Friday, January 4, 2013

LBO Valuation Skills

A lot of people visit this blog and my website Corpfin.Net searching for information about leverage buyout (LBO) models, private equity models, and business valuation mechanics.  Both sites provide discussions of those topics and free access to easy- to- use, cloud-based financial models with which to do those analyses.

Unfortunately, many visitors move on from my sites without actually trying the models.  In my mind, reading about financial analysis techniques without actually doing an analysis is about as effective a learning method as reading a golf instruction book and never swinging a club.  In finance, like many other endeavors, the nuances and sensitivities of the game are best realized and understood through execution. 

One of the issues that may be at work for those not trying our models is the lack of a real-world corporate finance deal to analyze and compare one’s results to.  Accounting educators have for years addressed this issue by having students do practice sets (keeping the books for a fictional business through the completion of a one-month or longer accounting cycle) where the correct answers are known and the students mastery of the subject matter can be evaluated.  Unfortunately, as far as I know, no such curriculum is in place for financial forecasting and business valuation skills building. 

Which brings me to the point of this post: 

In the past I was involved as an advisor in the sale of small, privately owned insurance industry claims processing company.  After assisting the client in developing a five-year forecast for his firm, I used the Corpfin.Net LBO model to advise the client on pricing.  The client took my recommendations and (happily) realized that selling price.    

For those who would like to test their LBO analysis skills against an actual result, I propose that you sign-up for a free account on Corpfin.Net and e-mail me at, asking me to copy my insurance industry client’s forecast to your member directory (the forecast is titled “LBO Valuation Skills”).  Using that forecast, create an LBO valuation (about eight assumptions) and let me know the selling price you come up with.  If you would like a critique of your work, let me know and we will arrange to get together (for free) either on line or through e-mail to go through the details.

I am thinking about recognizing, in some way, those who either do a good job initially in estimating the selling price, or who demonstrate a basic understanding of the subject matter after a critique.  Please let me know if this idea of recognizing basic LBO valuation skills is appealing to you.    

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