins based upon historicals hardcoded into the IS
        1. First is revenue growth = This year revenues / last year revenues – 1. Consolidated growth rate derived from SEGMENT BASED CONSOLIDATED REVENUE GROWTH RATE CHECK and linked to it.
        2. Next is gross profit as a % of sales = gross profit / revenue
        3. Next is R&D margin = R&D / revenues. Don’t forget to use a negative sign so we get a positive margin
        4. SG&A margin = SG&A / revenues. Use negative sign so we get a positive margin.
        5. Tax rate = tax expense / pretax profit. Not revenue
      2. Revenue schedule by revenue, product and ASP
        1. Segment based data in product based breakouts in Sales Data disclosure in 10k
          1. Total line at the bottom with % growth headers
          2. Back into ASP by inputting revenue historical in schedule and product sales historical and dividing them to get ASP. Multiply by 1,000 to get the scale correct.
          3. FOR FORECASTING, use Equity Research drivers blue hardcoded for PRODUCT and ASP to then drive REVENUE AGGREGATE to get into detailed drivers on a product by product basis
          4. ASP needs formula in absolute number for ASP = last year * (1 + growth rate) and guess at the rate to get you the ABSOLUTE ASP which is consistent with EQUITY RESEARCH. Keep 0% change for years 3 through 5 since we don’t have Equity Research guidance
          5. Units are hardcoded % growth from Equity research and hardcode 3% growth for years 3 through 5
        2. Product and ASP have row for % growth for each line item
      3. Create BS row headers
        1. Company specific row headers from the 10k
        2. Row headers for Schedules for each line item starting with working capital
      4. Create time period column headers
        1. Need latest fiscal year end date (Latest 10k date)
        2. Three years historicals, five year projection period
          1. Start with third column in as the current last year historical 10k and work backwards to the first column header
          2. Input fiscal year above
  • Input fiscal year end date below
  1. A for actual
  2. E for expected (projection years)
  1. Input IS historicals as blue hardcoded numbers
    1. Income is presented as a positive
    2. Expenses is presented as a negative
  2. Build a revenue schedule by product units sold and ASP (average selling price). Blue hardcoded driver is derived from Equity Research (the Street) for initial projection periods for base case. Roll this up into revenue.
  3. For FORECASTING the IS, build IS blue hard coded drivers for each line item in IS. Blue drivers drive black linked line items in same year.
    1. Skip interest income (function of cash balance on BS) and interest expense (function of debt balance on BS)
      1. Pull the forecast DRIVERS (blue hardcoded) from Equity Research for first two years and hold even from years 3 through 5
        1. Gross profit as a % of sales drives GROSS PROFIT line item = Revenues * gross profit as a % of sales
        2. Back into COGS = Revenues – Gross profit
        3. R&D % drives R&D line item = Revenues * R&D %
        4. SKIP interest expense/income
        5. Straightline nonoperating items including OTHER EXPENSE
        6. Tax = Pretax profit * tax rate
  • Leave D&A and Stock based comp blank
  1. Leave EBITDA blank
  1. Input BS historicals
    1. Two years worth of historical results since company disclosures have two years (SEC required)
    2. Aggregate line items for cash into one row header since these are all really cash equivalents
      1. Cash
      2. Short term marketable securities
  • LT marketable securities
  1. Aggregate vendor nontrade receivables and other current assets
  2. Aggregate Goodwill and acquired intangible assets into one line item
  3. Aggregate Accrued Expenses and Deferred Revenue (current and noncurrent)
  5. Aggregate Common stock and APIC (additional paid in capital)
  6. LINE ITEM ROW FOR TREASURY STOCK. Companies may lump buybacks into retained earnings to show retained earnings net of treasury buybacks.
  7. Balance sheet check = total assets – liabilities – equity
  8. Determine historical ratios based upon historical absolute numbers in balance sheet
    1. Row headers for RATIOS
      1. Net debt = sum (company’s debt) – company’s cash
      2. Asset turnover
      3. Net profit margin
      4. Return on Assets
      5. Return on Equity
    2. For FORECASTING THE BS, Build roll forwards (Prior year’s ending balance as BEGINNING OF PERIOD, then ADDITIONS & SUBTRACTIONS during period, then get to END OF PERIOD balance which is the line item balance for that year) for each line item from historicals by the blue driver to forecast the black linked line item below the balance sheet:
      1. Start with Working Capital
        1. AR
          1. Natural driver is revenue. Grow AR with revenue growth rate
          2. Also want to track Days Sales Outstanding when it comes to AR. DSO = (AR/revenue) x days in period. How long does it take to collect on receivables?
          3. Determine EOP balance by referencing the AR from that year for historical years
          4. Determine AR as a % of revenue = AR/revenue. This is for two years historical.
          5. Determine Days Sales Outstanding
          6. Determine BOP balance for first projection year by referencing EOP balance from previous historical year.
          7. TO FORECAST AR, refer to EQUITY RESEARCH for the DSO HARDCODED BLUE DRIVER to get to EQUITY RESEARCH ABSOLUTE NUMBERS FOR AR for EOP to then back into AR as a % of revenue. DSO talked about more by analysts.
          8. Calculate the roll forward change
          9. Build IF statement to handle explicit thesis for DSO, but does not require it, as in grow with revenue growth rate instead of DSO.
        2. Inventory
          1. Natural driver is COGS since inventory cycles out through the IS through COGS. More COGS, more inventory
          2. Also want to track inventory turnover, when it comes to inventory. IT = COGS/inventory
          3. Determine EOP balance by referencing the AR from that year for historical years
          4. Determine Inventory as a % of COGS = I/COGS. This is for two years historical.
          5. Determine Inventory Turnover historical
          6. Determine BOP balance for first projection year by referencing EOP balance from previous historical year.
          7. TO FORECAST AR, refer to EQUITY RESEARCH for the IT HARDCODED BLUE DRIVER to get to EQUITY RESEARCH ABSOLUTE NUMBERS FOR I for EOP to then back into I as a % of COGS. Hold IT flat (= previous years IT). IT talked about more by analysts.
          8. Calculate the roll forward change
  • AP
    1. The natural driver is COGS or revenue, most commonly revenue. Grow AP with revenue. More revenue, more receivables. If AP comprised of inventory, then tied to COGS. If AP comprised of SG&A then tied to revenue (broader default relationship). Drivers are company specific. Allow user to model different assumption than Revenue or COGS.
    2. Also want to track Days Payable Outstanding when it comes to AP. How long can we get away with not paying our vendors.
    3. DPO = AP/COGS x days in period
    4. Determine EOP balance by referencing the AP from that year for historical years
    5. Determine AP as a % of COGS = AP/COGS. This is for two years historical.
    6. Determine DPO historical
    7. Determine BOP balance for first projection year by referencing EOP balance from previous historical year.
    8. TO FORECAST AP, refer to EQUITY RESEARCH for the DPO HARDCODED BLUE DRIVER to get to EQUITY RESEARCH ABSOLUTE NUMBERS FOR AP for EOP to then back into AP as a % of COGS. DSO talked about more by analysts.
    9. Calculate the roll forward change
  1. AE & DR
    1. The natural driver is revenue. If going into SG&A solely, then grow with SG&A. The more revenue the more expenses you have, this drives the accrued expenses. Allow user to model different assumption. AE and DR are lumped together in the roll forward schedule.
    2. Determine EOP balance by referencing the AE from that year for historical years
    3. Determine AE as a % of Revenues = AE/Revenues. This is for two years historical
    4. Determine BOP balance for first projection year by referencing the EOP balance from previous historical year.
    5. TO FORECAST AE, hold constant the AE & DR % of revenues hardcoded blue to get the same as EQUITY RESEARCH
  2. Then work way down the balance sheet starting with Assets, then liabilities, then equity.
    1. Intangible Assets
      1. Last historical EOP begins as BOP balance. Purchases increase Intangible and amortization expense decreases the intangible assets (amortization expense means noncash expense on the IS and add back on the SCF)
      2. Projection period first year has BOP balance as last historical year’s EOP balance
      4. Link in the roll forward to purchases and amortization drivers.
      5. The value of intangible assets can only increase due to PURCHASES not WRITEUPS.
      6. For FORECASTING, assume that purchases are in line with historical trends using % of Sales or straightline the dollar amount. If intangibles are lumpy and not consistent, assume no new purchases (lumpy is most companies).
      7. Future amortization of existing assets disclosed in 10k. If new purchases, then future INCREMENTAL AMORTIZATION with useful life assumption.
      8. Infinite lived assets, trademarks and goodwill.
      9. Writedowns and sales of intangibles may need to be included in roll forward schedule. Don’t include unless specific guidance. Does the sale impact your IS (was the intangible asset driving sales?). Does the cash proceeds equal the book value? Will have a noncash gain that needs to be put on the IS.
    2. PP&E
      1. Start with prior periods EOP balance and BOP balance
      2. CAPEX makes balance go up and depreciation makes it go down. Depreciation effects income statement in line items COGS and SG&A and SCF is add back.
      3. Purchases of CAPEX should be in line with historicals. Absence of guidance, use historical % of sales or straight line.
      4. If mature company, CAPEX grows at a lower rate than a high growth startup. If distress or restructuring, then prune back CAPEX. Maintenance (bare minimum) CAPEX vs. discretionary CAPEX.
      5. For depreciation, forecast as a % of CAPEX using historical ratio of depreciation to CAPEX. Historical depreciation not disclosed, since we have D&A, we can back into historical depreciation. Arrive at D, by finding A and subtracting it from D&A.
      6. When companies provide book value of PP&E by category, along with useful life estimates, a more complex depreciation forecast can be made. Can build depreciation schedule. But book value of PP&E is almost never provided, a function of receiving private information.
      7. Land is not depreciable
      8. The more CAPEX a company has made, the more Depreciation it will see in the future. Depreciation is the cycling out of CAPEX through the income statement as an expense.
        1. For high growth companies, CAPEX outpaces depreciation. CAPEX/depreciation = >1
        2. For mature or declining businesses, Depreciation catches up and sometimes goes larger than CAPEX, =1. Ratio should converge to 1.
      9. Writedowns not explicit in models.
      10. Modeling Sales of PP&E is uncommon except for some industries. Company consistently make sales? Impact the IS (did PP&E drive sales)? Do cash proceeds equal book value, if exceed there is to be a gain on sale on IS which is a noncash decrease NI and add back on SCF.
      11. HISTORICALLY, can find CAPEX on the SCF in 10k and get CAPEX as a % of revenue historically.
      12. HISTORICALLY, get Depreciation by D&A in EBITDA reconciliation and add the negative Amortization to get D. Get Depreciation as a % of CAPEX.
      13. FORECASTING, CAPEX as a % of revenue as a driver but want to be in line with EQUITY RESEARCH. Arrive at a forecast that approximates ER. Drives CAPEX.
      14. FORECASTING, straight line historical Depreciation as a % of CAPEX. Drives Depreciation. Get to absolute results that ER is suggesting. Backing into the Street case.
      15. FORECAST EBITDA RECONCILIATION D&A based upon our forecast of separate Depreciation and Amortization. What should our driver look like to approximate the Street case on the ER report?
      16. Link Roll Forward Schedule to Absolute CAPEX and Depreciation that were driven by the DRIVERS
    3. Other Current Assets & Other Non-Current Assets
      1. Catch all OTHER current all lines for prepaid expenses
        1. If tied to operations, want to grow with revenue otherwise straightline. As business grows, expect accruals to grow as well to support growing business. Need to read disclosures to then determine the DRIVER.
        2. To see what is inside of OTHER, go to the footnotes
      2. Catch all OTHER noncurrent all deferred tax assets, pension assets
        1. Associated with nonoperating. Straightline if no disclosures
      3. OCA schedule including non-trade receivables
        1. Go to 10k BS and see disclosures for OCA and vendor non-trade receivables
        2. Straightline at 0 to be consistent with Equity Research
      4. DTA schedule
        1. EOP in that year is the BS line item for the two years
        2. BOP in future projection year is the EOP balance from historical year
        3. Are the actual items within the disclosure tied to operations? Then grow with revenue.
      5. OA schedule
        1. EOP in that year is the BS line item for the two years
        2. BOP in future projection year is the EOP balance from historical year
        3. Are the actual items within the disclosure tied to operations? Then grow with revenue.
        4. ER research straightlines so we will. Straightline means zero increase/decrease
      6. ONL schedule
        1. EOP in that year is the BS line item for the two years
        2. BOP in future projection year is the EOP balance from historical year
        3. Are the actual items within the disclosure tied to operations?
          1. Made up of DTLs so search for disclosures. Waiting for repatriation of cash. Money owed to the IRS. Recognition of taxes owed but not yet paid
          2. Hardcode the change in the ER report amount in the roll forward to get to EOP balance
        4. Deferred Tax Assets (Prepay of taxes for revenue that hasn’t been recognized on a GAAP basis yet)
          1. When actual taxes are greater than GAAP. Can be presented as current (expect reversal in next 12 months) or noncurrent asset. Book recognition of revenue vs. tax recognition of revenue. Actual tax authorities are more aggressive in recognizing revenue. Captures temporary difference between actual taxes vs. GAAP. Instead of cash going down, what gets reversed is DTA.
          2. Best practice is straightline historical balance.
        5. Deferred Tax Liabilities (Defer required payment of taxes for revenue that has already been recognized on a GAAP basis)
          1. When actual taxes are less than GAAP. Captures temporary difference between actual taxes vs. GAAP. What gets reversed is the DTL. The excess is captured is a DTL.
          2. Best practice is straightline historical balance. Or grow with revenue.
        6. Other Liabilities
          1. Other Current Liabilities (Catchall)
            1. If tied to operations, grow with operations. If financial, then straightline it.
          2. Other Noncurrent Liabilities(Catchall)
            1. If tied to operations, grow with operations. If financial, then straightline it. A lot of BS line items are straightlined, especially when there is no clear driver (not sure what line item represents as in no disclosures). If management or equity research is guiding to straightlining then ok to straightline. Ok to straightline small items.
          3. Debt
            1. Roll forward increased by NEW BORROWINGS and PAID IN KIND INTEREST (PIK), which is a noncash interest expense on IS and add back on SCF, and decreased by PAYDOWN of debt
            2. Types of Debt: Bank debt (directly issued by lenders, interest rate tied to LIBOR plus some spread, principal payments (amortization) made throughout the term of the loan, most restrictive covenants and secured by assets of the firm so bank debt is cheaper) vs. Bonds (issued by company and purchased by investors, interest rate structure is fixed coupon and no principal paydown until maturity, unsecured)
            3. In 10k there is a Debt footnote and schedule of principal payments on aggregate debt and usually corresponding interest rates and terms of the borrowing.
            4. FORECASTING, you want to reflect paydown if declining debt is assumed to not be replaced by new debt to maintain capital structure. Assume debt level stays the same. Straight line the debt. New debt will replace old debt
            5. For PIK option on loan, accrues interest expense as PIK INTEREST. Interest expense on IS but no cash impact so added back on SCF. Accrued principal is growing slowly by amount of PIK interest.
            6. EOP for both historical years references BS and BOP for forecast year first is EOP for previous historical year
            7. Go to 10k for note of LONG TERM DEBT. Floating rates tied to LIBOR. Swaps to make floating rates to fixed interest rates. ER shows no new borrowing, but reflect beyond ER, that paydown. HARDCODE PAYDOWN in ROLL FORWARD.
            8. FIND INTEREST EXPENSE on LONG TERM DEBT by backing into with a given INTEREST RATE DRIVER BLUE HARDCODED into the future. =Interest Rate* Average(previous period, current period)
            9. FIND PIK ACCRUAL by % paid in PIK vs. cash so the INTEREST EXPENSE ON LT DEBT IS ADDED TO PRINCIPAL IN THE AMOUNT OF THE % PAID IN PIK. This is called a PIK TOGGLE (choice of PIK or not)
          4. Capital Stock
            1. Roll forward begins in forecast year with previous period historical EOP balance
            2. Increases with NEW ISSUANCES and STOCK BASED COMPENSATION (value of issued to employees, recognize the value as an expense).
            3. Capital stock is common stock and APIC (aggregate them)
            4. FORECASTING, assume no new issuances, unless management and ER guiding to this. If going to forecast new share issuances, factor this is share count for EPS. Stock based compensation expense Forecast is to straightline % SBC to sum(COGS, R&D, SG&A) to then back into STOCK BASED COMPENSATION. GET NEAR ER amounts for SBC.
            5. New share issuances located on SCF (Proceeds from issuance of common stock)
          5. Treasury Stock
            1. Contra account so starts as a negative and gets more negative, accumulation of all prior buybacks
            2. Statement of shareholder’s equity financial report or SCF (Financing section) detailed REPURCHASES OF COMMON STOCK
            3. Roll forward increases the negative by SHARE BUYBACKS.
            4. In absence of formal buyback program, straight line historical buybacks. Companies buy back shares on a regular basis to mitigate dilution that occurs from others exercising options.
            5. Impact to share count will depend on share price at the time
            6. Look in 10k for repurchase program.
          6. Retained Earnings
            1. Roll forward increases by net income and decreases by dividends (common or preferred)
            2. FORECASTING is going to have missing parts of net income. FORECASTING dividends by % dividends to net income historical ratio.
            3. Historical dividends in SCF (financing)
            4. DIVIDEND PAYOUT RATIO is going to be dividends/net income. Do historical first. Dividends as a % of net income. If do not have ER, then straightline the dividend payout ratio. Override PAYOUT RATIO TO GET TO ABSOLUTE NUMBER OF DIVIDENDS IN ER REPORT.
            5. Complete the roll forward by pulling NI and dividends in
          7. OCI
            1. Represents income/loss accumulated that does not flow through retained earnings
            2. Roll forward OCI in current year. Example would be currency, derivatives, hedges.
            3. FORECAST OCI, straightline historical balance by forecasting 0 gains and losses. Assume no change.
            4. Historical two periods EOP
          8. Then consolidate the roll forward schedules into the consolidated BS
            1. Start from working capital and input EOP balance into line items into the balance sheet
            2. All done except for int income/expense, cash, and revolver (plugs and plug derivatives)
            3. Fill RATIOS to the right
          9. SCF line items are changes in BS. The final statement that is forecast. Don’t need historical SCF. The forecast is changes in the balance sheet. When models don’t balance, often due to mistakes in SCF. Need to build a SCF to figure out what CASH BALANCE will be and REVOLVER BALANCE (IS) will be and INTEREST INCOME and INTEREST EXPENSE (BS)
            1. Cash Flows from Operations
              1. Income Statement line items cash be referenced directly on SCF. BS items need year over year changes. CAN USE THE ROLL FORWARD SCHEDULES FOR THIS SO GRAB THE CHANGE IN THE ACCOUNT LINE ITEM.
              2. Assets are NEGATIVE and Liabilities are POSITIVE. SWITCH THE SIGN ON ZEROS STILL WHEN NECESSARY.
            2. Cash Flows from Investing
              2. Assets are NEGATIVE and Liabilities are POSITIVE. SWITCH THE SIGN ON ZEROS STILL WHEN NECESSARY.
            3. Cash Flows from Financing
              2. Assets are NEGATIVE and Liabilities are POSITIVE. SWITCH THE SIGN ON ZEROS STILL WHEN NECESSARY.
  1. Net Change in Cash
    1. CFO – CFI – CFF = net change in cash
  • Asset side of balance sheet done
  1. Build plug schedules for excess cash and revolver
    1. Revolver
      1. Revolving credit facility, is a core plug that handles deficits. Plug for surplus is excess cash. Plug on deficit is revolver.
      2. To support short term working capital needs. Secured by AR and Inventory. Can borrow up to 90% of AR plus 70% of inventory for example. Often a component of borrowing from a bank. Priced at LIBOR plus some spread.
  • Revolver balance rises if cash shortfall
  1. If surplus, cash rises only after revolver balance paid down
  2. Still want to build revolver into model even if don’t have a revolver. When building weak case, will have to use the revolver
  3. ROLL FORWARD LOGIC, increases with NEW BORROWING, revolver needs analysis starts with BOP cash balance, surplus pay down revolver. Minimum cash assumption to get to available cash. Add new Free Cash Flows (all CFs except for revolver). If revolver fully paid down, remaining cash surplus adds to cash balance. When decreasing the revolver, this is a cash use and will have to get tracked in the CFF section revolver line item.
  • If have losses after min cash, revolving credit line is increased by the amount. CFF section on SCF revolver line item inflow.
  2. Roll forward INCREASES/DECREASES, USE – MIN FUNCTION(CASH AVAILABLE, BOP REVOLVER). Spits out whatever balance is smaller.
  1. Interest income
    1. Now can complete the CASH ROLL FORWARD
    2. Back into Interest rate on cash, find Interest income from 10k for historicals. Can get IMPLIED INTEREST RATE ON CASH = INTEREST INCOME / AVERAGE(EOP THIS PERIOD, EOP PREVIOUS PERIOD)
  • Can find WEIGHTED AVERAGE INTEREST by searching in 10k to get interest rate and simply hard code it historically and then straight line the % going forward
  1. EPS
    1. To calculate Earnings Per Share, we need to calculate the share count.
      1. We needed to go through equity items on BS to determine if company was going to issue shares (increase basic share count) or buyback shares (decrease basic share count)
      2. Basic share count is actual share count
      3. Need to get to a SHARE PRICE to get to share count. USE CONSENSUS EPS ANNUAL GROWTH AS A PROXY FOR SHARE PRICE GROWTH. Holding the PE ratio multiple constant, the increase in EPS should drive the same increase in share price. Solve for Price and change the EPS.
      4. Share price current x (1 + growth rate) = New share price
      5. EPS over the long term approximates value creation
    2. Diluted shares includes options, warrants, and convertible debt and stock.
  1. SHARES OUTSTANDING SCHEDULE TO GET TO EPS. IN MODEL, YOU HAVE WEIGHTED AVERAGE SHARE COUNT FOR BASIC AND DILUTED, NOT EOP. EOP SHARE COUNT IS ON THE FRONT PAGE OF THE 10K. Latest historical EOP is the 10K share count. Future pro forma first year is BOP which is EOP from previous year.
  2. Shares outstanding are increased by issuances, which are not forecasted in model, and decreased by buybacks which are forecasted in model. Need to get consensus EPS for future years to get implied EPS growth and thus implied average share price growth. CONSENSUS EPS IS FOR DILUTED EPS. CAN GET EPS HISTORICAL. Average share price for last year by analyzing every day share price for last year. Grab two years consensus EPS results. For years 3 through 5, use analysts long term growth rate. Back into IMPLIED EPS. THEN BACK INTO IMPLIED AVERAGE SHARE PRICE.
  3. Shares repurchased aggregate dollar amount taken from CAPITAL STOCK SCHEDULE and divided by implied share price to get to how many shares bought back.
  • Now can link to the Basic and Diluted share count up top but take AVERAGE OF BOP AND EOP, not just EOP.
  • Straight line impact of diluted shares
  1. Find Basic EPS and Diluted EPS by taking NI / basic shares outstanding and diluted shares outstanding
  1. Balancing the Model
    1. By linking interest income and interest expense into the income statement, we created a circularity.
      1. Alt D L for data validation. List. Allow list. Source ON, OFF
      2. Start with OFF and have drop down menu for ON
  • Interest income and interest expense do IF statement which says, IF circuit breaker, is off, do function previously, otherwise, 0 which fixes the broken model
  1. Circuit breaker is turned on when model breaks to fix it. Then turn back off to get to normal model again.
  1. If BS is off, divide that amount by 2 and try to find that number and then switch the sign (usually in the SCF)
  2. Sanity check base case model against Equity Research report
  1. Sensitivity Analysis using data tables
    1. How is the projected EPS effected by changes in the revenue growth rate? This is called sensitivity
    2. Output variable in the top left corner. Row variable. Column variable and reference where in the model the row variable is and column variable is.
    3. Highlight entire table after output variable, and the input variables in the row and column are done. Alt D T. Choose input variable location for row and header. Then hit enter. Then hit F9 to calculate the table.
  2. Scenario Analysis
    1. Create drop down menu for base case, weak case and best case.
    2. Create an area for the main drivers of the IS that will choose the given assumption best upon the case. In the area for drivers, each cell will have an OFFSET WITH MATCH statement to choose the assumptions based upon the case.
    3. Now reference the scenario analysis area into the GROWTH RATES & MARGINS JUST BELOW THE INCOME STATEMENT


