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Why is an integrated 3-way financial model critical in M&A?

I first heard of a 3-way excel financial model in the early part of my career and it was spoken about in hushed tones, with such aura. Only the smartest people could build these, I was assured.

So let’s start with a definition of a 3-way integrated excel financial model.

A 3-way integrated excel financial model is a forecast of a company’s three financial statements – profit and loss, balance sheet and cashflow statements.


That’s it. Simple.


Why then is a 3-way so important in M&A?

Buyers of businesses are wised up to how financial measures from the profit and loss statement, such as EBITDA are often used as dodgy valuation proxies. After all, an EBITDA measure could be a useful pre-tax measure of cash generation for companies that consume no capital. And every company consumes some capital.

So, most buyers insist on reviewing the seller’s estimate of the future cash generation of a business.

The only way to accurately review a future cash generation forecast is to assess a forecast of the cashflow statement.


Being forewarned is forearmed.

So, the question becomes, should you build a 3-way model of your own business before you sell, or should you wait until you are selling and encourage a prospective buyer to build their own 3-way?

In my experience, being forewarned is forearmed. As the dictionary says, “advanced knowledge allows for advanced preparation; knowing about potential problems makes it possible to prepare for them”. Another way of saying this is if the future buyer of your business assesses your business forecast through a 3-way model, it’s a really good idea that you should build a 3-way model now, so you can prepare.

Many, but not all M&A advisors do this for you. At Presser & Co, we believe that being forewarned increases business value, so we build a 3-way for all our clients, as part of our preparation process.


Our next newsletter will discuss how it’s not easy to build a 3-way model. We also discuss how we use some really smart software, from a company in Melbourne called Modano, to quickly and simply arm our clients as they go to market. And finally we will talk about how we arm our clients, through a Presser & Co subsidiary called BeeReadi, 1 to 2 years prior to them going to market, with their own 3-way, that up-dated and rolled over every month.



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