Type 5 Role-Corporate Development:Acquire company? Do a partnership?

With corporate development, this refers to roles where you're working at a normal company; not in the finance industry. It might be a technology company, or a manufacturing company, or a utility company, it could be almost anything.

And here you're charged with internally making acquisitions, setting up partnerships, setting up joint venture deals, and so you use financial modeling to assess the viability of those. Usually you're trying to target a certain amount of money from each deal that you're doing, and so you use models to see whether or not you can actually achieve that.

So in some sense it's quite similar to what you might do in private equity where you're also thinking about buying entire companies; the difference here is that you're generally not as focused on selling them, because most deals you do are designed to be more long term.

So it's a little bit different, but fundamentally you're still trying to see whether or not deals and potential acquisitions are going to satisfy your criteria, and make enough money for it to be worth your while, and to significantly improve your company. So you come up with models for all these.

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Type 4 Role-Equity Research

In equity research, it's very, very similar to asset management and hedge funds, but the difference is that you're not putting your company's money to work. You work at a bank, and you issue reports on companies, you follow companies, and then when the bank's clients call you, they're institutional investors that are trading with the bank, and buying and selling through the bank.

They'll call you and you may talk to them, you may give your own views on companies, you may bring up points that they haven't thought of before, and then you're also communicating directly with companies, and trying to learn more from their management teams by going to conferences, and so on.

So for equity research it's similar, because you're still thinking about whether or not you should buy or sell stocks, but you're always making client recommendations. So in that sense it's really more what people call the “sell-side,” which investment banking falls into, where you're not putting your Coy's money to work, you're advising other people, and coming up with models to help with the advise that you provide to them.

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Type 3 Role-Asset Mgmt / Hedge Funds:Buy/sell this stock?

These types of companies essentially invest in public companies, and sometimes other public securities, all sorts of different securities, not just companies. They could invest in commodities, they could invest in derivatives, and they could invest in companies’ debt structures rather than their equity.

So there are a lot of different opportunities, but in this tutorial I will focus on equity investments. And the fundamental question here is should we buy this company's stock, or should we sell it, or if we haven't bought it yet should we short the company? In other words should we bet that its stock price is going to fall, or should we long the company (in other words, buy it with the expectation that the stock price will rise over time)?

The difference between these two is that hedge funds can employ strategies that are much less conventional. Most asset management firms are doing pretty straightforward things, really just buying and selling stocks; hedge funds it gets a lot more exotic. Also hedge funds are managing to an absolutely return; they're targeting a certain percentage return each year, whereas asset management firms are just trying to beat the market, whatever the stock market has returned that year.

So in these roles the purpose of a financial model is to look at a company, and say is it undervalued, is it overvalued, and then based on that should we buy it or should we sell it, or if we don't even own it right now, should we just avoid it, or should we short sell it to hopefully make money when the stock price falls?

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Type 2 Role-Private Equity:Acquire a company, run it, and then sell it again?

On the other hand, in private equity side, there's actually a lot of overlap, because with both of these fields you're really dealing with entire companies making major moves. The difference is that private equity is what's known as the buy side which essentially means that you're not advising companies, you're actually using your own capital to buy companies, and then to later sell companies in the future.

Here, you acquire a company, you may borrow some money to acquire it, you're probably not going to use all your cash to do that, probably going to borrow some amount of money, so it's not your money that's paying for it up front. You will run it for several years, maybe make some improvements, and then you will sell it again, hopefully for a much higher price so you can actually make money on this type of investment. So with this, the purpose of a model is pretty simple, you want to see whether or not by doing this you can actually make the amount of money that you want, and achieve the return that you're targeting.

Sometimes we use this type of model even in investment banking roles, for example, if you're working on a deal where you're selling a company to a private equity firm, but for private equity most of the models you create are designed to answer that question.

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Type 1 Role-Investment Banking:Sell the company? Raise capital? Find buyers?

With investment banking, typically the way that you use financial modeling is when a company wants to sell itself, it'll come to you and say, "Hey we want to sell, can you please advice us, and help us find buyers, and get us a good price for our company?"

Sometimes they will also not want to sell, but they will want to raise capital, so maybe they need funding to build a new factory, or they need funding for everyday purposes and they want to change the terms for their current loan from the bank, or something like that, or maybe they're planning something major, like an initial public offering; an IPO, you've probably heard and seen those in the news before.

Sometimes they hire you because they want to buy another company, and they want your advice on what to do, and there are some other situations. They might need to restructure their debt obligations, and change around how the debt repayment terms work, or how the debt interest works, or other things like that, but for the most part you're advising them, you're not directly investing your own money.

So the financial models you come up with are designed to give them an idea of what they might be worth. Sometimes they're designed to get other people, investors comfortable with investing in the company, or lending the money. And sometimes the models are used because when you go out and you market the company to potential buyers they're going to say, "Tell me what your five year forecast looks like" for example, so that's investment banking.