Then build roll forward schedules first, then roll up into the consolidated balance sheet. First you forecast working capital line items.














Financial statement modeling refers to the creation of a standalone operating model for a company. The operating model is built using historical performance (i.e. historical financial statements). We use the operating model to see pro forma performance of a company given certain assumptions. These pro-formas are the basis for decision making on the build-side, the sell-side and the buy-side.


Financial statement modeling best practices:

Blue is hard codes, black is formulas

Be consistent with millions and billions (keep conventions the same)

Footnote everything in presentation

Keep your model simple (1,000 cells is better than 10,000 cells)




The following is a financial statement model:





Chapter 10:

Financial Statement Model Analysis




Analyzing the implied ratios from historical financial statements as well as pro forma financial statements.


ROA includes debt and does not facilitate comparison across companies with different capital structures. ROE solves this issue and takes debt out of the picture.


Ratio Analysis:

How companies are performing by how they are changing over time

Financial statement modeling has allowed us to build an interlinked three statement model to understand how the financial statements connect. After that, we can utilize tools of analysis to understand perpetuity performance by looking at the relationship between two or more financial statement accounts and understanding how this relationship (ratio) changes over time.

Ratios are broadly classified into four categories:

  1. Activity
  2. Liquidity
  3. Profitability
  4. Leverage



Activity Ratios

Measure of efficiency of a firm’s assets and using them

Receivables turnover – understand how quickly you collect from customers. Want very high

Inventory turnover – how quickly turning over inventory. Means that you carry high or low inventory to support sales. Want very high

AP turnover – Compare to PPP and see how long it takes

Payables payment period – Want to be high. Long time to pay vendors

Days sales outstanding – Want to be very low

Debt to total capital Debt to equity Debt to EBITDA Debt to int. expense

Solvency Ratios (Coverage)

Measure of a firm’s ability to repay its debt obligations. Used by lenders/creditors for debt capacity.

Current ratio

Liquidity Ratios

Measure of a firm’s short-term ability to meet its current obligations

Activity ratios measure how efficient a company is at using its assets

Inventory turnover: If you only need $50 in inventory to support $1,000 in COGS that means you carry very little inventory; can be advantageous because it means you do not need large amounts of cash for inventory requirements until a sale is actually made. Had you needed large inventory purchases prior to the sale, you would have had to tap other financing sources like debt.

Receivables turnover / DSO: Identical conceptually to inventory turnover –if you collect very fast from customers, you immediately get cash. If you had to wait a long time for customers to pay, cash that you need for other activities would have to come from somewhere else (like debt). Another way to express the relationship between A/R and sales is days sales outstanding(DSO) = (AR / Credit Sales) x days in period.

Receivables turnover Revenue / Average accounts receivable Days sales outstanding (DSO) Days in period / receivables turnover Inventory turnover COGS / average inventory A/P turnover COGS / Average AP Payables payment period (PPP) Days in period / AP turnover


Activity ratios measure how efficient a company is at using its assets

AP turnover and PPP: Measures how quickly a company pays its vendors. Generally longer credit terms provide a company with more flexibility. Imagine a scenario where you use your cash inflows from operations to fund your operating cash outflows. If the average DSO is 30 days but the average PPP is 15 days, that means that cash from customers takes longer to collect than the terms your vendors have provided you –and implies that you cannot rely on receivables alone to fund your short term credit terms –you’ll need to access other capital sources.


Liquidity ratios –

The current & quick ratios gauge the ability of a company to cover short term financing needs.

Rough rule of thumb: A current ratio > 1 is good.  It implies that there are more liquid assets than short term liabilities, reflecting a healthier level of liquidity.

The flip side is that companies with very strong working capital management can operate effectively with lower liquidity ratios, enabling them fund activities more efficiently

For example, a company that collects aggressively from customers and has to maintain very few inventory, while at the same time negotiates long payment terms with vendors is able to convert non-cash assets like A/R and inventory into cash quickly and avoid having to use that cash for vendor payments. If it chooses to use that extra cash to finance activities, it would have a low current ratio.

Current ratio Current assets / Current liabilities Quick ratio (acid test) Cash and AR / current liabilities


Profitability ratios – The higher the margins the better

Gross profit margin (GPM): A company with a 80% GPM collects $0.80 for every dollar in revenue after accounting for COGS (direct expenses). The higher the margin, the better a company is at converting revenue into profits.

Operating margin: Like GPM, but captures operating (non-direct) expenses like SG&A.

Net profit margin: Like OPM but captures all non-operating income/expenses.

Gross profit margin Gross profit / Revenue Operating margin Operating profit / Revenue

Net profit margin Net income / Revenue Asset turnover Revenue/ average assets Return on assets (ROA) Net income / Average assets Return on equity (ROE) Net income / Total equity Basic EPS Net income less preferred dividends / weighted avg. shares out. Diluted EPS Diluted net income  / weighted avg. diluted shares out. Dividend yield Dividends / Net income


Profitability ratios

Asset turnover: Asset turnover can mean several things –a business with $500 in assets and $1,000 in revenue (2.0x asset turnover) could be far more capital intensive than a business that achieves the same sales with only $100 in assets. Alternatively, it could just have a lot more cash. Comparison of similar companies within an industry might shed light on general efficiency –for example Walmart’s ratio is 2.3, compared to Sears’ 2.0.

Return on assets (ROA): Measures how effective a company is at converting assets into profits, as opposed to just revenue. The higher the ROA the better, although just like with asset turnover, there are many possible scenarios that make this rule of thumb less than perfect.

Return on equity (ROE): One of the primary challenges with ROA is that it commingles a levered measure of profitability (net income is sensitive to leverage via interest expense) with an unlevered measure of assets (assets can be financed by a lot of leverage or no leverage at all –it is independent of the leverage question).

The consequence of this is that ROA makes for a poor ratio to use when comparing companies with significantly different rates of leverage.

ROE solves this challenge by factoring leverage into the denominator and calculates a return on just the equity value of the firm.  This facilitates the analysis across companies with varying degrees of leverage.


Leverage and solvency ratios

Leverage / solvency ratios are important to investors (especially lenders) as they try to determine whether borrowers have sufficient profits to make interest payments, and sufficient equity to carry debt.

Debt to EBITDA is used to determine a company’s debt capacity. For example, lenders contemplating lending to a company with EBITDA of $100m restrict the loan amount to 5.0x the company’s EBITDA.

Debt to EBITDA Debt/EBITDA Interest coverage ratio EBIT / interest expense Fixed charge coverage (EBIT + lease charges) / (Lease charges + interest expense) Debt to total assets Total debt / total assets Debt to equity Total liabilities / Total equity

Interest and fixed charge coverage ratios analyzes how much in profit is available to satisfy interest expense. Coverage ratios are often included in credit agreements whereby a borrower must maintain a certain ratio to be in good standing with the lender.

Analysts should understand that since EBIT is a GAAP measure of profitability, it captures many noncash items.

As a result, sometimes lenders adjust EBIT to better approximate cash profits.

Debt to equity is used to understand how levered a company is.  The higher the D/E, the more highly levered a firm is.

Analysts should note, however, that since the book value of equity can seriously understate market value of equity for many companies, a market value of equity should be used to better understand leverage.

Ratios help you to ask the right questions: they seldom answer them.

Leverage ratios  show how heavily the company is in debt.

Liquidity ratios  measure how easily the firm  can lay its hands on cash.

Efficiency  or turnover ratios measure how productively  the firm  is using its assets.

Profitability ratios  are used to measure the firm’s  return on its investments.




Chapter 10:

Adjusted EBITDA Calculation


In finance, we are trying to get to the actual cash flow. A proxy for this that is used in finance is EBITDA. It needs to be adjusted EBITDA to come closer to an actual cash flow metric.




Part IV:

Valuing Monetary Value


Continuing on through foundations of valuation, we arrive at the actual valuation methodologies used in investment banking & private equity.





Chapter 13:

Public Company Valuation







Chapter 13:

Comp Companies



Also known as trading comps. Management team gives you 1 to 2 years projections or equity research comp reports to get forward multiples (x Revenue or x EBITDA ) which may be used as the basis for this valuation. You can get comps from the general overview as it will discuss the target’s comps in the 10K. Find comps with good multiples to then tell your story to the marketplace to then get a certain valuation.


  1. Select the universe of comparable companies – Choose 7, 8, 10 comps, need their 10K, 10Q, analyst reports to get TEV for each comp then divide by line item to get multiple.



  1. Locate financial information on comp companies – Information must come from latest filing (10K or 10Q). Print out 10K, 10Q, analyst reports.




  1. Spread key financial information, ratios and multiples – Calculate TEV (in comp spread tab). To get MVE, use TSM method. TSM = Exercisable options outstanding x (share price – strike) / share price.
  2. Benchmark comp companies – Get the multiple that the company is trading at for each metric for each comp and get mean and median of comps for the metrics (ex. TEV/EBITDA)



  1. Determine implied valuation – Multiply mean and median multiple x the revenue or EBITDA to get the valuation range for your target company.




The better the company, the higher the multiple and the better valuation you get.


In IB/PE/CorpFin, you need to know comp companies and transaction comps. “Here are the comps in your sector…”


Higher multiple because…

Operating in better markets, better operations


The multiple tells you which company is better, margin analysis tells you why they are better.


Sell side key question:

“Which comp would you use to guide potential buyers?”






Chapter 13:

Comp Transactions



The basis for precedent transactions being used as a valuation methodology is that M&A involving similar companies on a business and financial basis will yield similar multiples to your target.


  1. Select universe of comp transactions



  1. Locate deal-related and financial information – Need press release of the deal, 8K, 10K, and 10Q. Type of payment: cash, stock, cash & stock.



  1. Spread financial information, ratios and multiples – Get transaction TEV (implied) & transaction MVE (implied)



  1. Benchmark precedent transactions



  1. Determine implied valuation




20% to 25% control premium paid with the transaction multiple being an implied one based upon the valuation.


Determine whether the market is good or bad based upon whether people are paying good premiums (control premiums).


When a transaction occurs, update client on the latest transaction to show them impact on the control premiums being paid and implied multiple as well.


Point to the transaction comps that have the highest control premium.






Chapter 13:

Discounted Cash Flow (DCF)




  1. Spread historical financial statements (input historicals) and derive historical ratios, trends and variables (drivers of future performance; margins and growth rates). Project financial statements (proforma). Revolver modeling to link IS, BS, and SCF



  1. Project free cash flow (FCF)



  1. Determine Weighted Average Cost of Capital (WACC) – Discount rate


Cost of equity:

Rf = 10 year treasury

Market risk premium = Rm – Rf. Refer to Ibbotson. Ultimately this is S&P returns over 70, 80, or 90 years

Beta = Levered beta of comps to unlevered median and mean of comps (unlevered beta); should be .5 to 2.5; 2 year to 5 year betas (taking out capital structure and relever to actual capital structure. With beta, we are putting capital structure on unlevered beta mean and median of comps to calculate WACC of own company.


Cost of debt: weighted average of tranches of debt tax effected; found in 10K. Rates from the notes. If private company, get from clients the tranches and to get rates, go to DCM to get approximation.



Cost of equity 20% to 25% in private markets. No use of debt is an inefficient use of capital. Trying to optimize the D/E ratio to minimize cost of financing.




  1. Determine PV of explicit projection period free cash flows



  1. Determine terminal value – EBITDA multiple which is going to be almost 80% of the company value. Terminal value = LTM multiple from comps x EBITDA. Perpetuity growth rate should be 2.5% to 3% and should not be larger than the size of the GDP of the country



  1. Calculate net present value (NPV) and determine implied valuation




Need the valuation date; this determines stub year fraction (i.e. period left in the year). Stub year fraction – investor does not have claim on revenues before that. DCF value always moving through time consistent with valuation date.


IB interviews test you on DCF. Everything else that you know is a bonus.


Do DCF to find yield to decide whether or not to invest principal.


Creating value:

$ dollars of value increased by…

Changing multiple on valuation

Decreasing the discount rate






Chapter 13:

Triangulating Valuation with the Football Field




After going through and determining the valuation range for each of the various valuation methodologies, we are going to triangulate the ultimate valuation of the target company by using the valuation football field. We are going to display each of the ranges on a chart and then paint lines with will be the ultimate valuation range for the target company and then determine the mean of the ultimate range to arrive at the valuation. The more confidence we have in a valuation, the tighter the range will be.









As perpetuities continue to grow, the builder of the perpetuity seeks to grow the perpetuity inorganically or exit the perpetuity. This is the primary role of the sell-side, which is to aid in the buying and selling of perpetuities. Investment bankers now enter the picture as this is their core work.





Part I:

How to Sell a Perpetuity?



On the sell side, the primary responsibility of the investment banker is to aid those owning perpetuities in analyzing their strategic alternatives related to inorganic growth or exit.


Which phase is the perpetuity in? (SMB, LMM, MM, UMM, L)


Which buyers are likely interested in the perpetuity? (Individual, Financial, Strategic, Special Situation)


Each of these buyers have a different valuation range

Individual – Desire 30% to 40% IRR, 3x EBITDA

Financial – 4x to 7x EBITDA

Strategic – 5x to 10x EBITDA


Valuation is a range


Determine valuation method (DCF, comp companies, precedent transactions)

Calculate benefit stream (synergistic vs. owner benefit)


Determine required rate of return given the phase of the perpetuity and the buyer (discount rate)


Convert benefit stream into present value at the discount rate

Sensitize the variables for a range of values to see effect on valuation (sensitivity table)


Strategics and financials establish their filter criteria (hurdle IRRs for financial and minimum EPS increase for strategics) and test targets against this filter


Strategics have a range of values with standalone value as the lower end and valuation with all synergies on the higher end. A deal happens usually in the middle




Chapter 30:

Investment Banking






Corporate Finance (this function is most commonly referred to as “Investment Banking”): Assist corporations in raising capital through debt and equity capital markets, and provide advisory services on mergers and acquisitions (M&A) and other corporate transactions.

Corporate Finance is broken down into several types of groups, but the primary distinction is between Product groups and Industry/Coverage groups. Each group handles its own client accounts, and is responsible for a designated product or industry sector.

