[EP 008] Rise of the (Super) Models Part 2: How Financial Modelling Can Benefit Your Business with Michael Hutchens

Aspect Legal, Joanna Oakey, Business Sale and Purchase, Mergers and Acquisition, NSW Sydney Solicitors

Michael Hutchens of Modano continues our two-part series on the topic of financial modelling and goes into detail about the ways in which financial modelling helps businesses plan for the future. We also discuss the benefit of proper financial modelling in an M&A environment and how modelling can help identify when acquisitions might be a good strategy for growth. And finally, we close this series with some action items to help you get started in this area.

CLICK HERE to download the transcript for this episode.

Episode Highlights:

02:38 What modelling offers in M&A situations

14:00 Being transaction ready (…and the benefits of touch typing!)

17:32 A Billion Dollars’ worth of revenue opportunity

23:58 Action items

Joanna: Hi, it’s Joanna Oakey here and welcome back to the Deal Room podcast. Today we have the second part of our special two part series about the amazing world of financial modelling.

In this episode we are talking with Michael Hutchens from the software company Modano. Michael is an ex investment banker, professional financial modeller, software developing CEO. In this and the previous episode Michael discusses software and the nuances of financial modelling in sales and acquisitions transactions.

In part one of our series, we looked at what financial modelling is, why it’s important and where the real value lies. We discussed how financial modelling can provide the opportunity to take an understanding of your business to a whole new level and give you the ability to look into the future and test ideas you might have about how to grow the business. We also discussed in detail the opportunities for accounting practices. So if you haven’t yet heard that episode I strongly recommend that you go back and check it out.

But in this episode the final part of our two part series we talk in detail about the ways in which financial modelling helps businesses plan for the future. We discussed the benefit of proper financial modelling in an M&A environment and we look at how modelling can help identify when acquisitions might be a good strategy for growth. On the flip side, as a seller, why and how businesses can get themselves in a transaction ready state. So to kick it off, I asked Michael about how financial modelling can really assist in both small simple acquisitions as well as in those larger acquisitions.

If we bring all of that back to an M&A type situation, let’s look at two scenarios one small simple acquisitions and larger acquisitions. So lets start with the smaller. Is this concept relevant still for smaller acquisitions.

 

What modelling offers in M&A situations

Michael: It’s such an interesting discussion. Financial modelling and M&A – they sound so sexy. When I came out of uni, I just wanted to do M&A. I wanted to do deals. The funniest thing I learned about M&A is that the majority of what bankers do is run around like headless chooks doing whatever is necessary to close the deal.

So at least 60, 70 percent of your time is just doing admin, on planes and in meetings. That’s one of the reasons why I want us to do financial modelling full time because I didn’t have enough time to do that one thing well.

But with investment banking and M&A and the types of deals you’re talking about, it is funny because there’s this big belief that M&A is really hard when in actual fact a merger is simply taking the components of two businesses and looking at how they would actually operate together. Now obviously there are things like synergy, which is a really sexy word for “Hey, if you had these companies in one building, you wouldn’t need two lawyers. You can get rid of that lawyer. That’s an 80 grand cost saving, 120 pounds cost savings.” So synergy is just a way for saying you get rid of double-ups.

What’s different about small business M&As compared to large business M&As is that small businesses are obsessed with the cash impacts of the M&A transaction and the shareholder impacts. Whereas you look at large M&A, they’re looking at earnings accretion dilution and impacts on stock market share prices and valuation. So with smaller businesses, it’s often you’re unable to go out and say listen there are 500 comparable companies which you do particularly in the US and the U.K. You’re in a large transaction you just look at comparable companies and that would give you a lot of metrics and your financial model probably isn’t as relevant as it is in Australia where there are less companies. But the interesting thing with M&A in Australia is you often have two owners and operators in small businesses negotiating over what they think is reasonable for their valuations. And once you agree on that, the purpose of the financial analysis is really showing how that’s going to impact them and what their cash and often the deposition is going to be as a result. So the financial model really is a sanity check on the viability of a deal.