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Financial Modeling in Real Life

This time around I'm going to give you examples of how you can use financial modeling in real life to draw conclusions about investment opportunities, about advising clients/investors on their options when they're thinking about selling their own company or perhaps buying other companies. And we're going to look at these at a high level. So you can get started in thinking about the ways that you can use the output from a financial model to make these types of decisions.

Now before we actually get started with the examples here, one thing I want to mention briefly is that the way that you use financial modeling also depends a lot of the role that you're in[i][/i]. What I mean is that if you are an investor, and you only buy and sell small percentages of
company's outstanding shares being traded, so you're really like someone on a brokerage side except you have a lot more capital, and you're able to buy much bigger positions.

That is quite a bit different from buying and selling entire companies, and that in turn is quite a bit different from advising companies on what to do, not directly buying and selling yourself, or using your own money, but simply giving them advice, and perhaps helping them raise capital in the form of debt or equity.

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janefrancisca:
Hello goodevening, plz do u offer training classes for those who want to learn? If u do, are you running any current one and how much does it cost?

Hi janefrancisca,

Please check my signature below and get in touch.I will revert with answers to any query you got.

Step 6: Presenting your conclusions

The basic points that you have to mention here are what you're recommending, should your client buy another company?

Should your client sell to a specific company?

Should your company fund an internal project or not fund it?

Or, if you're an investor, should you buy a stock or should you sell a stock?

You have to tell them directly, up front, what your recommendation is. Then you have to say why. So you have to have supporting reasons backed up by numbers. A lot of people miss this because they talk about it at a very high level, at a very qualitative level. But the whole point of financial modeling is that you want to link and back up everything you say with numbers in some way, shape, or form

And then, you need to give an indication of how. So what is the best structure for this? What's the best timing? So if you think that your client should buy another company, how should they pay for it?

Should they use their own cash to do it? Should they borrow money from someone else? Should they do something else to fund the transaction? Should they do it right now? Should they wait? Should they do it, maybe not tomorrow, maybe they do it in three months time or something like that? So you need to give a more specific plan for the timing and the structure of what you're recommending as well.

Normally the format here will be PowerPoint slides. Sometimes you see Word documents. Sometimes it's just an oral presentation or a conversation with an executive or someone else at your company. So, the format varies widely. In this tutorial, we tend to focus on PowerPoint slides and Word documents because it's a bit better to have visual representations.

In general, people who are actually working in finance are pretty savvy about most of this. But your clients often are not and they know a little bit less about it. So you have to be really careful with how much detail you give and how much technical jargon you go into.

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Step 5:Build Your Analysis

This is the area where the "financial modeling" really happens. Because, you're not just reading about the company, you're not just gathering data.

You're actually doing calculations and hopefully forming conclusions based on those calculations. At a bare minimum, usually you will have something about the revenue and expenses for the company that you're analyzing, following, or advising.

Maybe you don't have a ton of detail on them, maybe you just have a simple percent growth rate or you assume that sales are going to grow by 3% or 5% or 7% per year. But you have to have some idea of what they're making and what they're spending. You need to know all that. Because, otherwise, you're not going to be able to make the correct decision or to properly advise your company/investor.

You'll almost always create full or partial financial statements. We'll look at exactly what that means in the next topic.

Now beyond this, often you will do a valuation, regardless of the scenario, so you'll see what this company might be worth. Putting aside whatever offers they've received or what they're thinking about doing, how much is it worth or how much should it be worth if you think it's current stock price is not accurate.


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Step 4: Gather Data for Other Companies

Kindly note that, this step depends on the purpose of your analysis. It can be important in valuation and M&A scenarios but it is less important for cases where your firm is a private equity firm, they're buying an entire company, and then they're selling it.

if you're looking at something like one company acquiring another company or your firm acquiring a company, running it, and then maybe selling it, this tends to be less data intensive because the key question is not what the potential buyer or seller look like and what the combined entity is going to look like.

So, really, you just need information on two companies, the buyer or the seller. And in some cases, you just need information on the seller. So these types of scenarios tend to be a little bit less data gathering-intensive. But you will still do some form of that here.

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Step 3: Identify the Key Drivers

After you have a sense of what the company is, what its story is, and what its industry is like, you have to identify the key drivers. A lot of people tend to over complicate this process and they can't really narrow it down exactly what to say.

So, they'll look at company and say, "Okay, well there are 50 key variables that impact its results and its financial performance." And, at some level, they're correct.

There are a lot of drivers that impact a company's performance. But, in most cases, and in most models, it's not even close to that many. It might be 3 or 4 key drivers, maybe 5, maybe up to 10. But usually it's more like 3, 4, or 5 key drivers when you get right down to it. So you have to figure out what these are. And we'll go through a few examples of these by industry coming up soon.