Product groups: Differentiated by what types of services the groups provide. Typical groups include Mergers and Acquisitions (M&A), Leveraged Finance (Lev Fin), Equity Capital Markets (ECM), Debt Capital Markets (DCM) and Restructuring. These groups focus only on their specific products and can work across all industry groups.

Industry/Coverage groups: Differentiated by what types of clients the groups serve. Typical groups include Healthcare, Technology, Media, Telecom (TMT), Financial Institutions Group (FIG), Natural Resources, Consumer & Retail (C&R), Industrials, Real Estate, Gaming and Lodging, and Financial Sponsors.  Industry groups cover all companies in a specified industry, but have exposure to a variety of products including debt, equity, and M&A. Financial Sponsors is a unique coverage group as it does not cover a specified industry but instead serves only Private Equity firms. Private Equity firms may own multiple “portfolio” companies across a variety of industries, and have a series of unique investment banking needs.


The term “Bulge Bracket” has evolved from this origin to refer to the group of investment banks considered to be the largest and most profitable in the world. All Bulge Bracket banks have a presence in each of the world’s major geographic regions: The Americas, EMEA (Europe, Middle East & Africa), and Asia-Pacific. Additionally, their clients will typically include the largest corporations, institutions, and governments. These investment banks are usually the most prestigious to work for, and therefore generally the hardest to break into. At Bulge Bracket banks, interviews are very structured, highly competitive, and quite intense.


Bank of America Merrill Lynch (Bank of America acquired Merrill Lynch in 2008)

Barclays Capital (Barclays acquired the North American operations of Lehman Brothers in 2008)


Credit Suisse

Deutsche Bank

Goldman Sachs

JPMorgan Chase

Morgan Stanley



A “Boutique” investment bank is considerably smaller than a “Bulge Bracket” investment bank and typically focuses exclusively on advisory services (generally M&A), because it has fewer resources available to consistently execute other types of corporate transactions for its clients (such as equity offerings).  Boutiques provide the same type of advisory services for corporations as Bulge Bracket firms do, but usually work on smaller deals than they do.


That said, a few Boutique investment banks have reputations on par with those of the Bulge Bracket firms. This is primarily due to high-profile investment bankers leaving their Bulge Bracket firms in order to launch their own investment banks. In certain cases, it is actually harder to obtain a job at some of the prestigious Boutiques than it is to do so at a Bulge Bracket firm.


Top Boutique investment banks include:


Broadpoint Gleacher

Centerview Partners

Evercore Partners

Greenhill & Co.

Houlihan Lokey


Moelis & Co.

Perella Weinberg Partners


On the sell-side, the process can be broken down into four high level steps:






List of Investment Banks:

The list with the top 200 investment banks and boutiques is segmented into three main categories:


Large, International Investment Banks – 10 Banks

Large, Mid-sized, and Prestigious Boutique Investment Banks – 40 Banks

Boutique Investment Banks – 150 Banks

For groups 1 & 2, there is a standard link to the bank’s career website.


The most valuable part of this list is the information provided for group 3:



-Office Locations

-Senior Member at the Firm

-Email address

-Phone # (many of them are direct dials so be ready if you decide to cold call)

Click here to see their ranking in terms of pay, intern offer rates and career development opportunities


1) Large, International Investment Banks

  1. Goldman Sachs

Revenue: $28.811B

Net Income: $4.442B

Total assets: $923.00B

Assets under management (AUM): $828.00B


  1. Morgan Stanley

Revenue: $32.406B

Net Income: $4.111B

Total assets: $807.69B

Assets under management (AUM): $781.475B


  1. JP Morgan

Revenue: $97.234B

Net Income: $18.976B

Total assets: $2,265.79B

Assets under management (AUM): $1,923.88B


  1. Credit Suisse

Revenue: $27.05B

Net Income: $2.074B

Total assets: $1,115.9B

Assets under management (AUM): $1,307.7B


  1. Bank of America Merrill Lynch

Revenue: $94.426B

Net Income: $1.446B

Total assets: $2,129B

Assets under management (AUM): 647.126B


  1. Barclays Capital

Revenue: $50.2B

Net Income: $6.141B

Total assets: $2,431.48B

Assets under management (AUM): $253.394B


  1. Citigroup

Revenue: $78.353B

Net Income: $11.067B

Total assets: $1,873B

Assets under management (AUM): ?


  1. Deutsche Bank

Revenue: $42.999B

Net Income: $5.569B

Total assets: $2,802.71B

Assets under management (AUM): $1,445.83B


  1. UBS AG

Revenue: $29.585B

Net Income: $4.429B

Total assets: $1,510.95B

Assets under management (AUM): $2,307.16B


  1. Wells Fargo

Revenue: $86.08B

Net Income: $18.89B

Total assets: $1,422B

Assets under management (AUM): $450B


2) Large, Mid-sized, and Prestigious Boutique Investment Banks

Allen & Company

(does not have a website – old school)


Alvares & Marsal


BB&T Capital Markets


BMO Capital Markets


BNP Paribas


Broadpoint Gleacher Securities Group, Inc.


Brown Brothers Harriman


Cantor Fitzgerald


Centerview Partners


CIBC Wholesale Banking


Cowen Group


Duff & Phelps


Edgeview Partners


Evercore Partners


Friedman Billings Ramsey


Greenhill & Co.…


Guggenheim Partners


Harris Williams & Co.


Houlihan Lokey Howard & Zukin


Jefferies & Company


Keefe Bruyette & Woods Inc.


Lazard Ltd


Moelis & Company


Montgomery & Co.


Morgan Keegan


Nomura Holdings, Inc.


Oppenheimer & Co.


Perella Weinberg Partners


Peter J. Solomon Company


Piper Jaffray


Raymond James Financial Inc.


RBC Capital Markets


Robert W. Baird & Company




Royal Bank of Scotland


Sandler O’Neill + Partners L.P.


Stephens Inc.


The Blackstone Group


Thomas Weisel Partners/Stifel Financial


William Blair & Company




3) Regional/Boutique Investment Banks

Aethlon Capital

Minneapolis, MN

Ms. Sima Griffith, Managing Principal,, (612) 338-0934


Alderwood Capital

San Francisco, CA

Mr. Christopher Beros, Managing Director,

(415) 874-3382


Alexander Hutton

Seattle, WA

Mr. Thomas Elzey, Managing Director,, (206) 792-1968


Allegiant Capital Corporation

Dallas, TX; Chicago, IL; Lake Elmo, MN; New York, NY; Seattle, WA.

Mr. Terry Fick, Senior Managing Director,, (214) 540-8109


Allen C. Ewing & Co.

Jacksonville, FL; Charlotte, NC

Mr. Morgan Payne, Managing Director,, (904) 354-5573


Allison-Williams Company

Minneapolis, MN

Mr. David Kluender, Executive Vice President, (612) 333-3475


America’s Growth Capital

Boston, MA; Silicon Valley, CA

Mr. Scott Card, Partner,, (617) 261-4140


Anderson LeNeave & Co.

Charlotte, NC

Mr. Gregory LeNeave, Managing Director,

(704) 552-9212


Antaeus Capital

Los Angeles, CA

Mr. Cesar Moya, President & CEO, (310) 788-8653


Aquilo Partners

San Francisco, CA

Mr. John Dyer, Managing Director. (415) 677-8989


Aramar Capital

New York, NY; San Francisco, CA

Mr. Jeffrey Lehman, Founder, n.a., (212) 708-0700


Arbor Advisors

Palo Alto, CA

Mr. Stan Christensen, Managing Director,, (650) 305-2582


Archway Capital Management

Dallas, TX; Washington, D.C.

Mr. A. Joseph Shepard, President, (214) 614-8444


Asante Partners

New York, NY; Menlo Park, CA

Jennifer Hasley, Founder & Managing Director,

(650) 566-9364


Ascendiant Capital Group Inc.

Irvine, CA

Mr. Bradley Wilhite, Co-Founder & Executive Managing Director, (949) 259-4949


Ascent Partners

Rachno Santa Margarita, CA

Mr. Scott Foresman, Managing Director,,

(619) 300-8200


Aspen Advisors

Dallas, TX

Mr. Marc Still Partner,, (214) 292-5000


Averil Capital Markets Group, Inc.

Los Angeles, CA

Ms. Diana Maranon, Managing Partner, (310) 553-5351


AZCA, Inc.

Menlo Park, CA

Mr. Masazumi Ishii, Managing Director,, (650) 324-9100


Babson Capital Management LLC

New York, NY; Boston, MA; Charlotte, NC; Hartford, CT; Springfield, IL; Washington, DC


Bailey Southwell & Co.

Nashville, TN; St. Louis, MO

Mr. Jack Bailey, Co-Founder & Partner, (615) 371-6155


Baldwin & Clarke Corporate Finance, Inc.

Bedford, NH

Mr. John Clarke, Jr., President, (603) 668-4353


Barman Capital LLC

New York, NY; Los Angeles, CA

(310) 421-0270


Bengur Bryan & Co., Inc.

Baltimore, MD

Mr. Chris Royston, Managing Director, (443) 573-3030



Detroit, MI

Mr. Jeff Bocan, Managing Director,, (248) 489-9000


Berkshire Capital

New York, NY; Denver, CO

Mr. Ted Gooden, Managing Director,, (212) 207-1043


Boenning & Scattergood

Philadelphia, PA; Pittsburgh, PA; Marmora, NJ; Powell, OH

Ms. Kathy Wilhelm, Executive Vice President, (800) 883-1212


Boston Capital Advisors

Boston, MA

Mr. Mark Slater, Founder & Managing Partner, (617) 669-5281


Brean Murray, Carret & Co., LLC

New York, NY

Mr. William McCluskey

President & CEO,, (212) 702-6505


Broadmark Capital Corporation

Seattle, WA; New York, NY

Mr. Joseph Schocken, President,, (646) 467-8615


  1. K. Cooper & Company

Irvine, CA; Chicago, IL; New York, NY

Mr. William Porter, Managing Director, (888) 477-9301


Cain Brothers & Company, LLC

New Ywork, NY; Atlanta, GA; Chicago, IL; Houston, TX; Indianapolis, IN; Orlando, FL; San Francisco, CA; St. Louis, MO

Mr. Andrew McB. Garvey, Head of Capital Markets, (212) 869-5600


Capital Alliance Corporation

Dallas, TX

Mr. Edward Dawson, Chairman, President & CEO, (214) 638-8280


The Capital Corporation

Greenville, SC; New York, NY; Spartanburg, SC

Mr. Dan Adams President & CEO (846) 672-8400


Cappello Capital Corp.

Santa Monica, CA; Austin, TX

Mr. Alexander Cappello, Managing Director,, (310) 393-6632


Capstone Partners, L.C.

Boston, MA

Mr. John Ferrara, Founder & Managing Partner, (617) 619-3325


Cary Street Partners LLC

Richmond, VA; Abingdon, VA; Atlanta, GA; Fredricksburg, VA; Greensboro, NC; Staunton, VA

Mr. Tom Tullidge, Managing Director, , (804) 521-3340


Cascadia Capital LLC

Seattle, WA

Mr. Michael Butler, Chairman & CEO, (206) 436-2500


Caymus Partners LLC

Atlanta, GA; New York, NY

Mr. Geoffrey L. Faux, Managing Partner,, (404) 995-8302


CBIZ Mergers & Acquisitions Group, Inc.

Atlanta, GA

Mr. Douglas Hubert, Managing Director,, (770) 858-4491


Challenger Capital Group, Ltd.

Dallas, TX; Chicago, IL

Mr. Michael Burr, President & Executive Director, (630) 908-7248


Cherry Tree Investments, Inc.

Minnentonka, MN; Denver, CO

Mr. Tony Christianson, Managing General Partner, (952) 893-9012


Clayton Capital Partners

St. Louis; Golden, CO; Dallas, TX

Mr. Kevin Short, Managing Partner,, (314) 725-9939


Coady Diemar Partners, LLC

New York, NY; Peapack, NJ

Mr. Robert Diemer, Jr. Managing Director,, (212) 901-2600


Cogent Partners

Dallas, TX; New York, NY

Mr. Scott Myers, Managing Director,, (214) 871-5407


Colchester Partners, LLC

Boston, MA

Mr. Franklin Kettle

Managing Director,, (617) 896-0200


The Colmen Group

Wayne, PA

Mr. Peter Colella, Managing Director,, (610) 964-9020


Colmen Menard Company, Inc.

Wayne, PA

Mr. David Menard, President & CEO,, (484) 367-0300


Columbia West Capital, LLC

Scottsdale, AZ; El Segundo, CA; Salt Lake City, UT

Mr. John Farr, Managing Director,, (480) 664-3949


Consensus Advisors LLC

Boston, MA; New York, NY

Mr. Michael O’Hara, Founder & CEO, (617) 437-6500


Consilium Partners LLC

Wellesley, MA

Mr. Gregory Sneddon, Senior Managing Director,, (617) 267-0600


Converge Capital

Dallas, TX

Mr. Jim Stone, Partner & CEO,, (972) 726-1911


CDI Global

Boca Raton, FL; Chicago, IL; Evergreen, CO; Darien, CT; Los Angeles, CA;

Wilmington, DE

Mr. Terry A. Busskohl, Partner,, (203) 655-5436


Corporate Finance Associates Worldwide

CFA has offices in 17 states throughout the US

Mr. Robart Contaldo, Managing Partner,, (847) 836-7035


The Rodman Energy Group

Houston, TX; Simsbury, CT

Mr. T. Prescott Kessey, Managing Director,, (713) 654-8080


The Courtney Group

Los Angeles, CA; Newport Beach, CA

Mr. Tom Courtney, Founder,, (949) 706-3600


Covington Associates LLC


Craig-Hallum Capital Group LLC

Minneapolis, MN; Boston, MA; Philadelphia, PA

Mr. Rick Hartfiel, Director of Investment Banking,

(612) 334-6381


Crosskeys Capital

Ft. Lauderdale, FL; Chicago, IL; Baltimore, MD; Philadelphia, PA; Tampa, FL

Mr. David Burns, Managing Director,, (954) 779-2600


D.A. Davidson & Co.

Davidson Companies has over 60 office locations throughout the United States in these states: California, Colorado, Iowa, Idaho, Massachusetts, Minnesota, Missouri, Montana, Nebraska, Ohio, Oklahoma, Oregon, Utah, Washington, Wyoming

Mr. Doug Woodcock, President of Equity Capital Markets, (503) 603-3001


Dahlman Rose & Company, LLC

Boston, MA; Houston, TX; New York, NY; San Francisco, CA

Mr. Alexander Khutorsky, Managing Director, Head of Mergers & Acquisitions, (212) 920-2940


Davidson Capital

Santa Rosa Beach, FL; Atlanta, GA

Mr. Thomas Davidson, Sr. President,, (202) 365-7000


DecisionPoint International

Charlotte, NC; St. Louis, MO

Mr. Douglas Ellis, Managing Partner,, (704) 248-1122


DeSilva & Phillips, LLC

New York, NY

Mr. Jeffrey Dearth, Partner,, (202) 338-5790


Dinan & Company, LLC

Phoenix, AZ

Mr. John Kelly, Executive Vice President,, (866) 447-3500


Dougherty & Company LLC

Minneapolis, MN

(612) 376-4000


Dresner Partners

Chicago, IL

Mr. Brian Graves, Managing Director,, (312) 780-7237


Duncan-Williams, Inc.

Charlotte, NC; Chicago, IL; Cleveland, OH; Hattiesburg, MS; Houston, TX; Jackson, MS; Jersey City, NJ; Knoxville, TN; Los Angeles, CA; Memphis, TN; Nashville, TN; New York, NY; Philadelphia, PA; San Francisco, CA; Seattle, WA

Mr. Ben Labry, Executive Managing Director,, (901) 260-6833


Eastdil Secured

Atlanta, GA; Boston, MA; Chicago, IL; Dallas, TX; Los Angeles, CA; Orange County, CA; Richmond, VA; San Diego, CA; San Francisco, CA; Silicon Valley; Washington, DC (212) 315-7200


Energy Spectrum Advisors

Dallas, TX

Mr. Charlie Lapeyre, Managing Director ,

(214) 987-6123


Falkenberg Capital Corporation

Denver, CO

Mr. Bruce Falkenberg, President,, (303) 320-4800


Fennebresque & Co.

Charlotte, NC

John Fennebresque, Founder & Managing Partner, (704)295-8902


Ferghana Partners Group

Boston, MA; New York, NY

Mr. William Kridel, Jr. Managing Director,,

(212) 986-7900


Financo, Inc.

Los Angeles, CA; New York, NY, (212) 593-9000


First Southwest Company

Over 20 offices in the following statesL Alaska, Arkansas, California, Colorado, Connecticut, Florida, Massachusetts, New York, North Carolina, Rhode Island, Texas Mr. Stephen Johnson, Managing Director, (214) 953-8856


FMI Corporation

Denver, CO; Napa, CA; Phoenix, AZ; Raleigh, NC; Tampa, FL

Mr. William Hill, Managing Director,, (303) 398-7237


FocalPoint Partners LLC

Los Angeles, CA

Mr. Daniel Conway, Managing Director,, (310) 405-7000


Focus Strategies, LLC

Austin, TX

Mr. F. Gary Valdez, Founder,, (512) 477-3280


Gemini Partners Inc.

Baltimore, MD; Los Angeles, CA

Mr. Jeff McKenzie. Managing Director, Head of Mergers & Acquisitions, (310) 696-4009


Genesis Capital, l.l.c.

Atlanta, GA

Mr. Jeffrey Villwock, Managing Director,, (404) 816-7503


Gilford Securities

Fort Lauderdale, FL; Melville, NY; Morristown, NJ; New York, NY; Spokane, WA; Westhampton Beach, NY

Mr. Robert Maley, President,


Goldmark Advisers, Inc.

New York, NY

Mr. Jeffrey Gold, President,, (212) 779-6059


Grace Matthews

Milwaukee, WI

Mr. John Beagle, Managing Director,, (414) 278-1120


Gramercy Venture Advisors

San Francisco, CA

Mr. Dave Weinstein, Partner, (415) 543-3000


Green Manning & Bunch, Ltd.

Denver, CO; Phoenix, AZ

Mr. Chris Hammond, Managing Director,, (303) 592-4820


Greene Holcomb & Fisher LLC

Minneapolis, MN; Phoenix, AZ; Seattle, WA

Mr. Chip Fisher, Managing Director,, (612) 904-5704


Greif & Co.

Los Angeles, CA

Mr Jeremy Back, Director,, (213) 346-9269


GrowthPoint Technology Partners, LLC

Palo Alto, CA

Mr. Michael Shepherd, Managing Director,, (650) 322-2306


GTK Partners

Los Angeles, CA; New York, NY; San Francisco, CA

Mr. James Turo, Managing Director ,, (310) 694-8202


Hales & Company, Inc.

Chicago, IL; New York, NY; San Francisco, CA; Seattle, WA

Mr. Mike Fletcher, Partner,, (212) 592-5700


Harvey & Company LLC, Newport Beach, CA,

Mr. Eric Hartley, Managing Director (949) 757-0400


Headwaters MB

Boston, MA; Burlington, VT; Denver, CO; Irvine, CA

Mr. John Ippolito, Managing Director,, (781) 273-6062


HealthCare Markets Group

Houston, TX

Mr. Francis Curry, Managing Director,, (713) 629-6070


High Rock Partners

Research Triangle Park, NC

Mr. Kenneth Marks, Managing Partner,, (919) 256-8152


Hoefer & Arnett, Inc.

