Intro

I talk a lot in this email series about how to build certain elements of financial models.

But what we don't talk about as much is when this stuff takes place.

For example, if you're looking to acquire a company, you'll probably build an LBO model pre-close, and if you already work at the company (or it was recently acquired), you'll likely build an FP&A model post-close.

Today we're in the shoes of an acquirer or private equity buyer and I want to talk post-close, specifically what happens in the first 100 days or so.

Let's dive in...

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What Budget?

You've spent months pouring over diligence, building LBO models, and the deal finally gets done, congrats!

Before you know it, it's "budget season."

You ask the finance team, "can you please provide a budget for next year?"

Very commonly the response is, "we haven't built a budget before, and the Investment Bank mostly helped us out with the forecast."

Good to know.

Herein lies your first task: time to build "The Operating Model."

The Operating Model

This is core FP&A.

We're going to build a model that we'll use each month that has a Budget and also records Actuals.

Then, we'll compare the two, see where we did better or worse, and figure out what to do next.

But how do you lead a budget?

If The Bones Are Good

You start with a very basic request from the Finance person at the company (CFO, Controller, Bookkeeper, etc.)...

"Can you please send me the Income Statement and Balance Sheet by month for the last two years?"

Use that information to model out the historical Statement of Cash Flows so you know the "guts" of your Three Statement Model are working, and then carry forward the operations totally flat for the next few years.

This is your infrastructure. The plumbing.

From here we track down the details.

Now Boarding

Armed with your "guts model," it's time to get on a plane and go visit the company.

Spend a day talking with the CFO (or head Finance person) and start ironing out the 80/20. What levers really move the business? It will probably be some combination of these things:

• Revenue
• Gross Margin
• Headcount
• Contractors (more common these days)
• One to two other OpEx items
• Working Capital Cycle
• Capital Expenditure

Talk through each one and start visualizing, "okay, how will I model this?"

Rep out a few sections and review with the CFO before you head back home (maybe spend 2-3 days onsite).

The Kitchen Async

From there, you can mostly go remote.

Back home, work on the 80/20 schedules one at a time, and review them with the CFO often (I use ​Loom​ for this and it's great; not an affiliate link, just a fan).

You will find that different people from the company are brought in to help with the budgeting process, so you'll want to think about "Department P&Ls" as you go.

As you continually iterate and get comfortable with the Department P&Ls, you are effectively leading the budgeting process. Most importantly, make sure everyone has buy-in on their respective P&L so there are no surprises later.

Let's Roll

I'm talking a lot of "budget," but what you're really building here is the groundwork for a rolling forecast.

Once the budget is done, here's what I like to do:

• Make a duplicate of my Three Statement Model tab (that has all the underlying schedules linked up)
• Copy/paste all the values and label that tab "Budget"

Now, my Three Statement Model can continually be updated as the year goes on, but my budget remains totally static.

The new Actuals come in and run through my Three Statement Model. Then, we talk with the team and make any go-forward changes as necessary. This is the "rollforward."

Since my budget tab is "frozen," all it requires are some lookups and I can easily compare each month (if you've read this far into the series I presume you know how to do this 😉).

Zooming out, this model will be reviewed over and over again until it becomes a monthly reporting tool that Management runs independently. But in the early days, this is your project to lead.

Culture Shock

Perhaps most often overlooked in this whole thing is culture.

The Portfolio Company has been operating on its own for however many years, and here comes big bad private equity to shake things up.

Be human. Remember this is a change. How would you feel if your job responsibilities changed overnight?

Help educate the team on the new Balance Sheet, why we even need the budget in the first place (often because it is required by the Lenders and the Board, and it builds a good financial discipline).

Be a partner, not an owner, and expect heavy involvement in the budgeting process for years to come. It's just part of the deal.

100 days will be over in no time.

That's it for today. See you next time.

—Chris

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