In terms of M&A and mergers, consolidations and those types of things, it’s not much different to building a standard model of a business. But you’re taking parts of two businesses. And I said to people for years “Imagine we had two businesses and imagine for simplicity that they were quite similar. So you decided you’re running say training business and you decide someone in Perth with a training business is running a very small business and you think maybe if you merge you could more successfully move into the Queensland and South Australian markets. You contact them and say “Listen. There’s a lot of opportunities for us to leverage off each other’s client base and experience. Would you be interested in working together?” And they say “That’s great!” They say “OK. Let’s build what’s called a pro forma model.” A pro forma model is a model that basically shows how something that doesn’t exist would look if it did exist. So you build a pro forma and the first thing you do is a model of just my business. I’m just going to forecast my revenue. In a model of our businesses, we’re going to forecast our combined revenue. For revenue purposes, you’re really just bringing it all in and you might break them out and show them as effectively two lines. You can show target acquirer but effectively all you’re doing is adding both in.

It gets more interesting as you get down to tax and capital structure where if you’re a combined entity you’d roll up all your debt for example into probably different facilities. You would probably refinance and restructure your capital structure. But effectively all you’re doing is you’re creating a really accurate view of what your business would look like if they weren’t two separate businesses.

The really exciting part of those models is saying “Okay. If we merged, we wouldn’t need to have two heads of business development. We wouldn’t need two lawyers. And we’d probably be able to move into one office, which would be, on a total cost basis, be a lot cheaper than having two separate officers. What you find is that there’s more value. You take the two businesses separately and they might each be worth five million dollars. You put them together they might be worth 15, 20. That’s the value of the model. You can see how the synergies give you that value uplift but you also can look at how money is going to move as a result of the merger or the acquisition. And that gives you clarity and shareholders clarity about what’s actually going to happen when these businesses come together.

 

Aspect Legal, Joanna Oakey, Business Sale and Purchase, Mergers and Acquisition, NSW Sydney Solicitors

 

Joanna: So essentially, modelling is giving us three things in this area for an acquirer.

  1. The modelling helps us identify when acquisitions might be a good strategy for growth.
  2. On the basis of what you’re talking about here as well, helping us to test when a target is found. So test roll forward, work out our assumptions and work out what it will look like together as a merged entity.
  3. And also finally, it helps in post transaction merging and making it all work together.

I guess that’s what I’m hearing from what you’re saying. Does that sound about right?

Michael: Yeah I mean the post transactions discussion is a whole new one because often post-merger is a fantastic time to consolidate the actual analysis of the two businesses and actually start from scratch and build a consolidated model. But as you said the real key to it is assessing the viability of something on one level and also then assessing how it would actually happen. And you’ll see the reason why the investment banks of the world still use Excel and the reason why no one in 50 years since the spreadsheet came out has found an easy way of doing it because you don’t you need the skills you need for finance tax accounting and modelling skills to do this and every business is very different. That’s the reason why the big four and the investment banks actually get paid a lot of money. They build these models because without them, you can’t pay an oracle to build a database of a company that doesn’t exist yet. The majority of accounting packages are based on your starting point as an existing business with existing data.

Obviously the big accounting package providers are trying to move into the forecast space. But it’s just so dynamic. You might actually do a whole piece of analysis for a month in the investment banking role or advisory role as an accounting firm just to test the viability of a potential strategy and you’re not going to implement an accounting package to do that because your accounting package is about compliance predominantly.

It’s really interesting stuff in that there’s this big black hole. And when it comes to strategic analysis (and that’s really what the modelling of M&As specifically is about), getting to that point where you decide something is or isn’t viable is actually really the hardest part. Once you’ve decided something is viable, it’s like you built the house. It’s there and you’re just painting walls and putting furniture in. But getting to that point is really where the hard bit comes in. And that’s really what investment banks do.

Investment banks charge success fees when they spend their whole life trying to find viable combinations and permutations of companies working together. If they find one they think works, they go out to and say “Hey, have you considered buying this business over here?” If they say yes, you say “We’ll advise you. Ten million dollar fee to help you.” It’s a billion dollar transaction. That’s how they make their money.

So investment banks spend their whole life thinking strategically and don’t really think much about compliance at all. And the accounting firms at the very other end of the spectrum. I suppose the big message I’ve always had for people was that there’s a big void in the middle there. And I mean we came up with this phrase we call “transaction-ready”. The best businesses in the world are transaction ready in that they don’t require an adviser to come in specifically at a point in time and tell them where they’re at because they already know. That’s where we have a process of years ago where a client came to us and said “Oh, we’re a bit of a mess.” They are an innovative company car leasing company and they had quite a complex business. They basically said “We don’t really have a good budgeting planning model and we’re looking at doing a whole lot of strategic stuff over the next few years. So we would like you guys to help us build a day to day strategic planning model.” So we built a monthly rolling planning model for them and then they suddenly decide they want to refinance a whole lot of their debt. We ended up working alongside a whole lot of banks refinancing a lot of their debt and then they decided they were going to IPO.

