Fast-Track Profit Models

Abstract

The authors propose the new approach to due diligence that employs sophisticated business modeling to identify profit opportunities in advance of an acquisition. They call it Fast-Track Profit Models, which leverages advances in process models and costing. Today, industry process templates can be customized to simulate actual operations of a prospective acquisition. Transaction data from the prospect can be run through this model to provide valuable and accurate insight into business profitability and performance across the enterprise. Specific opportunities and risks can be more rigorously identified. Synergies can also be quantified. The purpose of this article is to add a new tool that focuses on the specific opportunities to boost the profitability of the company. Through the new Fast-Track Profit Models, buyers can enjoy more accurate profitability, cost, and capacity utilization across the enterprise in days instead of months. These models highlight which specific customers, sales representatives, contracts, products, services and vendors are undermining profitability, and which changes can be made to enhance profits. This can be used for valuation, post-merger management, problem identification, exit strategies, and fundraising. In this article, the author will explain how this new tool works, demonstrate its success, and discuss its potential usage for would be acquirers, whether they be industry insiders or financial outsiders.

TOPICS: Private equity, factor-based models, portfolio construction, statistical methods