Atlanta, GA; Austin, TX; Charlotte, NC; Chicago, IL; Cohasset, MA, Marblehead, MA; Raleigh, NC; San Francisco

Mr. Thomas Lynch, Managing Director,, (312) 655-2980



Austin, TX; Chicago, IL; Dallas, TX; Los Angeles, CA; Palm Beach

Mr. James Hill, Managing Director,, (310) 535-9200


Imperial Capital, LLC

Boston, MA; Los Angeles, CA; Houston, TX; Minneapolis, MN; New York, NY;

Mr. John Mack, Head of Mergers & Acquisitions, (310) 246-3705


Integris Partners

Denver, CO

Mr. Patrick Seese, Managing Director,, (303) 825-9618


Janney Montgomery Scott

Over 50 offices Nationwide

Mr. Cliff Booth, Managing Director,, (215) 665-6000


JD Ford & Company, L.L.C.

Dallas, TX; Denver, CO; Orange County, CA (303) 333-3673


JH Chapman Group L.L.C.

Chicago, IL

Mr. David Epstein, Principal,, (773) 693-4800


JMP Group Inc.

Boston, MA; Chicago, IL; New York, NY; San Francisco, CA

Mr. Peter Hunt, Director of Mergers & Acquisitions, (212) 906-3500


Jordan, Knauff & Company

Chicago, IL; Kansas City, MO;

Mr. Thomas Knauff, Managing Principal, (312) 254-5900


Kaufman & Company, LLC

Boston, MA

Mr. Seth Kaufman, Managing Director,, (617) 426-0444


Kerlin Capital Group, LLC

Los Angeles, CA

Mr. William Doyle, Managing Partner,, (213) 627-3300


Kurt Salmon Associates Capital Advisors, Inc.

Atlanta, GA; Los Angeles, CA; Minneapolis, MN; New York, NY; San Francisco, CA (212) 319-9450


Ladenburg Thalmann

Boca Raton, FL; Lincolnshire, IL; Los Angeles, CA; Miami, FL; Melville, NY; New York City, NY;

(212) 308-9494


Laidlaw & Company (UK) Ltd.

Boerne, TX; Fort Lauderdale, FL; Miami, FL; Melville, NY; New York, NY; San Francisco, CA; Stamford, CT

Mr. Alex Shtaynberger, Director,, (212) 697-5200


Landmark Ventures

New York, NY; San Francisco, CA (212) 268-8500


Leerink Swann & Company, Inc.

Boston, MA; New York, NY; San Francisco, CA

Mr. James Boylan, Senior Managing Director, (617) 248-1601


Lincoln International LLC

Chicago, IL; Los Angeles, CA; New York, NY

Mr. Robert Brown , Managing Director, (312) 580-8340


  1. R. Beal & Company

Chicago, IL; Dallas, TX; New York, NY; Sacramento, CA

Ms. Donna Sims-Wilson, President,, (212) 983-3930


Matrix Capital Markets Group, Inc.

Baltimore, MD; Richmond, VA

Mr. Jeff Moore, President,, (804) 780-0060


Maxim Group LLC

New York, NY

Mr. John J. Garrity, Managing Director,, (212) 895-3624


Mazzone & Associates, LLC

Atlanta, GA

Mr. Michael Bllom, Managing Director,, (404) 931-8545


Mesirow Financial Holdings, Inc.

Chicago, IL; New York, NY

Mr. John Chrysikopoulos, Managing Director,, (212) 351-8181


MidMarket Capital Advisors, LLC

Philadelphia, PA

Mr. Graem Howard, Managing Director,, (215) 875-8201


Milestone Merchant Partners LLC

Miami, FL; Newport Beach, CA; Washington, DC

Mr. David Doyle, Managing Director,, (202) 367-3005


Miller Buckfire

New York, NY

Mr. Jason Anderson, Managing Director, (212) 895-1849


Morgan Joseph & Co. Inc.

New York, NY

Ms. Sharon Reaves, Head of Investment Banking Recruiting, (212) 218-3984


Munda SICAV Valor Investments

Madrid, ES

Mr. Andres García Bartolomé, President, 0034 912 771 024


Needham & Company

Boston, MA; Menlo Park, CA; New York, NY; San Francisco, CA

(212) 371-8300


Newbury Piret

Boston, MA

Mr. Allen Fullerton, Managing Director,, (617) 367-7300


North Point Advisors

San Francisco, CA

Mr. Bill Placke, Managing Director,, (415) 358-3500


Pagemill Partners, L.L.C.

Palo Alto, CA

Mr. Mark Grossman, Managing Director,, (650) 354-4086


PierCap Partners

PierCap Partners, M&A Investment Bank, San Diego, Irvine

San Diego, CA, Orange County, CA

Mr. Zaheer Dhruv, Managing Director,, 858.342.7517

Mr. Ashish Jariwala, Managing Director,, 646.701.2359


Pegasus Intellectual Capital Solutions LLC

Chicago, IL 60602-4270

Charles Smith, Managing Partner,, (312) 951-0100


Pharus Advisors, LLC

New York, NY; San Francisco, CA

Mr. Michael Goodman, Managing Director,, (212) 904-0100


Philpott Ball & Werner

Boston, MA; Charlotte, NC

Mr. Edward Werner, President,, (978) 526-4200


Reynolds Advisory Partners

Denver, CO

Doug Reynolds, Managing Director,


Roth Capital Partners, LLC

Los Angeles, CA; Newport Beach, CA; New York, NY; Radnor, PA; San Diego, CA; Seattle, WA

Mr. Michael Chill, Managing Director,, (646) 358-1905


Sagent Advisors

Charlotte, NC; Chicago, IL; New York, NY; San Francisco

Mr. David Bain, Managing Director, (415) 489-4400


Salem Partners LLC

Los Angeles, CA

Mr. Trevor Bohn, Managing Director,, (310) 806-4200


Savvian, LLC

Chicago, IL; Menlo Park, CA; New York, NY; San Francisco, CA

Mr. James Avery, Managing Director,, (415) 318-3600


Seven Hills Group LLC

San Francisco, CA

Mr. David Weiss, Partner,, (415) 869-6225


Shattuck Hammond Partners

Atlanta, GA; Chicago, IL; Nashville, TN; New York, NY; San Francisco, CA

Mr. Phillip Camp, Managing Director,

(212) 314-0400


Shoreline Pacific LLC

San Francisco, CA

Mr. Paresh Patel, Director of Corporate Finance,

(415) 477 9908


Signal Hill Capital Group LLC

Baltimore, MD; Nashville, TN; San Francisco, CA

Mr. Justin Balciunas, Managing Director,, (443) 478-2400


Silver Lane Advisors LLC

New York, NY

Elizabeth Bloomer Nesvold, Managing Partner,, (212) 883-9400


Sperry, Mitchell & Company

New York, NY

(212) 832-6628


St. Charles Capital, LLC

Denver, CO

Mr. Wesley Brown, Managing Director,

(303) 339-9099


Susquehanna International Group, LLP

Bala Cynwyd, PA; Boston, MA; Chicago, IL; New York, NY; Pasadena, CA; San Francisco, CA; Stamford, CT

(610) 617-2600


SVB Alliant

Palo Alto, CA; Santa Clara, CA

Mr. Brian Larson, Head of Human Resources,, (408) 654-7400


The Riderwood Group Inc.

Baltimore, MD

Mr. Mitchell Fillet President,, (410) 825-5445


ThinkEquity Partners LLC

Boston, MA; Chicago, IL; Minneapolis, MN; New York, NY; San Francisco

Mr. Doug Gonsalves, Head of Mergers & Acquisitions, (415) 249-2900


Trinity Capital LLC

Los Angeles, CA

Mr. Chad Spaulding, Managing Director,,

(310) 231-3109



Edina, MN

Mr. Scott Tudor, Managing Director,, (952) 253-5300


Triton Pacific Capital, LLC

Los Angeles, CA

Mr. Joseph Davis, Managing Director,, (310) 943-4990


Updata Capital, Inc.

New York, NY, Reston, VA

Mr. John MacDonald, Partner,, (212) 710-5795


Viant Capital LLC

San Francisco, CA

Stephen Gurney, Director,, (415) 820-6116


Waller Capital Corporation

New York, NY

Mr. Jeffrey Brandon, Managing Director,, (212) 632-3600


Westlake Securities LLC

Austin, TX; Houston, TX

Mr. Randy Finch, Managing Director,, (512) 306-1651


Wilcox Swartzwelder & Co.

102 Decker Court, Suite 204, Irving, TX 75062

Jason Wilcox, Founder & Managing Director,, (972) 831-1300


Windstone Capital Partners, Inc.

Scottsdale, AZ

Mr. Bill Miller, Managing Director,, (602) 224-2400


XRoads Solutions Group

Santa Ana, CA

Mr. Dennis Simon, Head of Corporate Restructuring,, (949) 567-1612


Investment Banks & Capital Markets:

Investment banks act as an intermediary between the build-side (uses of capital) and the buy-side (sources of capital). The investment bank will analyze, structure and market the financial product (perpetuity or annuity) to the appropriate sources of capital that match with the investment mandate.


For financing product of IB, the investment bank does a private placement of either debt or equity (IPO?). The investment bank underwrites the financial product (perpetuity or annuity) and packages it, and then markets it and takes a fee for doing so. Acts as an intermediary between the build-side and the capital markets (buy-side).


Investment bankers underwrite, package, market and sell financial products with variable interest rates into perpetuity, called perpetuities. They are the go between the build-side and the buy-side. The perpetuities they sell typically grows at about 5 to 6 percent per year in revenues, earns about a 13 percent return on equity (IRR), and has a 9 percent cost of capital. The resulting P/E ratio (multiple) is 15x. Buyers of perpetuities are financial buyers called private equity and strategic buyers called corporations. Interest rates vary by industry. There is a difference between interest rate and rate of return where there is movement in the valuation of the perpetuity due to market demand.



Since M&A (Mergers & Acquisitions) is the core product of investment banking, discussions around investment banking typically relate to M&A. M&A is the selling of a perpetuity in the form of a corporation to either a financial or strategic buyer. Financial and strategic buyers have what is known as investment/corporate M&A mandates which detail the size and industry of prospective targets for acquisition. The investment banker takes these mandates and matches them with targets and takes a fee for doing so. Investment bankers typically focus on one industry and provide what is known as coverage by building an index of public companies and tracking changes in targets relative to the index in terms of:






The investment banker monitors trends in these variables and determines the optimal time to sell (when multiples are strong) or acquire (when multiples are weak) and advises target management accordingly. When a target agrees to sell via an investment banker, this relationship is known as a sell-side mandate and an M&A process will be led by the investment banker. During the M&A process, there are definite steps and deliverables including a teaser, CIM, and management presentation. The M&A process can include many prospective buyers (broad auction) or few prospective buyers (targeted or negotiated sale).

The investment banking core product is M&A. As such, the investment banker’s role is to aid in the growth of perpetuities via an inorganic strategy (merger, acquisition).


The real work of M&A is origination, matching and deal-structuring. Financial modeling and valuation is merely for decision support and deals often get done simply based upon precedent transactions analysis. Thus, the priority of the investment bankers is to obtain a base level understanding of financial modeling & valuation but then to immediately start originating sell side and buy side mandates.


Investment bankers explore strategic alternatives (value creation opportunities) with corporation’s CEO’s/owners.




Valuation Football Field and the Midpoint is the final valuation of the company.


Calculate NPV and IRR to the sponsor in LBO or EPS Change and Balance Sheet Effects in Merger


Compare NPV and IRR OR compare EPS change and BS effects to other strategic alternatives and choose the highest return/EPS alternative


Ultimately, as an investment banker, you are to:


Use valuation methodologies to determine valuation ranges of each strategic alternative and see if capital sources match uses. IBankers should provide the client with tight ranges on valuation.


Use an operating model of the target (and acquirer if strategic) and then tailor it to the specific client:

Financial (LBO)

Strategic (Merger)



NPV and IRR for financial in LBO

EPS change and balance sheet effects for strategic in merger M&A


Run the M&A process


Traditional Investment Bank Responsibilities:


Junior Banker:

Industry coverage

Comps and comp transactions (where are multiples)


Mid Banker:

Operating model creation + tailored to transaction client (LBO or Merger)

Manage M&A process

Senior Banker:

Revenue center

Personal contacts at firms to win engagements




Chapter 30:

Strategic Management & the Investment Banker






Investment Bankers & Strategic Alternatives

Investment  bankers  identify  the  business  opportunities  that  can  generate  the  most  attractive  equity  valuations  and implement strategic  plans  to  capitalize  on  those  prospects. Determine strategic alternatives with management after discussing market (m&a, financing, value chain of industry, where ROA is coming from, what the equity markets are rewarding with higher multiple)


Then model the strategic alternatives in excel


involving  an  investment  bank  in  an  organization’s  strategic  planning  process


When  the  time  is  right  to  execute  on  a  strategic  or  financial  transaction,  an  investment  bank  serves  as  a  strong  advocate  for  the  client during  the  transaction  marketing  process.


An  investment  bank  can  help  shape  a  company’s  strategic  plan

Using  feedback  from  strategic  and  financial  investors,  a  firm  can  direct  its  efforts  to  exploring  business  opportunities  that are  viewed  favorably  by  the  investment  community  and  strategic  investors.  This  approach  to  long  range  strategic  planning  can  yield significant valuation gains over time.


allow  a  firm  to  sell  opportunistically  when  the  market  is  robust  and, conversely,  buy  when  the  market  experiences  softness. Without  an  investment  bank’s  input  into  a  firm’s  strategic  plans,  the  likelihood  of mis-timing  the  market  and  underperforming  increases  greatly.


Senior  executives  should  make  contact  with  their  chosen  senior  investment  banker  at  least  once  a  quarter.  Discussion  topics  during this  update  session  may  include  operational  developments  and  strategic  initiatives,  financial  results,  and  market  intelligence  on  the strategic  wish  list  as  well  as  broader  investment  objectives.  Ideally,  conducting  this  discussion  in  advance  of  any  board  meetings  will ensure  that  a  company  is  fully  apprised  of  any  new  developments  in  the  marketplace  and  can  develop  strategies  that  incorporate them.

Conducting  an  annual  review  of  the  firm’s  strategic  alternatives  with  an  investment  bank  can  yield  new  insights.  By  reviewing  a  firm’s strategic  alternatives  with  respect  to  capital  raising,  partnership  opportunities,  and  shareholder  liquidity  options,  the  company  can chart  a  course  for  the  long  term.  With  the  feedback  from  this  review  as  a  backdrop,  a  firm  can  kick-off  its  internal  strategic  planning process and create a framework for optimizing the company’s resources and opportunities for the coming year.


Strategic alternatives pitch.  Student teams develop a bank-quality  strategic alternatives pitch and deliver their recommendations to the CFO or head of  strategy  of  a firm.


The breakdown of your index into separate indices for subsector allows you to build your value chain for the industry and highlight what the equity markets are rewarding, where ROA is coming from.


Evaluating Strategic Alternatives

Most companies, particularly well-managed businesses, have multiple strategic options available for both liquidity and growth. Evaluating Strategic Alternatives (ESA) is a formal review, analysis, and decision-making process that guides owners in assessing their financial and strategic options. The ESA process helps owners clarify and prioritize their personal and business objectives based on their company’s strategic direction, financial characteristics, and shareholder liquidity preferences.


Whether an owner’s goal is to expand the business, or to pursue a value-optimizing exit strategy, our investment banking team’s ESA assessment provides an objective, market-based valuation, as well as the options to achieve the value, and the implications of each option for the owner. The output from an ESA assessment includes a framework for strategic and operational decision-making; alignment between the owner’s long-term business objectives and the needs of the management team and shareholders; optimization of wealth transfer between shareholders; and coordinated tax structuring and exit planning strategies.


Essentially, investment bankers determine the valuation of the company under a number of strategic alternatives using comp companies, precedent transactions, DCF, LBO analysis and Merger analysis. The investment bank is usually asked by a company or pitches the prospect of reviewing strategic alternatives for the company.


The first step is to determine valuation (football field) under different scenarios including as is, change in capital structure, and sale to a strategic or financial buyer.  The max valuation is then communicated as a recommendation to the Board of Directors of the company. The investment banker then recommends a process to be run by the investment bank in order to execute on the strategic alternative.


Strategic Management:

Strategic plan (industry value chain optimized financial statement model with scenarios + valuation), strategic goals, corporate projects, executing corporate projects (business case development, project proposal, selection), tracking project benefits individually and in aggregate in relation to strategic plan


A strategic plan links the vision and the mission to the economic reality of the business expressed in a financial statement model. The schedule for revenues is broken down by segments which is broken down further by corporate projects (that have been accepted).


Strategy is how you plan to add monetary value from a valuation perspective

Strategic plan is where you are (historicals and current valuation), where you want to be (from a multiples perspective and EBITDA), and then building backwards from then until now.


Business level strategy is how do we compete in a distinct business

Corporate strategy is how do we bring the businesses together in a way that adds value?


Business strategy is where projects/programs emanate.


Industries change in attractiveness in terms of profitability at any given time

What is the average ROI/ROA in the industry? Is your perpetuity above or below this?


In order to beat the average, must have a competitive advantage

Part of performance has to do with the industry. Part of the performance has to do with are you better or worse than the competition (positioning)

5 forces acting on the corporate arbitrage to weaken it


Industry analysis to understand ROA of the industry given an index of public comps that you are maintaining


Second is positioning, higher price with positioning or lower cost to improve ROA


Are you a premium priced differentiator or a cost leader with an acceptable product


Positioning will relate to an analysis of the value chain. Where are ROAs at each step of the value chain?

Every business has a value chain and the early company must build out its value chain


All competitive advantage comes from the value chain

Where does competitive advantage come from in the value chain?

Projects/programs connected to some part of the value chain

Operate at best practice through each step of the value chain

Managers must identify best practice, validate them, then do them

Operationally effective means assimilating best practices

How to configure the value chain to deliver on the value proposition (differentiation) that your competitors cannot


Strategy is configuration of the value chain in a differentiated way past best practice. Pioneering new best practices


Best practices are founded by projects and programs


financial  plan is budgeted  financial statements


Investments must at least earn the cost of capital. If investments earn above cost of capital, market value will increase. If investments earn lower, market value will decrease


Capital markets can be broken down into primary markets and secondary markets. Primary markets are those markets where new issues of securities are sold. Secondary markets are where outstanding securities are traded (such as the New York Stock Exchange).


strategic  planning  is a way  of  preparing  for  the future  by  attempting  to  simulate  the  future via financial statement models


Strategic planning: Analyze current capabilities in the industry value chain and ROIs on each step in value chain. Analyze industry value chain average ROIs and compare. What capabilities in industry value chain to build next to increase ROI?


This marks strategic goals; will they be accomplished organically or inorganically?


These strategic goals should be included in the FSM&V to show the impact on value.