The most amazing thing happened. We actually got brought in alongside of UBS to work on a billion dollar IPO out of a company which we started with. I used to joke around with my friends saying we sort of started off as friends and ended up lovers. There was never this pursuit. There was never like “Let’s go out on a date.” There was nothing awkward about it. We just started off as friends and it evolved into a relationship where we end up doing a billion dollar mandate IPO alongside UBS. And what was really interesting about it was that UBS really didn’t like it.

First, the fact that they couldn’t run the model themselves because it’s sort of the centre of control when you’re making decisions. So they turned around and said “We’re going to build a parallel model.” So they did late nights. This poor analyst at UBS just did all-nighters for like two or three weeks. And in the end threw his hands up in the air and said “Listen. This is crazy. We’ve only got a couple of weeks to get this IPO going.” They ended up actually using the model that was owned by the firm that they had built working alongside us.

I keep saying this to small accounting firms. And that’s a bigger end of town there. But if you start working with companies when they’re small and they grow fast, you can build your business off the back of one of those clients.

A great example of that is a company called Fonda Mexican which people in Melbourne would be familiar with. It’s a great Mexican chain. Those guys are growing quite rapidly. They were using a very small accounting firm very early on but then they needed financial modelling services. The firm that they were using didn’t have those. So they moved to a bigger firm that still struggle with those. And we’re helping them with that. But the irony of the whole situation was very early on. I spoke to their initial firm prior to this becoming an issue and said “You guys should upskill because some of your clients could grow and need this service.” They were like “Yeah. We’ll wait until it happens.” And they missed the boat.

Joanna: Wow.

Michael: Now they’ve ended up losing a client that would have been a nameplate client for them because they’re their best client. And now, they’re sort of still working with tax and compliance on much smaller businesses. I suppose what it comes down to as an accounting firm is what are your aspirations?

You’ve got to really think about that. Even the bigger firms, I speak to them all the time, and they tell me openly we’re really struggling to move away from tax compliance because it’s just so easy compared to what you’re saying. And then what a lot of them are looking for is a silver bullet, which are things like an add onto xero where they get a cut and it’s fifty or a hundred bucks a month and it just plugs in some numbers, gives you a great looking dashboard and you tell the client you’re adding value.

I’m pretty harsh on a lot of those programs because I think they actually take control away from the company and your adviser. You’re effectively outsourcing your analysis to a third party that doesn’t understand your business and isn’t even integrally involved. Whether you like it or not, to have a deeper relationship with your client, it takes time and investment of time and energy and passion to the point where you genuinely understand your clients’ businesses.

We’ve got clients that will call our consulting directors on a Sunday afternoon before they do a transaction saying I need to sit down with you Monday morning because we’re about to make a bid for a company and I’m not comfortable doing it without speaking with you guys first and making sure the numbers are up. When you get to that point with a client, you’re in a very good place because they see you as a trusted companion not only in relation to their compliance but in relation to their forward success.

I always joke around saying I always associate my beer with a Friday night (because I always have a beer on Friday when I get home). I have always said to my friends “It’s sort of like I associate the success of a satisfying week with a beer.” If you can get to a point where clients basically associates successfully running their business with you being in the room when they make decisions, you’ve got a good life. And that’s where you think about accounting firms right now. They’re killing each other on margins and fees. Technology is each client’s work.

I find it extraordinary how so many accounting firms are lapping up technologies which in some regards are taking control away from their particular margins. They are doing it because they’re a lot easier to use. It is a lot easier to implant xero and maybe take a cut and plug some numbers in than it is to actually learn a skill that is much more complicated. But in time, there is a lot more upside in skills which can’t be automated away completely.

 

Being transaction ready (…and the benefits of touch typing!)

