Key Financial Models in Investment Banking & M&A
These are the core technical models used by analysts and associates to evaluate deals, value companies, and support transactions.
Key Financial Models in Investment Banking & M&A
These are the core technical models used by analysts and associates to evaluate deals, value companies, and support transactions.
1️⃣ Comparable Company Analysis (Comps)
Purpose:
Value a target company based on how similar public companies are valued.
Core Components:
Identify peer group (same industry, size, growth)
Gather trading multiples (EV/EBITDA, P/E, EV/Revenue, P/B, etc.)
Apply median or average multiple to target company's financials
Make adjustments for differences in growth, margins, or capital structure
Key Outputs:
Implied enterprise value (EV)
Implied equity value (market cap)
2️⃣ Precedent Transaction Analysis (Transaction Comps)
Purpose:
Value a target based on multiples paid in previous M&A transactions.
Core Components:
Identify relevant historical transactions (same sector, size, geography)
Gather deal multiples (EV/EBITDA, P/E, EV/Revenue, premiums paid)
Apply multiples to target financials
Key Outputs:
Implied enterprise and equity values
Insight into market premiums for control, synergies
3️⃣ Discounted Cash Flow (DCF) Analysis
Purpose:
Intrinsic valuation based on present value of expected future cash flows.
Core Components:
Project free cash flows (usually 5-10 years)
Determine terminal value (exit multiple or perpetuity growth method)
Discount cash flows using Weighted Average Cost of Capital (WACC)
Sensitivity analysis (different assumptions for growth, margins, discount rates)
Key Outputs:
Intrinsic enterprise and equity value ranges
Sensitivity tables for key assumptions
4️⃣ Leveraged Buyout (LBO) Model
Purpose:
Analyze private equity acquisition using debt-financed structure.
Core Components:
Purchase price assumptions
Debt structure (tranches, interest rates, amortization)
Cash flow waterfall (debt repayments, interest coverage)
Exit scenarios (IRR, multiple of invested capital - MOIC)
Sensitivity analysis (exit multiples, leverage levels)
Key Outputs:
IRR (internal rate of return)
MOIC (multiple on invested capital)
Debt paydown schedule
5️⃣ Merger Model (Accretion / Dilution Analysis)
Purpose:
Analyze pro forma impact of M&A on EPS (earnings per share) for acquirer.
Core Components:
Purchase price & payment mix (cash, stock, debt)
Pro forma income statement
Synergies (cost savings, revenue synergies)
Financing costs
Tax implications
Key Outputs:
EPS accretion/dilution
Sensitivity to different synergy levels or deal structures
6️⃣ Sum-of-the-Parts (SOTP) Valuation
Purpose:
Value multi-business companies by valuing each segment separately.
Core Components:
Break company into business units
Apply appropriate multiple to each segment
Sum segment values for total enterprise value
Key Outputs:
Consolidated valuation reflecting business mix
7️⃣ Restructuring / Distressed Analysis Models
Purpose:
Analyze companies in distress or bankruptcy.
Core Components:
Recovery analysis (creditor waterfall)
Debt-for-equity swaps
Enterprise value in restructuring scenarios
Liquidation analysis
Key Outputs:
Expected recoveries for creditors
Post-restructuring capital structure