Vision and mission statement before strategic goals


  1. Determine position (industry value chain & ROIs)
  2. Develop strategy (grow current capabilities, acquire/build new in order to organize firm value chain in a differentiated way)
  3. Develop plan to acquire/build capability along with FSM
  4. Implement the plan
  5. Measure against the plan actual results


Strategic Alternatives & Strategic Management Process:


Strategic Analysis & Choice

Strategy choice involves the evaluation of alternative strategies and selecting the best one. It involves the following steps:


  1. Focusing on strategic alternatives
    1. Involves the identification of alternatives. The strategist examines what the organization wants to achieve (desired performance) and what it has really achieved (actual performance). The gap between the two is the background for various alternatives (gap analysis). The gap can be filled via the industry value chain and either deepening activities in an existing part of the industry value chain or entering a new part of the industry value chain.
  2. Evaluating strategic alternatives
    1. Involves the modeling of the strategic alternative in a financial statement model in excel. Corporate scenario analysis means creating pro forma balance sheets and income statement to forecast the strategic alternative’s impact.
  3. Strategic choice


Gap Analysis

When doing a strategic analysis via financial planning & analysis within a corporation, we are going to model pro forma financial statements based upon historical assumptions carried forward into the future. This is going to give us an understanding of where we will be if we do nothing differently. We can then identify where we would like to be from a valuation perspective and then go about identifying strategic alternatives that can fill the gap between where we are now and where we want to be.



Plans, Programs & Projects

The strategic plan devised by the organization proposes the manner in which the strategies will be put into action. Strategies are accompanied by the implementation of tools including plans, programs, and projects. The strategy itself will be broken down into different plans to chunk the work. Within the plans, there are various programs to chunk the work further into smaller components. Programs then lead to the formulation of projects. A project possesses a time schedule and costs (budget) and requires the allocation of funds based upon capital budgeting by organizations. Projects require resources inputs and systems.


Perpetuity Management:


The Purpose of the Company

Companies exist to create value


How Companies Create Value

Companies create value by investing capital at rates of return that exceed their cost of capital. This is the principle of value creation.


The only thing that differs across companies is the implementation (i.e. different asset and capitalization mix)


Strategy & Finance


Valuation Drivers



The Role of the CEO



Perpetuity Management






Perpetuity Management with Discounted Cash Flows



Growth or Restructuring



Perpetuity Management Process




Measuring Value Added: ROIC vs. Market Return


Measure return on invested capital (after-tax operating profits divided by capital invested in working capital, PP&E) and compare it with stock market returns


Measuring Value Added: Economic Profit & NPV


Economic profit = ROIC spread % over cost of capital x invested capital


The objective is to maximize economic profit. When the company is larger, one should use Net Present Value (NPV) which calculates economic profit in a more robust and flexible fashion.


Valuation in the Public Markets


Valuation in the public markets has investors paying for the performance they expect the company to achieve in the future; investors ultimately end up paying more since their valuations are not based upon the past or cost of the assets.


The CEO should endeavor to have his company in the public markets since the largest multiples are applied in valuation


Real Markets & Financial Markets


When a public company, the CEO has to both maximize the intrinsic (DCF) value of the company and manage the expectations of the financial market


Differences between actual performance and market expectations and changes in these expectations drive share prices. The delivery of surprises produces higher or lower total shareholder returns


Perpetuity Planning & Control (i.e. Management)


Planning & control system should be put in place to monitor the NPV of every business unit and summed to get the NPV of the corporation. Economic profit (i.e. NPV) targets set annually for next three years, progress monitored monthly and managers’ compensation tied to economic profit against these targets


Value Metrics


Metrics are to drive decisions and guide all employees toward value creation.


Perpetuity Planning & Control (i.e. Management) in Practice


Corporate management sets long-term value creation targets in terms of market value of a company or total returns to shareholders (TRS)

Strategic alternatives valued in DCF (i.e. NPV)

Intrinsic value of chosen strategic alternative translated into short and medium term financial targets and then targets for operating and strategic value drivers


Performance assessed by comparing results with targets on both financial indicators and key value drivers. Managerial rewards linked to performance on financial measures and key value drivers


Value Metrics: Market Value Added & Total Return to Shareholders


Market Value Added is the difference between the market value of a company’s debt and equity and the amount of capital invested. Measures financial market’s view of future performance relative to capital invested in business.


Total Return to Shareholders measure performance against the expectations of financial markets and changes in these expectations. TRS measures how well a company betas the target set by market expectations


Value Metrics: DCF vs. Earnings Multiple


DCF is intrinsic value. Earnings multiples are market values.


Earnings alone is inadequate without understanding the investment required to generate the earnings. Should know ROIC


Cash Flow


Cash flow equals the operating profits of the company less the net investment in working capital and fixed assets to support the company’s growth.


Perpetuity Management Capability


  1. Analyze where perpetuity is currently at (which phase)
  2. Determine which phase is the goal
  3. Determine steps to get to next phase of the perpetuity
  4. Build Work Breakdown Structure (WBS) to get to next phase working backward from the next phase
  5. Execute the plan


Perpetuity Lifecycle:




Chapter 31:

How to Build a Middle Market M&A Practice Methodology


In order to build a middle market M&A practice, one must fulfill the two parts of investment banking; coverage & origination and running the M&A process. Coverage & origination is usually reserved for the highest levels of the front office including the Managing Director of the coverage group. In building your own M&A practice, you are going to need to act as the Managing Director yourself as well as fulfill the M&A process once you land an M&A engagement. The following page shows both processes that will be running simultaneously.



  1. Coverage & origination
    1. IB product choice
      1. M&A
      2. Financing
  • Growth advisory
  1. Industry coverage choice
  2. Index building
  3. Multiple, margin & growth tracking
  4. Coverage marketing material
    1. Teaser
    2. Report
  5. Sell side coverage (strategic alternatives)
    1. M&A
    2. Cash needs (financing)
  6. Buy side coverage (mandates)
  7. Pitchbook (strategic alternative specific)
  8. M&A engagement agreement
  1. M&A process
    1. Collect financials
    2. Financial statement model
    3. Adjusted EBITDA calculation
    4. Valuation
      1. Comp companies
      2. Comp transactions
  • DCF
  1. Football field
  1. Marketing material
    1. Teaser
    2. CIM
  2. Teaser distribution
  3. NDA
  4. CIM distribution
  5. Buyer/seller meeting
  6. IOIs/LOIs
  7. Due diligence
    1. Data room
  8. Definitive agreement
  9. Closing & flow of funds


Decide on the industry/industries that you will cover, read/research the value themes/players/multiples in the industry on the following levels:


  1. Large cap
  2. Mid cap
  3. Small cap
  4. Middle market
  5. Lower middle market


Pick an initial vertical and sub-vertical to cover. With AltQuest Group, our initial coverage groups were the following:


  1. Manufacturing
  2. Software
  3. Business Services
  4. Healthcare


After choosing your coverage, the investment banker is then to build an index for each of the verticals and sub-verticals made up with the public comps. The AltQuest Group coverage is broken down in the following manner:


  1. Manufacturing
    1. Durable consumer
    2. Non-durable consumer
    3. Aerospace & defense
    4. Building products
    5. Industrial
    6. Medical
  2. Software
    1. Traditional software
    2. SAAS
    3. Internet
  3. Business Services
    1. Education & Training
    2. Business Process Outsourcing
    3. Facility Services and Industrial Services
    4. Human Resources
    5. Information Services
    6. Marketing Services
    7. Real Estate Services
    8. IT Services
    9. Specialty Consulting
  4. Healthcare
    1. Dental Product
    2. Dental Providers
    3. Medical Devices & Products
    4. Medical Product Distribution
    5. Specialty Providers
    6. Pharma Services
    7. Practice Management
    8. Provider Services
    9. Long Term & Behavioral Care


The investment banker then spreads each public comp and the financial data feeds into the median and average for the vertical and sub-vertical which ultimately ends up in the research (industry report, newsletter), pitchbooks, and CIMs of the investment bank. For investment banks with an equity research department, financial statement models will be built for each public comp that is being covered and consensus EPS data taken from research reports will be used to establish the value of the public comp.


The investment banker ultimately uses the vertical index and sub-vertical index to perform proprietary research and develop industry reports and newsletters which will aid in coverage and ultimately origination. The research, which we will go into greater detail on later in the book focuses on vertical and sub-vertical trends in margins, multiples, and M&A.


After establishing one’s coverage and then building an index for the vertical and sub-vertical as well as establishing relationships with strategic and financial buyers within the vertical and sub-vertical, the investment banker may begin advising targets on their strategic alternatives using information gleaned from the vertical and sub-vertical indices. Regarding the vertical index and sub-vertical index, the investment banker ultimately tracks trends in:


Growth rates




Debt to Equity




The investment banker takes the index and establishes tiers which turn into peer groups. This is why we pull public comps; to benchmark a target against the comps. By comparing a target’s level of performance to it’s peers and the industry in general the investment banker can determine when it is ideal to exit the business (when multiples are strong) and when it is not (when multiples are weak). This is how investment bankers advise on strategic alternatives.


Getting Started in Investment Banking


For those just getting started in investment banking, it is preferable to start with the lower middle market and middle market building relationships with financial and strategic buyers as well as potential targets. This means building your rolodex. Obtain the investment mandates from the strategic and financial buyers and establish a fee arrangement for buy-side deals. This will end up being the Lehman scale for the fee on the buy-side. This is how I built the boutique investment bank, AltQuest Group (


For example, with AltQuest Group, I chose to cover manufacturing. If you are starting in the lower middle market, the goal is to get 10 sell side engagements at any given time. It took me one year to get 10 sell side engagements working 40 hours per week and not on weekends. Further, it is going to take you 6 months to one year to close a deal so stay proactive with origination and mandate/target matching.


To give you an idea of the level of productivity that you should target, the following are the investment banking statistics from year one with AltQuest Group:


3,000 introduction emails

30 sell side pitches (phone and in person)

10 sell side engagements won

4 IOIs from strategic/financial buyers


As you get better and establish a process, your email conversion rates will go up and you will be pitching more and your ability to win sell side engagements will go up. I am at the point now that if a seller is interested in selling, I will either win the sell side mandate or I will structure it as a buy side deal and receive the fee from the strategic/financial buyer.


Looking forward to year two, here are the projections:


1,000 introduction emails

50 sell side pitches (phone and in person)

20 (+18 existing = 38 total engagements) sell side engagements won

8 IOIs from strategic/financial buyers

2 closed M&A deals

$110,000 in M&A fees received


The statistics assume that you will be working full time at 40 hours per week and not working on the weekends.


Regarding fees, here is a simplified understanding of fee structure for sell side engagements. The key to remember here is that you do not make your money when you quote your fee, you make your money when you close the deal. The point is that I would rather win an engagement and give up 1% to 2% of the fee than have the seller think that I am not being fair. The Lehman scale simplifies this a bit but often times the seller will want to know the exact % that they will be paying you.


Large cap – Lehman scale

Mid cap – Lehman scale

Small cap – Lehman scale

Middle market – Double Lehman structure

Lower middle market – 3% to 10%









Part II:

The Middle Market


The majority of perpetuities are in what is known as the middle market, a classification for mid-sized perpetuities. This is where the majority of the transactions occur and where the average investment banker will make his living.






Chapter 32:

Middle Market Breakdown


Because of the wide range of company sizes within the definition, the middle market can be further broken down into the following:


Overview of Middle Market

Pitchbook defines the middle market as companies with total enterprise value between $25 million and $1 billion and the “core middle market” as between $100 million and $500 million.


Lower Middle Market: $5 – $50 million of revenue;

Companies with EBITDA below about $10 million (lower middle market) are typically family or entrepreneur owned and individual customer wins and losses greatly impact performance. Many of those sales relationships are concentrated in the family, and senior management ranks are often populated with family members.


Middle Market: $50 – $500 million of revenue; and

We define the core middle market as companies with $10 to $75 million of EBITDA.


Upper Middle Market: $500 million – $1 billion of revenue.

Upper middle market companies typically have $75 million of EBITDA or more, and are often publicly held or sponsor backed.




Chapter 33:

Buyer Profile: Individuals & Search Funds


Individuals and search funds like to be in the 3x to 4x range. Be sure to qualify these individuals ahead of time. You realistically only want financials and strategics talking to the seller for deals with approx $1M of EBITDA up. Deals south of $1M EBITDA, you start to get into the individual buyer range of reasonability.


Qualify individual buyers to make sure you are talking with PE and strategics for deals approx. $500k EBITDA up. Individuals and PE search funds should be looking at smaller deals where their multiple expectations of 3x to 4x are in line with the size of the company.


On solid perpetuity deals, the seller is willing to wait for a strategic buyer even if it takes a longer time period.


Individual buyers are looking for companies that they can run passively and work on growing the business instead of working in the business doing the manufacturing, building the product etc. They do not want to be operators in addition to owners. Unfortunately, their multiple expectations of 3x to 4x are very close to only qualifying them to speak with owner/operator businesses.



Chapter 34:

Buyer Profile: Lower Middle Market Private Equity


Comes in at about $1M of EBITDA and wants to be in the 5x range. Sets your buyer floor. LMM PE funds typically look at deals in the $1M to $3M of EBITDA range.


An example of a LMM PE group is Prospect Partners:



Chapter 35:

Buyer Profile: Middle Market Private Equity


Minimum EBITDA of $2M for a platform to pursue a roll up in the space. 7x EBITDA up from there.


An example of a middle market private equity group would be Centre Partners:



Chapter 36:

Buyer Profile: Strategic Buyers


Strategic buyers come in at ~$500k of EBITDA and provide a valuation floor of 5x EBITDA.





Part III:

M&A Multiples


It is crucial for investment bankers to understand the M&A marketplace in the middle market and particularly for the industries that they cover. In M&A, everyone goes off of multiples of adjusted EBITDA.


It is important for the investment banker to have a strong understanding of multiples in the M&A marketplace in general and then in his/her sector and sub-sector. In general in the middle market, we typically see 7x – 7.5x EBITDA for companies that are larger than $25M in TEV. For companies that are smaller than $25M in TEV, we typically see 5x – 5.5x EBITDA. There are adjustments that need to be made for size and predictability of revenues as well as for certain sectors (ex. software).


In the lower middle market to middle market, multiples usually are the following:


4x for <$1M EBITDA

5x for ~$1M EBITDA

6x for $1M – $2M EBITDA

7x for >$2M EBITDA


This is the method that we use at AltQuest Group to quickly value companies on the back of a napkin in discussions with CEOs and owners of companies. It can help set expectations with CEOs and owners and provide a roadmap to increasing valuation to met a target (for example, $5M or $10M in Total Enterprise Value (TEV)). Additional services can be provided to the company to move the company through the different phases of the perpetuity in additional to M&A such as growth advisory (management consulting).





Chapter 37:

M&A Multiples


Since the investment banker will most likely be starting in the lower middle market or middle market, it is important to have a strong understanding of the multiples in the M&A marketplace in general and then in your sector and sub-sector. The following are 2016 M&A multiples from the data provider, Pitchbook (Morningstar), that you can use initially. Here are the EBITDA multiples for transactions in the lower middle market:



These are EBITDA multiples for transactions in the middle market:



Finally, we have EBITDA multiples for transactions in the upper middle market:


Notice how the multiples increase as the size of the perpetuity increases due to the scarcity value of larger perpetuities (increased demand for large perpetuities and less of them).


The following is a chart depicting the average debt to equity breakdown for LBOs. You will notice that equity levels are steadily increasing, indicating a tighter credit market:



In this chart, you will see the average time that is it taking for deals to close. You will notice that the majority of transactions get done in the 5-9 weeks and 10-14 weeks timeframe:



Next, the following is a chart that depicts the % of deals getting done with some aspect of an earnout, meaning portion of the purchase price contingent on future performance of the business:



Finally, we see a chart depicting activity for the buyers of perpetuities:







Part IV:

Investment Banking Coverage Methodology


It is crucial for investment bankers to understand the M&A marketplace in the middle market and particularly for the industries that they cover.




Chapter 38:

Investment Banking Coverage Methodology



First, the investment banker is going to choose what size of companies he/she is going to cover (ex. public co’s, middle market, lower middle market). From there, the investment banker chooses an initial vertical and sub-verticals to cover. With AltQuest Group, our initial coverage groups were the following:


  1. Manufacturing
  2. Software
  3. Business Services
  4. Healthcare


After choosing your coverage, the investment banker is then to build an index for each of the verticals and sub-verticals made up with the public comps. The index and the changes in the index are going to provide a measuring stick within which to evaluate targets against.


It is important for the investment banker to have a strong understanding of multiples in the M&A marketplace in general and then in his/her sector and sub-sector. In general in the middle market, we typically see 7x – 7.5x EBITDA for companies that are larger than $25M in TEV. For companies that are smaller than $25M in TEV, we typically see 5x – 5.5x EBITDA. There are adjustments that need to be made for size and predictability of revenues as well as for certain sectors (ex. software).


For those just getting started in investment banking, it is preferable to start with the lower middle market and middle market building relationships with financial and strategic buyers as well as potential targets. This means building your rolodex. Obtain the investment mandates from the strategic and financial buyers and establish a fee arrangement for buy-side deals. This will end up being the Lehman scale for the fee on the buy-side.


The investment banker will often focus on a product group (i.e. M&A) and/or an industry (industrials, healthcare, technology). Proper coverage comes in the form of maintaining a coverage index for a sector and its sub-sectors which is broken down in the following manner:


  1. Industry macroeconomics
    1. Industry spending
    2. Sub-sector spending
    3. Stock market performance of industry
  2. Public sub-sector financial and valuation performance
    1. Sub-sector index
    2. Sub-sector index: financial performance
    3. Sub-sector index: public market multiples
    4. Sub-sector index by product category
    5. Sub-sector index by product category: financial performance
    6. Sub-sector index by product category: public market multiples
  • Industry M&A Market Update
    1. Industry M&A deal volume and spending
    2. Industry M&A exit multiples
    3. Sub-sector M&A deal volume and spending
    4. Sub-sector M&A exit multiples
    5. Sub-sector M&A deal volume by product category
    6. Sub-sector M&A exit multiples by product category
  1. Appendix
    1. Sub-sector index key metrics
    2. Sub-sector index key metrics by product category
    3. Industry most active buyers
    4. Sub-sector most active buyers
    5. Sub-sector most active buyers by product category


In the lower middle market and middle market, for each target geography (ex. Florida, New York, California, Texas) and each vertical, the investment banker is going to want to build his rolodex to approximately 2,000 to 10,000. This means having:


  1. The name of the company
  2. Name of the CEO or owner
  3. Email of CEO or owner
  4. Phone number of CEO or owner
  5. Initial contact (ex. Yes, no, timeline)


The investment banker is going to want to inquire as to whether the company is willing to take an offer on their business every six months as new scenarios emerge within the coverage companies which change exit dynamics.


After getting the initial contact, the investment banker can begin providing coverage to the individual company which includes providing sector and sub-sector coverage including:


  1. Industry macroeconomics
  2. Public sub-sector financial and valuation performance (public comps)
  3. Industry M&A market update


From this data and information the investment banker can advise on strategic alternatives including capital raising, M&A and growth advisory. Key questions include:


  1. Which way are multiples going?
  2. Whom are likely acquirers?
  3. What are likely multiples for the acquisition?
  4. What precedent transactions can we point to in order to justify a premium valuation?