Joanna: I think they’re really great points you make there. Certainly, your point about being transaction ready. I just think that this is the sort of thing that I’m constantly preaching to from a legal perspective as well. It’s exactly the same from a legal perspective – organizations being transaction ready. From a legal perspective, it can sometimes take a while for a company to be cleaned up. And there’s often leakage that can happen particularly through the due diligence phase, when clients come in and they’re not transaction ready. It sounds like exactly the same from the financial modelling point of view. Being able to give them the insight to ensure that from a financial perspective they’re also transaction ready.

Michael: It’s 100 percent the same thing. I mean the two examples I always use and I think as you’re saying the legal side is exactly the same. The great example I was using – touch typing.

Most people know that touch typing saves them a lot of time and it takes probably 100 hours to do it somewhat reasonably. Yet very few people in the world do it because they don’t want to invest that initial time. And therefore each year they probably spend two or three hundred extra hours typing.

It’s one of those things where you sit there and you’ve got two companies. You know you should fix this now. We always joke around with our consulting business. People come to us when they’re either petrified or running out of money or they’re really excited about getting really rich. So normally, when people come to us, things are either really good or really bad. But when it’s business as usual they are like “Oh, all right.”

It’s sort of the same with gym. More people are obese now than ever before. In fact I think more people are obese than not obese. And people know they’re not doing it properly. They know they’re not eating well and not being out of exercise. But they’re not fixing it in a hurry. Once you do fix that you see people that have this dynamic where they’re just fit. They’re eating well and they have that positivity that comes with getting it right. And I think getting people out of that mentality of “I’m okay. I’m doing okay.” is a real challenge. But once you get that out, you become friends for life. A lot of businesses are in that space where they’re not making . And I’ve been in this personally over the last five or ten years.

My business at times has not been going badly, hasn’t really been going well and suddenly I find something outside of work that excites me a little more than my mid-sized business. And suddenly you’re struggling a bit in the morning.

One of the keys with thinking strategically in your business is being constantly aware of the opportunities. Whereas when you’re just focusing on the now and today and yesterday, you sort of just focus on getting by. There’s a whole psychological analysis you could do of the types of people that love financial modelling and strategy versus the ones that are more focused on compliance. And I think with accountants, they are generally risk averse.

I wouldn’t say the average accountant is a really strong salesperson. I would say they’re much more the guy you rely on to get something done and to go out and pitch a new concept to somebody. And obviously combine the risk aversion on that. They don’t want to look stupid. So they don’t want to go out and pitch a service they’re not comfortable providing. They’re often concerned about investing a huge amount of money in upskilling their staff on something that might not work. So this is a chicken and egg problem where they’re thinking “What if I spend a whole lot of money getting my staff fired up about this and then the clients don’t even want it? And I’ve just spent thousands of dollars investing in something that I want. And then what if we do go out and a client wants it. We build it and we don’t do it properly and it doesn’t work. It’s stupid. You’ve got a lot to lose. Are we going to lose the compliance work from our clients?”

It’s certainly a much riskier field than ticking boxes. But at the same time it’s almost a necessary next step for accounting firms that want to be more to their clients than just effectively a compliance officer.

Aspect Legal, Joanna Oakey, Business Sale and Purchase, Mergers and Acquisition, NSW Sydney Solicitors

A Billion Dollars’ worth of revenue opportunity

Joanna: In the next five to ten years the world of accounting is going to change massively. Technology is having a very big impact so these opportunities to build differentiation point to enable you to find a way to really give life to that value add and to stop leakage of your best clients should be a really strong impetus for accounting practices to look really seriously at this type of opportunity.

Michael: It is. There is a lot of money there. We did some stats on just the Australian market size. And even with the out of dates, as we did this a couple of years ago in 2015, we look at it and there are in Australia alone over 2.1 million operating registered businesses with ASIC. And then you look at that and over 250,000 of those have more than five staff and over 50,000 of them have more than 20 staff. So you’ve got a situation there where we always look at companies and we basically tell them you should be spending as much on your planning and analysis as you are spending on your website. And what’s amazing is because everyone’s scared of not selling enough, people happily spend on website.

A lot of people spend SEO services without any idea whether they’re going to get a return on that. But very few companies will spend money on strategic planning tools because it’s just like “Well, I’m not quite sure what I’m getting out of that. I don’t really need it and I’m not going to feel bad because most companies don’t do it properly.”