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Financial Modeling – Steps

Step 1: What is the Purpose of Your Analysis?

A lot of people get this wrong. So you need to ask yourself that question first. For example, are you trying to figure out whether a company's stock is overvalued or undervalued?

Or, are you trying to figure out whether or not your company should open a new store, or invest in another company, or buy another company? You need to think about that first. Because otherwise, the rest of this process is useless. And you would be surprised at how many times people jump into this without having a clear idea of what they're doing.

Step 2: Do Some Background Reading

Now the next step is to do some background reading. A lot of people skip over this. Because they say, "Oh, well, I need to finish my Excel file as quickly as possible and I need to turn it in and send it as soon as possible to the firm I'm speaking with." And this is almost always a bad idea. Because, as we noted before, the numbers don't mean anything unless you know something about the company, and the industry, and the story behind it.

By doing this background reading first, and just reading up on the company, its specific situation, some of its characteristics, you will save a lot of time later on because you're not going to have to go back in and re-do all your Excel work and come up with multiple versions and things like that.



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Topic Two: Financial Modeling Process

In this second tutorial, you’ll learn the 6-step process you can use to create any type of financial model, and how you use models to make decisions, invest, and advise clients in practical real life scenario.

The intuition behind the inclusion of this topic is because a lot of students and professionals think that the whole purpose of financial modeling is to jump into Excel as quickly as possible and then to start entering numbers and coming up with conclusions and coming up with complicated formulas based on that. And it's actually completely the wrong approach to use in most cases

it's not a good idea to jump in and start calculating numbers and doing all of that first because you need to go through a very specific set of steps whenever you complete anything involving financial modeling in Excel.

In our next session, I'm going to lay down the six main steps that I recommend following. Then we'll go through each of them in detail and give you some examples of what to do at each point along the way. And then, at the end, we'll summarize all of this, and then I'll give you a short preview of the next session.

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Topic One Cont'd

Generally speaking, there are two purposes of financial modeling that I would like to point to you guys. Number
one is you want to be able to make the correct investment decision, and then make money as a result of that. As an example of
this type of purpose, If we're trying to make an investment decision, do we buy this company's stock, or do we not buy it? Or do we sell this company's stock, or do we not sell it? So that's one of the main purposes of financial modeling.

Then the second one is if you're not in a role where you're investing your money directly. Maybe you're just advising clients or potential clients, so a client, like XYZ Pharmaceutical. They've received an offer from a larger competitor, say Jz's Pharma, and they want your advice to decide whether or not they should accept the offer, and if they should not accept the offer, what else they should do. Should they go approach other companies? Should they go and try to acquire a smaller company?

Using financial modeling, you can give them answers to those questions. Now there's more to it than that. It's not just about the numbers. There are qualitative factors. There are market factors. But at a basic level, that is what you're doing. You're using the numbers to help your
client reach the correct decision on what they should do, and hopefully get a deal done if it makes sense. Or if a deal doesn't make sense, to help them avoid making a stupid decision and doing a deal that is going to hurt them in the end.

I have noticed that, there are a couple points about financial modeling that a lot of people overlook or don't really get correct, and there are a lot of misconceptions about it as well. Going back to the point I made before about, if you look at this topic online, you find, in my opinion, what is a lot of confusing and misleading information that doesn't make it clear exactly how you use this.

Topic Two.......

Topic One: What is Financial Modeling?

I'm assuming we're all new to financial modeling. If you're pretty advanced, feel free to skip this topic.

This will be good if you're brand new to this, you don't have much experience, you haven't used Excel for modeling that much before, you don't know that much about accounting, finance or how to value companies, or other topics that are of similar concern.

Google search will give you definitions that are filled with numbers and technical terms. I will define financial modeling a little bit different here.

I would define financial modeling as telling a story with numbers.

As an example lets assume you’ve been following a company in the stock market that you're thinking about investing in, and you don't know whether or not it's a good investment. You don't know whether or not the company's stock price will increase. But you can use financial modeling to go through the company's story, and to quantify everything about it, and to make that type of decision [Buy, Hold or Sell]

Alternatively, maybe you're working at a company, and they're trying to decide whether to construct a new store in a certain location. You don't know whether or not it's really a good idea, so you have to figure out the story behind it, and then you have to quantify it with the numbers, and then come to a conclusion, and then advise management accordingly.

In this tutorial, I'll teach you exactly what financial modeling is, why companies care about it, and how to use it in real life in roles such as investment banking, private equity, hedge funds, equity research, corporate finance, and business development.

You'll also see practical examples on how to use financial modeling to make presentation to investors and bankers.

In the same vein, you will also learn key financial concepts such as time value of money, Present Value (PV), Net Present Value (NPV), the Internal Rate of Return (IRR), etc.

Buckle Up!!!