Chapter 39:

Index Building & Benchmarking


Regarding the vertical index and sub-vertical index, the investment banker ultimately tracks trends in:

Growth rates



The investment banker takes the index and establishes tiers which turn into peer groups. This is why we pull comps, to build an index and benchmark against the comps.

The indexing and benchmarking that is done for a target company is going to serve as the basis for advising on strategic alternatives.

One should build indexes at the vertical level, then sub-vertical level and finally sub-vertical by product level.











Chapter 40:

Financial Data Sources


If you are at a larger investment bank, you will have various paid data sources at your disposal. These include:

  1. Bloomberg
  2. CapitalIQ
  3. FactSet
  4. Mergr

For those that are not at a larger bank, one can use the free sources of financial data including:

  • Yahoo Finance
  • Google Finance

Yahoo Finance and Google Finance get their EBITDA numbers from CapitalIQ and their analyst EPS consensus estimates from there as well.

Investment banks typically do not want you to use the EBITDA from CapitalIQ, Bloomberg, FactSet and would prefer that you spread the comps individually to get to EBITDA.

We are ultimately using the financial data sources to build and maintain our various indices associated with our coverage group.





Chapter 41:

Coverage Marketing Material


When maintaining coverage of an industry or sector, one prepares a newsletter to be send to prospective sell side clients in the industry or sector. Investment bankers use the index information to create this newsletter. The newsletter is about 2 to 6 pages.

For example, our AltQuest software industry coverage has produced the following newsletter which is sent to potential targets:


Industry or Sector Newsletter




Industry or Sector Report


When maintaining coverage of an industry or sector, one prepares a report to be send to prospective sell side clients in the industry or sector. Investment bankers use the index information to create this report. The report goes more in depth than the newsletter. The report can be about 15-20 pages.

For example, our AltQuest software industry coverage has produced the following industry report which is sent to potential targets:




Chapter 43:

Pitch Book


When we have built out our industry indices and began coverage, we can begin to pitch our M&A services to particular businesses to win M&A mandates. This means building a pitchbook for an individual target.






Chapter 43:

Rolodex Building


As an investment banker it is important to establish relationships with the strategics in your coverage group as well as relationships with targets and their potential buyers. After building the index containing relevant strategics, one should go to and find the email addresses for each of the CEOs, CFOs, and/or corporate M&A department head for the potential acquirer.

An example of a vertical specific rolodex would be the following:



Chapter 44:

Industry & State Level Coverage


When building out your coverage for your investment bank, if your coverage begins at $5M revenues on up in manufacturing, then there should be about 1,500 firms per state. AltQuest Group’s coverage includes California, Texas, New York where we give periodic updates to our coverage companies on the M&A marketplace including multiples, margins and M&A volume.




Part V:

M&A Origination Methodology


The following methodology describes the primary work of the investment banker, origination. The methodology arose through the work of Michael Herlache in his M&A career and the lack of content about the actual work of senior M&A professionals. There is plenty of knowledge around the technical support work of investment bankers including financial modeling and valuation, but there are no current texts on origination, let alone a methodology.


Chapter 45:

M&A Origination Methodology


M&A origination requires coverage, relationship-building & pitching. You first need to establish your coverage of a given industry and sub-sector to develop your awareness and expertise. From there, you need to go about building relationships with both strategic and financial buyers to get an idea of the buy-side. This includes obtaining investment mandates which will either be formally listed or informally given from corporate M&A departments for strategics. From there you are going to need to establish sell side relationships by giving market updates to executives and telling them what is going on in the M&A and capital markets. As the relationship is established, you can then pitch them strategic alternatives including selling their company. Throughout the relationship building process, there will be lunches and dinners to catch up on what the target has been doing and their strategic plans.


Step 1a: Determine Coverage Industries & Sub-Sectors


Step 1b: Build Industry and Sub-Sector Index


Step 2: Database Utilization & Emails Collected

The following email is used after pulling a county list from or screening in Salesgenie and screening for revenue size ($2.5M +) and contact person (owner, CEO, President). Starting from the end of the database (Z), go through each account in the database and determine the business owner’s  primary email address either from the database itself or by going to the website and acquiring the email address. Once 30 to 50 emails are obtained in one day, the process of emailing begins with the best practice below. The response rate to the emails should be approximately 3%.


Step 3: Email Inquiry



It’s a pleasure. I work with AltQuest Group right here in Fort Lauderdale. Would you be willing to take an offer on your business from a private equity group?


Please let me know.





Step 4: Offer & Price Inquiry

After receiving initial response, you will then message them that you will email them when you have the offers and ask for the price of the business. The following is the email that should be sent:




Alright. I’ll notify you when I receive the offers. What is your expectation regarding the price of your business?





Step 5: Phone Call Request (by Sellers) or Meeting Request

After requesting price, some sellers will request a phone call and provide their contact information. If the seller provides price information, they reply with the following email:









Step 6: Phone Call or Meeting

Phone call or meeting:


During the phone call you will introduce yourself and state that you work on behalf of private equity firms in locating quality cash flowing companies and that is how you found their company. From there you will state that you want to get an initial understanding as to the price of the business. After the price of the business is found, ask how the business performed last year (revenue and net income). The following is your outline for the phone call:




Net Income:


***If meeting, they may have their financials on hand to view and you view them. You can ask to keep a copy to aid in recasting.


Step 7: Fee Agreement




After sharing with our buyer the information from our call, they are interested. Even though we do not have an agreement in place, we would still like to connect you with our buyer. Do you accept our 6% success fee? We only earn our fee when our buyer purchases your company.


Please let me know.





After we send, Would you be willing to take an offer on your business from a PE buyer, we speak with our buyer and then get back to the seller the next week with this email to get a fee agreement in place.


Step 8: Add Backs Calculated and Teaser Created

After the meeting, you now have the financials or financial data needed to do add backs to get to an owner’s benefit or EBITDA number. From here you can input the recasted financials into the teaser and then complete the teaser based upon the general information (usually from the website and meeting conversation) of the business


Step 9: Marketplace

Then we put the opportunity on BizBuySell and find a strategic buyer ideally and at least a financial buyer


Step 10: NDAs Signed with Buyers

Once inquiries are received from buyers from the M&A marketplaces, you will send NDAs to the buyers which they will then sign and send back to you.


Often times, this email will precede an NDA:


Buyer Name,


Sure. The company is Velocity Jets located in Fort Lauderdale, FL. The website is If the company seems like a fit, we can sign an NDA and I will send you their financials.


Velocity Jets’ range of services for Charter Jet Flights includes private jet membership, aircraft sales, and management and worldwide aircraft charter. Our team ensures premium service from experienced industry specialists customized to fit your individual aviation needs.


Velocity Jets does not own or operate any aircraft, which enables us to recommend the best aircraft available each and every time. We take great pride in providing the best value by identifying the best aircraft for every mission. All operators utilized are FAA Part 135 operators required to adhere to safety requirements set forth by Argus/US and Wyvern, the two leading 3rd party air safety auditing firms in the country.  Providing the safest and most experienced aircraft and flight crews at the best rates is what sets Velocity Jets apart from the rest.


Please let me know.





Step 11a: Teaser with Name Given to Buyer

Once the NDA is received, you can give the buyer the name of the business on the teaser and request an IOI from the buyer after reviewing the teaser and summary financials. The following is the email to accompany the teaser:




After reviewing the teaser and summary financials, please submit your initial indication of interest (IOI) and we will set up a buyer/seller meeting.





Step 11b: Teaser with Name Given to Buyer

Often times a call will be requested by the buyer. On the phone the M&A professional finds out the following, taking notes on the call:


Industry interest:

Questions (that the buyer has):

Multiples that buyer is seeing or that they typically do:


Step 12: Connect the Buyer and Seller for a Call


Then we arrange a phone call to take place between buyer and seller


PE Buyer,


We are waiting on updated financials right now. Let’s set up a call between yourself and the owner so that he can answer any of your questions. Does a call later this week work for you?

Please let me know.





Step 13: Financials, Adjusted EBITDA, & IOI


Then we get financials from seller to buyer and then we get IOI. After reviewing the financials and the first buyer/seller meeting, you ask for the IOI with price and terms. IOI turns into agreed deal and they write purchase agreement with lawyers.


Step 14: IOI from Buyer

After reviewing the teaser and summary financials, the buyer will notify you that they are interested in purchasing the company (IOI).


Step 15: Buyer Seller Meeting

After submitting the IOI, you will arrange an in person meeting with the seller which is called the buyer seller meeting. If the buyer is unavailable due to distance or timing, a phone call can be set up.


Step 16: Purchase Agreement Given to Seller

After the buyer seller meeting, you prompt the buyer to submit a purchase agreement and then give this purchase agreement to the seller.


Step 17: Signed Purchase Agreement with Different Terms

After the seller reviews the purchase agreement they will either sign the contract or counter with different terms. They are to sign the contract with the contingencies written into the contract.


Step 18: Enter Due Diligence

After receiving the counter, the buyer can sign the agreement with makes for a legally binding purchase agreement contingent to the items that will now be explored during the due diligence period. As items are explored, the buyer signs off that the items are no longer in question one by one.


Step 19: Complete Due Diligence

After all the items in the due diligence list are completed, due diligence is now completed and the closing can be scheduled. The documents are sent to the closing agent with instructions as to the M&A fee as well.


Step 20: Closing & Flow of Funds

After the both the buyer and seller sign at the closing, the checks are cut and you receive your M&A fee and bring it to your bank or have the fee wired to AltQuest’s account. Make sure that your firm is on the Flow of Funds document to ensure that you get paid.






Chapter 58:

Building the Pitchbook



As mentioned earlier, the pitchbook is an origination document meant to win sell side business for the investment bank.

There are two main types of pitchbooks that are created.


Introduction & Market Overviews– Introducing the investment bank and giving market updates to potential clients. This is origination work and is associated with then allowing you to pitch different strategic alternatives for the company.

  1. Slides showing investment bank structure & coverage
  2. Slides showing tombstones of deals that you have worked on in the past in the sub-sector showing that you have relevant experience
  3. Slides showing a market overview with recent trends and deals in the market and data on how similar companies (“comps”) have been performing lately


Mandate Deal Pitches – To win sell-side M&A & buy-side M&A mandates, IPOs mandates, debt issuance mandates


Sell-side M&A Pitches:

  1. Bank Overview
  2. Situation / Positioning Overview

Slides that show what will make the company an attractive acquisition target and how you would pitch it to potential buyers.

  1. Valuation Summary

Slides that describe the valuation of the company including a football field showing the valuation range along with a description of the ultimate valuation. Also includes the individual methodologies to back up the valuation.

  1. Potential Buyers

Slides that show most likely buyers from strategic to financial in a summary format with detailed company profiles afterward

  1. Summary & Recommendation on Process

Shows the process of the M&A engagement and how long it will take and the steps broken down.

  1. Appendix

Models, data, additional profiles


Buy-Side M&A Pitches

  1. Lists the potential acquisition candidates and includes profiles of the companies
  2. Short information about valuation multiples of targets


Debt Financing or IPO Pitches

Includes financing valuation models – debt or equity financing models and how much will raise and at what valuation


A management presentation is different than a pitchbook since a pitchbook is used to win business, while a management presentation is part of the marketing material once you have actually won the mandate.















Part VI:

Mandate/Target Matching Methodology







Chapter 46:

Mandate/Target Matching Methodology


After determining one’s coverage and then initiating coverage in the form of index-building, it is important for the investment banker to then begin matching investment mandate’s of strategic and financial buyers to targets within the investment banker’s coverage. The Mandate/Target Matching Methodology is the following:


  1. Build relationships with strategic and financial buyers in a given industry sector or subsector (Use as a database within which to understand investment mandates and contact information)
  2. Indicate your interest in sourcing deals on their behalf and obtain their investment mandate. This will usually be detailed in a one-page teaser or presentation that they will send to you
  3. Screen for companies that match the mandate(s) in Salesgenie and obtain CEO/owner emails and phone numbers
  4. Begin emailing and calling CEO/owners and soliciting interest in taking an offer on their business from a financial or strategic buyer
  5. Structure as a sell-side engagement or a buy-side engagement depending on CEO/owner’s level of interest in selling
  6. Collect historical financial data for the last three years
  7. Introduce the financial and/or strategic buyer to the opportunity with the summary financial information and have them sign an NDA
  8. Have a call with the financial and/or strategic buyer and then make the formal introduction to the CEO/owner and have a buyer/seller meeting



Part VII:

M&A Fee Methodology



It is important for the investment banker to have a strong understanding of fees so that the


In the lower middle market to middle market, fees usually are the following:


6% for <$5M TEV

5% for $5M-$7M TEV

4% for $7M – $10M TEV

3% for >$10M TEV


As you move higher than $2M in EBITDA, the Lehman Scale appears and this is the preferred method for pricing the fee.




Chapter 47:

M&A Success Fee


In the lower middle market to middle market, most investment bankers work on a success fee basis meaning that they only receive compensation on a deal when it actually goes through and closes.





Chapter 48:

M&A Engagement Letter


In order to get paid, investment bankers have to land the engagement. Once the fee is agreed upon, the investment banker puts in writing the fee in something called an engagement letter. The AltQuest Group engagement letter looks like the following:






Part VIII:

Underwriting the Financial Product (Perpetuity)



After landing



Chapter 49:

Gathering the Historical Financials


In order to









Chapter 59:

Finding Adjusted EBITDA


After receiving the financials for the target, the investment banker must calculate adjusted EBITDA. EBITDA and Total Owners Benefits (TOB) are proxies for cash flow but not true cash flow of the business as there will be CAPEX and working capital deducted to get to true cash flow. Total Owners Benefit adds back taxes, interest, depreciation and owners benefit.

The calculation for EBITDA looks like the following:




Chapter 49:

Building the Financial Statement Model


In order to







Chapter 60:

Building the Valuation


After arriving at adjusted EBITDA, the investment banker will determine public comps and extrapolate a multiple for the target company adjusting for size of the company. From there, precedent transactions will be spread to determine a mean multiple. Finding the midpoint of the valuation methodologies can be used for determining valuation but the range is often communicated to the client or potential buyers:





Chapter 49:

Building the Transaction Specific Model


In order to






Part VIII:

Packaging the Financial Product (Marketing Material)



After landing






Chapter 61:

Building the Teaser


After finding adjusted EBITDA and determining valuation, the investment banker can build the marketing material for the target company which includes a teaser and a CIM. The teaser is a summary of the client’s key selling points. The teaser can be broken down in the following manner along selling points including:

  1. Overall financial profile: three years of historical revenue and EBIT/EBITDA and at least two years of projected revenue and EBIT/EBITDA
  2. Indicate type of transaction
  3. Indicate sustainable growth potential based upon competitive advantage:
  4. Customer entrenchment and high switching costs (ex. Software)
  5. Long term contracts (ex. Equipment service companies)
  6. Brand recognition (ex. Consumer products)
  7. Intellectual property
  8. Stable management teams
  9. Culture






Chapter 62:

CIM (Confidential Information Memorandum)


After creating the teaser, the investment banker goes into greater detail in a marketing document called a CIM. This document is distributed to buyers after the teaser and is for the serious buyers to do an in depth analysis of the target.

The CIM is the primary marketing document associated with sell side M&A. The document is filled with information on the target company including products/services, financials and markets. The teaser comes before the CIM and the NDA must be signed in order to get the CIM.

The typical breakdown of a CIM goes along the following lines:

1) Overview and Key Investment Highlights

2) Products and Services

3) Market

4) Sales & Marketing

5) Management Team

6) Financial Results and Projections

7) Appendices


As an investment banker, you are going to want to demonstrate the following:

The company’s best days lie ahead of it. There are strong growth opportunities, plenty of ways to improve the business, and right now is the best time to acquire the company.

The company’s sales are growing at a reasonable clip (an average annual growth rate of at least 5-10%), its EBITDA margins are decent (10-20%), and it has relatively low CapEx and Working Capital requirements, resulting in substantial Free Cash Flow generation and EBITDA to FCF conversion.

The company is a leader in a fast-growing market and has clear advantages over its competitors. There are high switching costs, network effects, or other “moat” factors that make the company’s business defensible.

It has an experienced management team that can sail the ship through stormy waters and turn things around before an iceberg strikes.

There are only small risks associated with the company – a diversified customer base, high recurring revenue, long-term contracts, and so on, all demonstrate this point.











Chapter 49:

Building the Management Presentation


In order to





Part VIII:

Buyer List Methodology



After landing the M&A engagement, the investment banker will need to build a buyer list and then begin outreach to the buyer list.



Chapter 49:

Buyer List Methodology


In order to build a buyer list, the investment banker uses a database service such as to pull a list of likely strategic and financial buyers along with contact information in order to run the M&A process and build a market for control of the perpetuity.





Chapter 50:

Buyer List Outreach


After finalizing the buyer list from the database, the investment banker can then began contacting each prospective buyer in the list. Contacts should be to the corporate M&A representative for large corporations or CEOs and owners for lower middle market companies.





Part IX:

Deal Structuring


After matching a financial or strategic buyer’s mandate with a target, landing the M&A engagement and building & executing on a buyer list, it is up to the investment banker to work with the buyer and seller to structure a deal. Deal structures initially involve a rough range of valuation to make sure that both parties are in the sphere of reasonability. Reasonable deals typically look like the following:


4x <$1M EBITDA

5x ~$1M EBITDA

6x $1M – $2M EBITDA

7x >$2M EBITDA


From there we should get an understanding of whether this is:


  1. Going to be a majority or minority ownership deal
  2. Whether the owner plans on staying as a CEO after the transaction or whether there is existing management in place
  3. Owner financing is available
  4. Earn outs


Chapter 51:

Deal Structuring


After matching a financial or strategic buyer’s mandate with a target, it is up to the investment banker to work with the buyer and seller to structure a deal. Deal structures can be along the following lines:


  1. Asset Sale vs. Stock Sale
  2. Majority vs. Minority
  • Cash vs. Stock vs. Cash & Stock
  1. Seller financing
  2. Earn out
  3. Seller stays on as management vs. consulting agreement for shorter term



Chapter 52:

Asset Sale vs. Stock Sale


An asset sale in M&A does not mean distressed but rather is where a buyer acquires the assets of a company rather than the stock.


In a stock sale, the depreciation schedule is transferred to the new buyer.


Purchase Price Allocation

The purchase price allocation forms points of negotiation where hard assets are stepped up to the purchase price.




Part X: M&A Process


When the owner of a perpetuity has decided to grow inorganically or exit the perpetuity, the M&A process must be executed/run.




Chapter 53:

M&A Process


From Origination to M&A Execution

Once the investment banker has originated 8 to 10 multimillion dollar listings, one should transition from origination to M&A execution process creating a shortlist for each deal (10 in the shortlist). The investment banker should concurrently prepare the marketing package which includes the teaser and the executive summary. Once the teaser is finished, the investment banker should begin emailing the shortlist with the teaser. From this shortlist, a percentage will reply seeking additional information on the target. NDAs should be sent out and after being signed, the executive summary should be sent to the shortlist member. After the executive summary is sent, a percentage will decide to request a buyer/seller meeting. After the buyer/seller meeting, a percentage will decide to make an offer.