If you do some basic numbers and assume that the average company in Australia with more than 5 staff has a budget of five thousand dollars a year for planning (which I would argue was negligent not to have if you got five staff who are paying bills); If your average salary is say 60 or 70 grand a year, you’ve got sort of three to five hundred thousand dollars over cost there. You probably should spend one percent of that on planning.

So if you do that and you say “OK, let’s assume that in Australia, you’ve got between five and 20 staff companies. You’ve got a billion dollars’ worth of fees there that the companies have to spend. You take it up another level and you say “Okay, the companies with 20 to 200 staff, there’s 50,000 of those.” Those companies are what we call the sweet spot financial modelling, the companies that often have a budget of 50 to 100 grand for a model per year and that’s still less than one full time staff member if they’re experienced.

But you sit and say “OK, well that literally is another one billion dollars’ worth of revenue now for accounting firms to go and get.” What’s amazing about that is that I would argue right now (and I’m very confident in saying) that I think that right now probably 5 percent of that market is being serviced and it’s being serviced by the mid-tiers, the big four. A lot of those companies would not consider a model that they own less than 40-50 grand of fees from.

So you’ve really got a billion dollars’ worth of fees sitting there. And the most amazing thing about that fee pool is it’s not the most sophisticated modelling. The most sophisticated modelling is where you have 200 plus companies which we’ve been working with a lot, companies like Origin where you build a transfer pricing model that’s 10 meg that takes three months to build and analyze really complex operational drivers.

The average company with 15 or 20 staff just need it integrated through and have it roll. The technology we’ve built and the technology that’s out there today, a lot of different tools are getting close to supporting that. Our system does support it but you just need to learn how to use it.

I say to companies “Listen. You’ve got the clients. You’ve got the demand. Even if you don’t realise it yet, you just probably haven’t told your clients that this is possible.” That’s why the marketing is very much an educational process. But when you say to people “Go at your clients and show them this.” Have a coffee with them and say “Hey, you’re turning over five million dollars now. You may have an IPO in five or 10 years. Have you ever thought about taking this to another level?” Most big companies do this.” Inspire them to do that and bring them on a journey with you. And that’s really where I think there’s a huge growth opportunity.

But as we keep saying, at the very core level you need to understand financial modelling. That’s obviously my mission in life, making financial modelling not a scary word. It’s actually really cool, exciting stuff.

For younger staff, financial modelling skill sounds terrible. But most of our staff that we’ve trained up, we struggle to keep them because we outsource them to companies and companies are like “Oh, they’re paying you two grand a day.” These are 25 year old guys and girls and they’re like “Would you want to come and join our company for a hundred grand a year?”

Joanna: You need some clauses in those agreements with your clients.

Michael: We try. It’s hard. It really is hard. The funny thing is it works well for us because often they’ll go across and then we’ll end up with more work coming from an ex-staff member working with that client. But the one thing I have noticed is that people with financial modelling skills are literally bombarded with career opportunities.

One of the ways I motivate people to get into financial modelling is saying “Listen. If you want to advance your career faster than anybody else you know, learn financial modelling.” You must know the youngest CFO and CEOs are people that happen to be in a place where they had learnt these skills very early in their career. As an investment banker, within six to 12 months you know financial modelling and that means you could go and run a midsize business at 26 because you understand businesses. Whereas if you’ve spent three or four years doing compliance work, you go and do compliance but you’re not going to get paid a lot for that. You’re not going to be sitting at the table when they decide whether they IPO or not.

It’s a very exciting field to be in. But people need to accept the fact that it’s not something you can just plug and play. It’s an art and a skill and it’s hugely valuable. But it’s more sophisticated than other things so you need to learn how to do it.

Joanna: Now you’ve got me! The enthusiasm you have for this financial modelling, I just want to come and join the band. I want to do some financial modelling myself. I can feel the energy!

Michael: The biggest challenges as a company is that we are all obsessed. We love modelling anything all the time. So one of the biggest challenges I face on a weekly basis is I’ll be at a function or birthday or a drink’s night for somebody’s birthday. My friends all say “My business is now turning over five million dollars.” I say “How are you doing your modelling? Have you run some numbers on that? And they say “No. What are you talking about? And then I’ll get calls from mates at 3 o’clock on Tuesday saying “Can you come and take a look at this for me?”

