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How to build an integrated 3-way model:

In our last newsletter, we discussed why you would build a 3-way model if you were planning to sell your business.

In a nutshell, it’s because buyers more and more build a 3-way model to:

(a) understand how your business works and

(b) to analyse the impact on their own financial statements should they acquire your business (for strategics).

By providing a pre-built 3-way model to potential buyers, you are guiding each buyer to assess your business rapidly and as a result, buyers can all assess your business at a similar rate, resulting in you and your M&A advisor maintaining the momentum of the sales process for longer and deeper into the sales campaign.

So how do you go about building a 3-way model?

3-way financial models not easy to build and maintain in excel. The steps include:

(a) determining what assumptions will drive your 3-way model

(b) specifying how your income statement is projected into the future, including how revenue and costs build out, and then

(c) building and linking your balance sheet and cashflow statements together to your income statement (thus creating the 3-way integration) such that the rule, Assets = Liabilities + Shareholders Equity is always maintained

Making 3-ways even more complex is that you’ll most likely be required to implement techniques to resolve circular referencing in your model, relating to the computation of cash balances, interest expenses, taxes and loan balances.

Finally, to make your 3-way come alive, you’ll need to update it every month, rolling over the next forecast month to become the last historical or actual month. Again, not easy to do.

Fortunately, software providers have made the job of building a 3-way easier. At Presser & Co, when building a model for our M&A clients, we use a software tool called Modano, which is a Microsoft Excel add-in that both speeds up the production of a 3-way, and produces the 3-way in a consistent, sustainable, and repeatable way with best practice spreadsheeting techniques. It also handles the monthly roll-overs in a breeze and incorporates MYOB, XERO, Sage, Quickbooks and MS-Dynamics API integration, making data transfer seamless.

In the next newsletter we’ll talk about a Presser & Co division, called BeeReadi, that provides a service that builds and rolls-over your 3-way spreadsheet every month, so that when you want to be ready to sell your business sometime in the future, you will be very familiar with the 3-way format and can ‘rehearse’ how a buyer will analyse your financials.

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