Building the Buyer Shortlist

The shortlist should include strategic and financial buyers and the investment banker should screen each that make it onto the shortlist for financial capacity to pay. The investment banker should use Salesgenie to pull the geographic competitors (geography screen with SIC code screen) and have 10 strategics. The investment banker should use the massinvestor database to determine which 10 financials to include in shortlist:



Competitors – synergies

Indirect Competitor



Hybrid strategic – financial buyer with asset in the sector

Pure financial


For deals that are $500k earnings and above, and should be used to find buyers. For deals below $500k in earnings, only should be used.


The Teaser

The teaser will contain an overall financial profile: three years of historical revenue and EBIT/EBITDA and at least two years of projected revenue and EBIT/EBITDA

Indicate type of transaction

Professional font (Times New Roman or Arial)

Send as PDF

Do not capitalize words or use flowery language

No grammar or spelling errors

Indicate sustainable growth potential based upon competitive advantage:

Customer entrenchment and high switching costs (ex. Software)

Long term contracts (ex. Equipment service companies)

Brand recognition (ex. Consumer products)

Intellectual property

Stable management teams




The NDA in a sell side engagement is a unilateral NDA meaning that only one side has to not disclose confidential information


Teaser With Name of Business & Financials

After the NDA is signed, a teaser with the business name is then sent to the buyer along with the financials in PDF form.



Executive summary

Company history

Sales process and/or manufacturing capabilities

Management team structure

Growth opportunities

Competitive landscape or industry outlook

Intellectual property overview and/or company assets

High-level financials (preferably five years of historical data and projections, if available)


The IOI (Indication of Interest)

Approximate price range. This can be expressed in a dollar value range (e.g., $10-15 million) or stated as a multiple of EBITDA (e.g., 3-5x EBITDA).

Buyer’s general availability of funds, including sources of financing

Necessary due diligence items and a rough estimate of the due diligence timeline

Potential proposed elements of the transaction structure, e.g., asset vs. equity, leveraged transaction, cash vs. equity, etc.

Management retention plan and role of the equity owner(s) post-transaction

Time frame to close the transaction


The Buyer/Selling Meeting

First conference call

In person meeting & tour the facilities

In person handshake meeting


The LOI (Letter of Intent)

Official deal structure and terms. Acceptance of engagement means that company cannot receive other offers


Deal Structure. Defines the transaction as a stock or asset purchase. Generally, the seller prefers a stock transaction from a tax and legal perspective. Asset transactions are preferred by the buyer to protect against prior liabilities and provides a stepped-up tax basis.


Consideration. Outlines the form(s) of payment — including cash, stock, seller notes, earn-outs, rollover equity, and contingent pricing.


Closing Date. The projected date for completing the transaction. This date is an estimation and often changes based on due diligence or the purchase agreement.


Closing Conditions. Lists the tasks, approvals, and consents that must be obtained prior to or on the Closing Date.


Exclusivity Period (Binding). It is common practice for a buyer to request an exclusive negotiating period to ensure the seller is not shopping their deal to a higher bidder while appearing to negotiate in good faith. Expect to see requested periods of 30 to 120 days. The duration may be negotiable, but the presence of the exclusivity term rarely is.


Break-up Fee (Binding). A fee to be paid to the buyer if the business owner decides to cancel the deal. Break-up fees are relatively common in larger deals (above $500 million). The fee can either be a percentage (typically 3%) or a fixed amount.


Management Compensation. Outlines plan for senior-management post-sale. This term describes who in the management will be provided employment, equity plans, and employment agreement. This term is often vaguely worded to provide the buyer with latitude since they may not be prepared to make commitments to senior management.


Due Diligence. Describes the buyer’s due diligence requirements, including time frame and access.


Confidentiality (Binding). Although both parties have probably signed a confidentiality agreement at this point, this additional term ensures all discussions regarding the transaction are confidential.


Approvals. Lists any approvals needed by the buyer (e.g., board of directors) or seller (e.g., regulatory agencies, customers) to complete the transaction.


Escrow. Provides the summary terms of the buyer’s expected escrow terms for holding back some percentage of the purchase price to cover future payments for past liabilities. The escrow is typically highly negotiable and often excluded from the LOI and presented for the first time in the purchase agreement.


Representations and Warranties. This clause will include indemnifications in the purchase agreement. It is best practice to include any terms that may be contentious or non-standard.


Due Diligence

Financial books and records

Incorporation documents

Employee benefits, policies and compliance issues

Internal systems and procedures

Customer contracts

Intellectual property

Condition of assets

Any key area of concern identified while negotiating the letter of intent


Digital deal rooms are now used (ex. Firmex and V-rooms). Due Diligence is usually 60 to 90 days


The Purchase Agreement

Incorporates all terms of the LOI and is written to address issues discovered in due diligence. The agreement will lay out a structure to handle this (a hold back account, deductions from future payments, price adjustment, etc.)


Pitchbook Table of Contents (exploring strategic alternatives to win a mandate):

  1. Executive summary
  2. Industry specific market update (discuss control premiums and multiples)
  • Review of company’s strategic priorities
  1. Potential strategic targets
    1. Vertical I
    2. Vertical II
    3. Vertical III


Sell side after winning the mandate:

  1. Discuss and demonstrate knowledge of buyer universe (strategic vs. financial)
  2. Discuss valuation range (“I believe that you can get $_____, providing that these things hold true”)
  • Process and timing
  1. Tax consequences
  2. What is going to happen to key management and employees


Confidential Information Memorandum (CIM) Table of Contents:

  1. Executive summary
  2. Key investment considerations
  • Growth opportunities
  1. Industry overview
  2. Company overview
    1. Overview
    2. Products and services
    3. Sales and marketing
    4. Operations
    5. Organization
  3. Financial overview


Confidentiality – Discuss in terms of project name, never mention name of company. “No comment” and refer press to PR department.


M&A Banker’s Role: M&A banker is hired to run a process:

  1. Defining exit options and strategies (4 types: auction process, controlled sale, targeted high level solicitation, closed negotiation)
  2. Valuation
  3. Recast financials
  4. Presentation and packaging
  5. Buyer qualifications
  6. Marketing
  7. Management coaching
  8. Due diligence facilitation (data room)
  9. Price and contract negotiation


From 100 buyer universe, narrow it down to 20 to 30 target buyers


Auction Process:

100-150 companies initial call

4 months; 6-12 months actual

Initial call interest, then send teaser

If interested after teaser, sign NDA, send CIM


Controlled Sale:

10-12 companies

4 months, 6-8 months actual


Targeted High Level Solicitation:

4-5 companies

2-4 months


Closed Negotiation:

1-2 parties

1-3 months


Regarding valuation, the investment banker will form the story which is either:

  1. Growth story
  2. Well operating story


Presentation and Packaging

CIM (1st round):

Week 1: interviews with CEO, CFO

2-3 weeks to create

70, 80, 90 pages


Teaser (1st round)

Management presentation (2nd round) – all info in CIM


Buyer Qualification:

Finalize to list of 50, bankers begin making phone calls



Sign NDAs, send CIM

Weekly calls with client to update (buyer list updates)



To win new business. Pitching can take years. This is ultimately deal sourcing with MDs calling on clients for 10-15 years.


Bake Off to Win Mandate:

To win sell side mandate there are 9 to 10 banks with 2 to 3 banks in the next round. They present to management and the board.


The Pitchbook to Win Business:

  1. Intros and quals
  2. Industry overview
  • Capital market overview (capital markets and products perspective (ex. M&A and IPO))
  1. Company and situation overview
  2. Valuation (football field)
  3. Process
  • Buyers/investors


Chapter 54:

Dealing with Sellers


Most sellers that are interested in having a discussion are 1 to 5 years away from actually selling. They either are waiting for a strategic buyer or simply need to grow a few more years to hit a target valuation to be in line with the lower middle market/middle market valuation spectrum:

$500k to <$1m is 4x

$1m is 5x

$1m to $2m is 6x

>$2m is 7x

Since sellers are likely a few years away even if you get a fee agreement in place, getting questions answered and a buyer/seller call will take time. Sometimes a year. Patience is the key here as m&a operates on an entirely different timeline that the rest of business. A business owner will sell his business once in a lifetime so 3 to 5 years is about the standard for an exit once he responds that he would be willing to take an offer on his business


Chapter 55:

Dealing with Buyers


When waiting for financials from the seller, go for a buyer/seller call in the interim to move the process forward. If the buyer wants to wait for financials, then request that the buyer write out their questions of the seller in an email and then forward these questions to the seller. This should set up the next step which is the buyer/seller call. After which financials will be more forthcoming. In fact, it is better to not even ask for financials from the seller until after having the buyer/seller call. Business owners feel more comfortable handing over financials to individuals that they have actually spoken to. If the buyer is only concerned with the numbers, the questions can be regarding top line and ebitda for last three years; this will serve as the questions which will then set up the call.


Qualifying Buyers

When buyers inquire through BizBuySell/BizQuest often times they only appear as individual buyers which typically only pay 3x to 4x EBITDA. Since our LMM/MM Valuation Guide will generally require a higher multiple, it is important to screen out these individuals by saying the following:

“Sure, I’d be happy to. Would you be buying the company individually or on behalf of a corporation”

Since most sellers do not have to sell, they are willing to wait for the right strategic buyer to purchase their company in line with the LMM/MM Valuation Guide.






Chapter 63:

Letter of Intent (LOI)


The LOI is non-binding except for a few terms:



No shop clause


LOI states terms of what the deal will look like and then allows the buyer time to verify the information presented and creates a roadmap for attorneys to craft the final purchase agreement.


Price and structure should be settled in the LOI without negotiation left afterwards.


Details should include:

  1. Seller note
  2. Earn out
  3. Compensation agreement for seller if staying on
  4. Status of net working capital items
  5. New ownership cap table is seller is retaining ownership





Chapter 64:

Purchase Agreement


After the strategic or financial buyer decides to draft an LOI and proceed with an acquisition of a given target, the purchase agreement will need to be drafted. In the LMM, the investment banker may draft the agreement himself/herself, but as transactions get larger, M&A attorneys will be involved and take the lead with the creation of the purchase agreement. The investment banker will stay actively involved in the drafting of the agreement.

While due diligence is going on, attorneys take boilerplate purchase agreement and modify them to include items of the LOI.

Once due diligence is complete, the purchase agreement should  be done for closing.




Chapter 65:

Due Diligence


LOI to accept price and terms.


Due diligence is open book time where buyer investigates the business to see if it is how the seller represented it.


SMB due diligence:

Standard asset purchase agreement is provided by M&A professional and contingencies for due diligence placed in the contract.


A buyer agrees to purchase the company provided the conditions are met. Due diligence items are checked off in writing as they are dealt with and a binding contract is remaining so you are ready to close.


Ex. The “book check” is done by the buyer or CPA


You can use Dropbox or Google Docs


LMM and MM Due Diligence:

Begins with IOI or non-binding LOI. The definitive purchase agreement is not created until after due diligence.


Use V-rooms or Firmex


Usually takes 60-90 days


The definitive purchase agreement is written to address issues discovered in due diligence, otherwise is boilerplate.





Chapter 66:

Minimum Financials to Do a Deal


The minimum amount of financials to get a deal done is the following:

  1. Last three years P&L
  2. Year To date (YTD) P&L
  3. Last Twelve Months (LTM) adjusted EBITDA to price an offer

This should be easy to get if the owner has QuickBooks Or Another Accounting Software.





Part XI: Investment Bank Management


Since the M&A market is so fragmented in the middle market, it may become necessary for the investment banker to run his own M&A practice.





Chapter 56:

How to Build a Boutique Investment Bank


At Investment Banking University, we are often asked , “How to build a boutique investment bank?”, so we created a methodology for doing so consistent with that which built AltQuest Group (, the middle market boutique investment bank. This methodology is known as the Boutique Investment Bank Methodology which goes as follows:


  1. Decide on IB product (M&A, capital-raising, growth advisory)
  2. Decide on size of market to cover (public co’s, middle market, lower middle market)
  3. Decide on industry coverage (AltQuest’s coverage is broken down between Healthcare, Manufacturing, Software, and Business Services)
  4. Break down industry into sub-verticals to cover
  5. Build indices for industry and sub-verticals made up of public co’s
  6. Utilize Coverage & Origination Methodology to advise targets on strategic alternatives
  7. Utilize Mandate/Target Matching Methodology to match strategic and financial buyers’ mandates to targets
  8. Gather financials, recast & IB deliverables (adjusted EBITDA, valuation, teaser, CIM, management presentation)
  9. Offer analysis
  10. Purchase agreement drafting/structuring
  11. Due diligence data room
  12. Closing & flow of funds


Decide on the industry/industries that you will cover, read/research the value themes/players/multiples in the industry on the following levels:


  1. Large cap
  2. Mid cap
  3. Small cap
  4. Middle market
  5. Lower middle market


Pick an initial vertical and sub-vertical to cover. With AltQuest Group, our initial coverage groups were the following:


  1. Manufacturing
  2. Software
  3. Business Services
  4. Healthcare


After choosing your coverage, the investment banker is then to build an index for each of the verticals and sub-verticals made up with the public comps. The AltQuest Group coverage is broken down in the following manner:


  1. Manufacturing
    1. Durable consumer
    2. Non-durable consumer
    3. Aerospace & defense
    4. Building products
    5. Industrial
    6. Medical
  2. Software
    1. Traditional software
    2. SAAS
    3. Internet
  3. Business Services
    1. Education & Training
    2. Business Process Outsourcing
    3. Facility Services and Industrial Services
    4. Human Resources
    5. Information Services
    6. Marketing Services
    7. Real Estate Services
    8. IT Services
    9. Specialty Consulting
  4. Healthcare
    1. Dental Product
    2. Dental Providers
    3. Medical Devices & Products
    4. Medical Product Distribution
    5. Specialty Providers
    6. Pharma Services
    7. Practice Management
    8. Provider Services
    9. Long Term & Behavioral Care


The indices for AltQuest Group look like the following:


  1. Manufacturing
    1. AltQuest Durable Consumer Index
      1. Newell Brands Inc. NYSE:NWL
      2. Whirlpool Corp. NYSE:WHR
  • Hanesbrands Inc. NYSE:HBI
  1. Gildan Activewear Inc. NYSE:GIL
  2. Brunswick Corporation NYSE:BC
  3. Tupperware Brands Corporation NYSE:TUP
  • G-III Apparel Group, Ltd. NasdaqGS:GIII
  • La-Z-Boy Incorporated NYSE:LZB
  1. Culp, Inc. NYSE:CFI
  2. Flexsteel Industries Inc. NasdaqGS:FLXS
  3. Johnson Outdoors Inc. NasdaqGS:JOUT
  • CSS Industries Inc. NYSE:CSS
  • Delta Apparel Inc. AMEX:DLA
  • Escalade Inc. NasdaqGM:ESCA
  1. Black Diamond, Inc. NasdaqGS:BDE
  1. AltQuest Non-Durable Consumer Index
    1. Colgate-Palmolive Co. NYSE:CL
    2. General Mills, Inc. NYSE:GIS
  • Campbell Soup Company NYSE:CPB
  1. The Clorox Company NYSE:CLX
  2. Church & Dwight Co. Inc. NYSE:CHD
  3. Coty Inc. NYSE:COTY
  • Edgewell Personal Care Company NYSE:EPC
  • Avon Products Inc. NYSE:AVP
  1. Inter Parfums Inc. NasdaqGS:IPAR
  1. AltQuest Aerospace & Defense Index
    1. Honeywell International Inc. NYSE:HON
    2. The Boeing Company NYSE:BA
  • General Dynamics Corporation NYSE:GD
  1. Airbus Group SE ENXTPA:AIR
  2. Mohawk Industries Inc. NYSE:MHK
  3. TransDigm Group Incorporated NYSE:TDG
  • Textron Inc. NYSE:TXT
  • Spirit AeroSystems Holdings, Inc. NYSE:SPR
  1. B/E Aerospace Inc. NasdaqGS:BEAV
  2. Bombardier Inc. TSX:BBD.B
  3. HEICO Corporation NYSE:HEI
  • Curtiss-Wright Corporation NYSE:CW
  • Esterline Technologies Corp. NYSE:ESL
  • Triumph Group, Inc. NYSE:TGI
  1. RBC Bearings Inc. NasdaqGS:ROLL
  • Aerojet Rocketdyne Holdings, Inc. NYSE:AJRD
  • Ducommun Inc. NYSE:DCO
  1. AltQuest Building Products Index
    1. Mohawk Industries Inc. NYSE:MHK
    2. USG Corporation NYSE:USG
  • Armstrong World Industries, Inc. NYSE:AWI
  1. Advanced Drainage Systems, Inc. NYSE:WMS
  2. Apogee Enterprises, Inc. NasdaqGS:APOG
  3. Builders FirstSource, Inc. NasdaqGS:BLDR
  • American Woodmark Corp. NasdaqGS:AMWD
  • Gibraltar Industries, Inc. NasdaqGS:ROCK
  1. Continental Building Products, Inc. NYSE:CBPX
  2. Insteel Industries Inc. NasdaqGS:IIIN
  3. Armstrong Flooring, Inc. NYSE:AFI
  1. AltQuest Industrial Index
    1. United Technologies Corporation NYSE:UTX
    2. Illinois Tool Works Inc. NYSE:ITW
  • Eaton Corporation plc NYSE:ETN
  1. Ingersoll-Rand Plc NYSE:IR
  2. Parker-Hannifin Corporation NYSE:PH
  3. Rockwell Automation Inc. NYSE:ROK
  • Crane Co. NYSE:CR
  • Hubbell Inc. NYSE:HUBB
  1. Colfax Corporation NYSE:CFX
  2. Barnes Group Inc. NYSE:B
  3. Actuant Corporation NYSE:ATU
  • Albany International Corp. NYSE:AIN
  • EnPro Industries, Inc. NYSE:NPO
  • Chart Industries Inc. NasdaqGS:GTLS
  1. Columbus McKinnon Corporation NasdaqGS:CMCO
  1. AltQuest Medical Index
    1. Medtronic plc NYSE:MDT
  • Hologic Inc. NasdaqGS:HOLX
  1. Abaxis, Inc. NasdaqGS:ABAX
  2. Analogic Corporation NasdaqGS:ALOG
  3. Integer Holdings Corporation NYSE:ITGR
  • AngioDynamics Inc. NasdaqGS:ANGO
  • Misonix, Inc. NasdaqGM:MSON
  1. Amedica Corporation NasdaqCM:AMDA
  2. Allied Healthcare Products Inc. NasdaqCM:AHPI
  1. Software
    1. AltQuest Traditional Software Index
    2. AltQuest SAAS Index
      1. 2U TWOU NasdaqGS
      2. Amber Road AMBR NYSE
  • Athenahealth ATHN NasdaqGS
  1. Bazaarvoice BV NasdaqGS
  2. Benefitfocus BNFT NasdaqGS
  3. Callidus Software CALD NasdaqGM
  • Castlight Health CSLT NYSE
  • ChannelAdvisors ECOM NYSE
  1. Cornerstone OnDemand CSOD NasdaqGS
  2. Covisint COVS NasdaqGS
  3. Ebix EBIX NasdaqGS
  • FireEye FEYE NasdaqGS
  • Fleetmatics FLTX NYSE
  • HortonWorks HDP NasdaqGS
  1. HubSpot HUBS NYSE
  • inContact SAAS NasdaqCM
  • IntraLinks Holdings IL NYSE
  • J2 Global JCOM NasdaqGS
  • Jive Software JIVE Nasdaq
  1. Live Person LPSN NasdaqGS
  • Marin Software MRIN NYSE
  • Medical Transcript MTBC NasdaqCM
  • Medidata Solutions MDSO Nasdaq
  • Netsuite N NYSE
  • New Relic NEWR NYSE
  • Paylocity Holding PCTY NasdaqGS
  • Q2 Holdings QTWO NYSE
  • Qualys QLYS NasdaqGS
  • RealPage RP Nasdaq
  • RingCentral RNG NYSE
  • SPS Commerce SPSC NasdaqGS
  • Tableau Software DATA NYSE
  • Tangoe TNGO NasdaqGS
  • The Ultimate Software Group ULTI NasdaqGS
  • TrueCar TRUE NasdaqGS
  • Upland Software UPLD NasdaqGM
  • Veeva Systems VEEV NYSE
  1. AltQuest Internet Index
  1. FLWS NasdaqGS
  1. 8×8 EGHT NasdaqGS
  2. Akamai Technologies AKAM NasdaqGS
  3. Alibaba BABA NYSE
  • AMZN NasdaqGS
  • Angie’s List ANGI NasdaqGS
  1. BIDU NasdaqGS
  2. Bankrate RATE NYSE
  3. Bitauto Holdings BITA NYSE
  • BlueNile NILE NasdaqGS
  • Brightcove BCOV NasdaqGS
  • BroadSoft BSFT NasdaqGS
  1. Carbonite CARB NasdaqGS
  • CYOU NasdaqGS
  • Chegg CHGG NYSE
  • Cimpress CMPR NasdaqGS
  • Criteo SA CRTO NasdaqGS
  • Ctrip CTRP NasdaqGS
  • DemandMedia DMD NYSE
  • eBay EBAY NasdaqGS
  • eHealth EHTH NasdaqGS
  • Everyday Health EVDY NYSE
  • Expedia EXPE NasdaqGS
  • Facebook FB NasdaqGS
  • GoDaddy GDDY NYSE
  • Google GOOG NasdaqGS
  • Groupon GRPN NasdaqGS
  • GrubHub GRUB NYSE
  • Harmonic HLIT NasdaqGS
  • Interactive Intelligence ININ NasdaqGS
  • LendingClub LC NYSE
  • LifeLock LOCK NYSE
  • Limelight Networks LLNW NasdaqGS
  • LinkedIn LNKD NYSE
  • Liquidity Services LQDT NasdaqGS
  1. Group 61HE.L LSE
  • MakeMyTrip MMYT NasdaqGS
  • MaxPoint Interactive MXPT NasdaqGM
  • Mercadolibre MELI NasdaqGS
  • Mitel Networks MITL NasdaqGS
  • Monster Worldwide MWW NYSE
  • NCSoft 036570.KS KSE
  • Netease NTES NasdaqGS
  • Netflix NFLX NasdaqGS
  • OSTK NasdaqGS
  1. Pandora P NYSE
  2. PetMed Express PETS NasdaqGS
  • Priceline PCLN NasdaqGS
  • QuinStreet QNST NasdaqGS
  • Renren RENN NYSE
  1. Rocket Fuel FUEL NasdaqGS
  • SeaChange International SEAC NasdaqGS
  • ShoreTel SHOR NasdaqGS
  • Shutterfly SFLY NasdaqGS
  • Shutterstock SSTK NYSE
  1. SINA SINA NasdaqGS
  • SOHU
  • Sonus Networks SONS NasdaqGS
  • STMP NasdaqGS
  • Synacor SYNC NasdaqGS
  • Tencent Holdings NNN1.F
  • The Rubicon Project RUBI NYSE
  • TST NasdaqGM
  • Travelzoo TZOO NasdaqGS
  • Lending Tree TREE NasdaqGS
  • Tremor TRMR NYSE
  • TripAdvisor TRIP NasdaqGS
  • TubeMogul TUBE NasdaqGS
  • Tucows TCX NasdaqCM
  • Twitter TWTR NYSE
  • VeriSign VRSN NasdaqGS
  • WebMD Health WBMD NasdaqGS
  • WIX NasdaqGS
  • XO Group XOXO NYSE
  • Xunlei XNET NasdaqGS
  • Yahoo! YHOO NasdaqGS
  • Yandex YNDX NasdaqGS
  • Yelp YELP NYSE
  • YY YY NasdaqGS
  • Zillow Z NasdaqGS
  1. Business Services
    1. AltQuest Education & Training Index
      1. Graham Holdings Company NYSE:GHC
      2. GP Strategies Corp. NYSE:GPX
  • Pearson plc LSE:PSON
  1. John Wiley & Sons Inc. NYSE:JW.A
  2. Capella Education Co. NasdaqGS:CPLA
  3. Bridgepoint Education, Inc. NYSE:BPI
  • Strayer Education Inc. NasdaqGS:STRA
  • K12, Inc. NYSE:LRN
  1. DeVry Education Group Inc. NYSE:DV
  2. Career Education Corp. NasdaqGS:CECO
  1. AltQuest Business Process Outsourcing Index
    1. Wipro Ltd. BSE:507685
    2. Cognizant Technology Solutions Corporation NasdaqGS:CTSH
  • Sykes Enterprises, Incorporated NasdaqGS: SYKE
  1. Convergys Corporation NYSE: CVG
  2. West Corporation NasdaqGS:WSTC
  3. TeleTech Holdings Inc. NasdaqGS:TTEC
  • Virtusa Corporation NasdaqGS:VRTU
  • Unisys Corporation NYSE:UIS
  1. AltQuest Facility Services and Industrial Services Index
    1. Cintas Corporation NasdaqGS:CTAS
    2. ABM Industries Incorporated NYSE:ABM
  • SP Plus Corporation NasdaqGS:SP
  1. Aramark NYSE:ARMK
  2. Iron Mountain Incorporated NYSE:IRM
  3. UniFirst Corp. NYSE:UNF
  • FirstService Corporation TSX:FSV
  • Waste Management, Inc. NYSE:WM
  1. Republic Services, Inc. NYSE:RSG
  2. Waste Connections US, Inc. NYSE:WCN
  3. Stericycle, Inc. NasdaqGS:SRCL
  • US Ecology, Inc. NasdaqGS:ECOL
  • Casella Waste Systems Inc. NasdaqGS:CWS
  • Covanta Holding Corporation NYSE:CVA
  1. Clean Harbors, Inc. NYSE:CLH
  • United Rentals, Inc. NYSE:URI
  • H&E Equipment Services Inc. NasdaqGS:HEES
  • CECO Environmental Corp. NasdaqGS:CECE
  • Team, Inc. NYSE:TISI
  1. AltQuest Human Resources Index
    1. Robert Half International Inc. NYSE:RHI
    2. ManpowerGroup Inc. NYSE:MAN
  • WageWorks, Inc. NYSE:WAGE
  1. On Assignment Inc. NYSE:ASGN
  2. 51job Inc. NasdaqGS:JOBS
  3. Insperity, Inc. NYSE:NSP
  • TriNet Group, Inc. NYSE:TNET
  • Korn/Ferry International NYSE:KFY
  1. TrueBlue, Inc. NYSE:TBI
  2. Kelly Services, Inc. NasdaqGS:KELY.A
  3. Kforce Inc. NasdaqGS:KFRC
  • Automatic Data Processing, Inc. NasdaqGS:ADP
  • Heidrick & Struggles International Inc. NasdaqGS:HSII
  1. AltQuest Information Services Index
    1. Thomson Reuters Corporation TSX:TRI
    2. Acxiom Corporation NasdaqGS:ACXM
  • Gartner Inc. NYSE:IT
  1. Alliance Data Systems Corporation NYSE:ADS
  2. The Dun & Bradstreet Corporation NYSE:DNB
  3. comScore, Inc. NasdaqGS:SCOR
  • Fair Isaac Corporation NYSE:FICO
  • Experian plc LSE:EXPN
  1. Equifax Inc. NYSE:EFX
  2. The Advisory Board Company NasdaqGS:ABC
  3. Verisk Analytics, Inc. NasdaqGS:VRSK
  • CoreLogic, Inc. NYSE:CLGX
  • CoStar Group Inc. NasdaqGS:CSGP
  • FactSet Research Systems Inc. NYSE:FDS
  1. Moody’s Corporation NYSE:MCO
  • Forrester Research Inc. NasdaqGS:FORR
  • IHS Markit Ltd. NasdaqGS:INFO
  1. AltQuest Marketing Services Index
    1. WPP plc LSE:WPP
    2. Omnicom Group Inc. NYSE:OMC
  • Publicis Groupe SA ENXTPA:PUB
  1. The Interpublic Group of Companies, Inc. NYSE:IPG
  2. MDC Partners Inc. NasdaqGS:MDCA
  3. InnerWorkings Inc. NasdaqGS:INWK
  • UBM plc LSE:UBM
  1. AltQuest Real Estate Services Index
    1. CBRE Group, Inc. NYSE:CBG
    2. CoStar Group Inc. NAsdaqGS: CSGP
  • Jones Lang LaSalle Incorporated NYSE:JLL
  1. Realogy Holdings Corp. NYSE:RLGY
  2. SouFun Holdings Ltd. NYSE: SFUN
  3. NM Kennedy-Wilson Holdings, Inc. NYSE:KW
  • E-House (China) Holdings Limited NYSE:EJ
  • RE/MAX Holdings, Inc. NYSE:RMAX
  1. Altisource Portfolio Solutions S.A. NasdaqGS:ASPS
  1. AltQuest IT Services Index
    1. International Business Machines Corporation NYSE:IBM
    2. Accenture plc NYSE:ACN
  • Cognizant Technology Solutions Corporation NasdaqGS:CTSH
  1. CGI Group Inc. TSX:GIB.A
  2. Booz Allen Hamilton Holding Corporation NYSE:BAH
  3. Leidos Holdings, Inc. NYSE:LDOS
  • Teradata Corporation NYSE:TDC
  • EPAM Systems, Inc. NYSE:EPAM
  1. Interxion Holding NV NYSE:INXN
  2. CACI International Inc. NYSE:CACI
  3. ManTech International Corporation NasdaqGS:MAN
  • Virtusa Corporation NasdaqGS:VRTU
  • The Hackett Group, Inc. NasdaqGS:HCKT
  • Unisys Corporation NYSE:UIS
  1. ServiceSource International, Inc. NasdaqGS:SREV
  1. AltQuest Specialty Consulting Index
    1. CEB Inc. NYSE:CEB
    2. FTI Consulting, Inc. NYSE:FCN
  • Exponent Inc. NasdaqGS:EXPO
  1. The Advisory Board Company NasdaqGS:ABC
  2. Huron Consulting Group Inc. NasdaqGS:HUR
  3. ICF International Inc. NasdaqGS:ICFI
  • Navigant Consulting Inc. NYSE:NCI
  • Resources Connection, Inc. NasdaqGS:RECN
  1. CBIZ, Inc. NYSE:CBZ
  1. Healthcare
    1. AltQuest Dental Product Index
      1. Zimmer Biomet Holdings, Inc. NYSE:ZBH
  • Henry Schein, Inc. NasdaqGS:HSIC
  1. Align Technology Inc. NasdaqGS:ALGN
  2. Patterson Companies, Inc. NasdaqGS:PDCO
  3. Cantel Medical Corp. NYSE:CMN
  • BIOLASE, Inc. NasdaqCM:BIOL
  • Milestone Scientific Inc. AMEX:MLSS
  1. Pro-Dex Inc. NasdaqCM:PDEX
  1. AltQuest Dental Providers Index
    1. Birner Dental Management Service OTCPK:BDMS
  2. AltQuest Medical Devices & Products Index
    1. Medtronic plc NYSE:MDT
    2. Abbott Laboratories NYSE:ABT
  • Stryker Corporation NYSE:SYK
  1. Becton, Dickinson and Company NYSE:BDX
  2. Boston Scientific Corporation NYSE:BSX
  3. Baxter International Inc. NYSE:BAX
  • Intuitive Surgical, Inc. NasdaqGS:ISRG
  • Zimmer Biomet Holdings, Inc. NYSE:ZBH
  1. St. Jude Medical Inc. NYSE:STJ
  2. Edwards Lifesciences Corp. NYSE:EW
  3. CR Bard Inc. NYSE:BCR
  • ABIOMED, Inc. NasdaqGS:ABMD
  • Integra LifeSciences Holdings Corporation NasdaqGS:IART
  • Wright Medical Group N.V. NasdaqGS:WMGI
  1. Johnson & Johnson NYSE:JNJ
  1. AltQuest Medical Product Distribution Index
    1. Danaher Corp. NYSE:DHR
    2. Stryker Corporation NYSE:SYK
  • McKesson Corporation NYSE:MCK
  1. Cardinal Health, Inc. NYSE:CAH
  2. AmerisourceBergen Corporation NYSE:ABC
  3. Henry Schein, Inc. NasdaqGS:HSIC
  • Patterson Companies, Inc. NasdaqGS:PDCO
  • Owens & Minor Inc. NYSE:OMI
  1. PharMerica Corporation NYSE:PMC
  2. Aceto Corp. NASDAQGS:ACET
  1. AltQuest Specialty Providers Index
    1. Fresenius Medical Care AG & Co… NYSE:FMS
    2. DaVita HealthCare Partners Inc. NYSE:DVA
  1. AmSurg Corp. NasdaqGS:AMSG
  3. Surgical Care Affiliates, Inc. NasdaqGS:SCAI
  • American Renal Associates Holdings, NYSE:ARA
  • Adeptus Health Inc. NYSE:ADPT
  1. LHC Group, Inc. NasdaqGS:LHCG
  2. AAC Holdings, Inc. NYSE:AAC
  1. AltQuest Pharma Services Index
    1. CVS Health Corporation NYSE:CVS
    2. Express Scripts Holding Company NASDAQGS:ESRX
  • Perrigo Company plc NYSE:PRGO
  1. Allscripts Healthcare Solutions, Inc. NasdaqGS:MDRX
  2. Magellan Health, Inc. NasdaqGS:MGLN
  1. AltQuest Practice Management Index
    1. WellCare Health Plans, Inc. NYSE:WCG
    2. HealthEquity, Inc. NasdaqGS:HQY
  • Team Health Holdings, Inc. NYSE:TMH
  1. AltQuest Provider Services Index
    1. Cerner Corporation NasdaqGS:CERN
    2. Healthcare Services Group Inc. NasdaqGS:HCSG
  • HMS Holdings Corp. NasdaqGS:HMSY
  1. The Advisory Board Company NasdaqGS:ABCO
  2. Omnicell, Inc. NasdaqGS:OMCL
  3. Evolent Health, Inc. NYSE:EVH
  • Providence Service Corp. NasdaqGS:PRSC
  1. AltQuest Long Term & Behavioral Care Index
    1. National HealthCare Corporation AMEX:NHC
    2. The Ensign Group, Inc. NasdaqGS:ENSG
  • Civitas Solutions, Inc. NYSE:CIVI
  1. Acadia Healthcare Company, Inc. NasdaqGS:ACHC
  2. SunLink Health Systems Inc. AMEX:SSY
  3. AAC Holdings, Inc. NYSE:AAC


The investment banker then spreads each public comp and the financial data feeds into the median and average for the vertical and sub-vertical which ultimately ends up in the research (industry report, newsletter), pitchbooks, and CIMs of the investment bank. For investment banks with an equity research department, financial statement models will be built for each public comp that is being covered and consensus EPS data taken from research reports will be used to establish the value of the public comp.


The investment banker ultimately uses the vertical index and sub-vertical index to perform proprietary research and develop industry reports and newsletters which will aid in coverage and ultimately origination. The research, which we will go into greater detail on later in the book focuses on vertical and sub-vertical trends in margins, multiples, and M&A.


After establishing one’s coverage and then building an index for the vertical and sub-vertical as well as establishing relationships with strategic and financial buyers within the vertical and sub-vertical, the investment banker may begin advising targets on their strategic alternatives using information gleaned from the vertical and sub-vertical indices. Regarding the vertical index and sub-vertical index, the investment banker ultimately tracks trends in:


Growth rates




Debt to Equity




The investment banker takes the index and establishes tiers which turn into peer groups. This is why we pull public comps; to benchmark a target against the comps. By comparing a target’s level of performance to it’s peers and the industry in general the investment banker can determine when it is ideal to exit the business (when multiples are strong) and when it is not (when multiples are weak). This is how investment bankers advise on strategic alternatives.


How to Advise on Strategic Alternatives?


After establishing one’s coverage and then building an index for the vertical and sub-vertical as well as establishing relationships with strategic and financial buyers within the vertical and sub-vertical, the investment banker may begin advising targets on their strategic alternatives using information gleaned from the vertical and sub-vertical indices. Regarding the vertical index and sub-vertical index, the investment banker ultimately tracks trends in:


Growth rates


Debt to Equity



The investment banker takes the index and establishes tiers which turn into peer groups. This is why we pull public comps; to benchmark a target against the comps. By comparing a target’s level of performance to it’s peers and the industry in general the investment banker can determine when it is ideal to exit the business (when multiples are strong) and when it is not (when multiples are weak). This is how investment bankers advise on strategic alternatives.






Chapter 57:

Running the Boutique Investment Bank


In building AltQuest’s initial book of business, we sent over 2,000 emails to our initial coverage group, industrials/manufacturers. The response rate was approximately 2%. Of those that responded approximately 50% were interested in seller and 50% were interested in taking an offer on their business. Of those that were interested in selling their business, approximately 50% accepted our fee agreement.


When first starting the M&A firm, majority of time should be spent originating sell side mandates. Once the investment banker gets to 20 sell side mandates, one can ease up on origination and transfer those responsibilities to analysts and associates hired as interns which then turn into full time analysts/associates.


This means that all of the investment banker’s time will now be spent in M&A execution with sell-side pitches from time to time when the analyst/associate originates an opportunity.


Good analysts and associates will originate 2 to 3 sell-side pitch opportunities per week so the investment banker will stay busy on the phone with these CEOs/Founders/Partners.


Realistically it will take a year to a year and a half to close your first deal if you are just starting out in M&A. If you have been in M&A and have a book of business, the timeframe shortens to the typical time it takes to close a deal which is shown below.


It is important for the M&A professional to plan for this extended time frame and not to get discouraged when deals blow up, get delayed, or change. All deals associated with an actual perpetuity close, it is just a matter of time.


Building an Investment Banking Practice:


It will take a year of pulling emails with coverage, emailing everyday getting 2% response rate, and landing engagements to get to 20 M&A engagements. Year 1 & 2 is spent in data mining and emailing (coverage capability) as well as building out the analyst and associate team to do the same coverage. Year 3 is focused on qualifying buyers, buyer seller meetings and closing deals.


AltQuest’s coverage is manufacturing, healthcare, business services, and software in Texas, Florida, New York, and California.

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Date: 15th December 2018 @ 8:00 am - 16th December 2018 @ 5:00 pm
Time: 8:00 am - 5:00 pm

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