I’m discovering pretty quickly that the only people that don’t want models are the people that don’t understand how powerful they are. Once you give somebody a good model, they become obsessed. We joke around and we call it binary flip. They will get a model and now they’ll think “Oh my God how did I go without this?” But it’s very much an educational process and that’s probably the hardest thing for accounting firms. You’ve got to educate your clients as to why they would want this before they realize how valuable it is.

 

Action items

Joanna: Yeah. And then they’ve got to get it, the accountant first, to be able to communicate that value. So Michael where can our accountants and our listeners who are often end client buyers and sellers and brokers as well consultants, where can they go to get more information about how your software works and how financial modelling could work for them?

Michael: Well, I don’t want to put an hour plug in right here but…

Joanna: Go for it! Tell us where to go.

Michael: My company is Modano. And what we’ve done is we’ve realised that the majority of the small end of town, what we call the small end of town, just don’t have this skill at all. So we’ve created about a 20-hour training system you can go online and do. It’s all completely free purely because once people learn how to model, they become interested in using our software. So it’s actually in our interest to educate people on this. So we’ve created effectively 20 hours. It’s basically seven exercises and in each one you build a model, you submit it and you answer multiple choice questions. You’re actually, typically moot building models for clients. So we’re providing that service.

I’d also recommend. The key is you need to get your hands on examples of financial models. Even the best financial modellers in the world, people that have often worked with the big investment banks never learned through osmosis. You need to get your hands on exact models.

We provide some on our website. You can go on LinkedIn and you can find people providing them. You can go on different websites. Just search for financial modelling examples. You really want to focus on integrated three-way models. That’s the key. They need to have an income statement, balance sheet and cash flow. You need to basically pull them apart and then put them back together again. But what you need to bear in mind is that the fundamentals of financial modelling are the same for all types of financial models.

People in this sector will love to tell you how complex it is and how what they do is different to everybody else. But on a core level we all face the same gravity. We’re all in the same universe.

For example, we rate models up in eight areas:

  1. Operational (i.e. revenue and expenses)
  2. Working capital (i.e. debtors and creditors)
  3. Assets (i.e. fixed assets and intangibles)
  4. Capital structure
  5. Tax
  6. Financial statements
  7. Outputs
  8. Other

 

If you can understand how to break a company up into those pieces and analyze them, you’ll be able to do everything. Over time you’ll be able got to do everything from M&As to consolidations to strategic planning to what-if analysis. So my advice to accountants is don’t go straight for the LBO because everyone on Wall Street’s talking about it. LBO is just another really complicated, sexy sounding phrase for effectively building a three-way model that contains a bit of restructuring on day one because your management’s buying a business out and you’re restructuring the capital structure.

Start off with the fundamentals. Learn how the three financial statements relate to each other on a forecast basis. Learn how our financial modelling differs from accounting. Financial modelling isn’t like debits and credits. When you model revenue, you forecast revenue normally on accruals basis and you make adjustments for cash, so debtors as models and adjustments.

A great example of how modelling differs from accounting is with accounting you obviously (and this will test my accounting), I’m not a CPA, but with accountants you actually book revenue when you debit accounts receivable, credit revenue. And then when the revenue comes in cash you obviously decrease your accounts receivable, increase your cash.

But in modelling it’s quite different. You look at it and say “What is my revenue going to be for the next period (which might be a month or a quarter or a year)?” And you say “OK, my revenue is going to be a million dollars.” You make an assumption and say “What is my debtor’s days? What is the number of days on average that it takes me to collect my debtors?” And you say 30 days, which in a 365 day year is about a twelfth. So a twelfth of that million dollars will be an adjustment to cash on the cash flow. You might have revenues of a million dollars but your cash will be less than. It might be just over nine hundred thousand dollars. But the way you model that is as an adjustment to cash. The reason why it’s as an adjustment to cash but the revenue is forecast independently of debtors until you do the cash adjustment is because the revenue is different from every business in the world whereas debtors calculations are often done just using debtors days. So these are the fundamentals that people need to learn. It is quite scientific the fundamentals. It’s when you start looking at specific industries and specific structures of businesses where it gets complicated. And we can help with that as a consulting firm with accounting firms. But the first thing I would do is learn the fundamentals which, as I said, you can try going to modano.com and do the online learning there and just search the web. Have a go.

You really need to get your hands dirty. So choose a client, not too complicated. I would recommend starting with a business that contains a single currency, single entity business. You don’t want to start off doing a multi-currency consolidation. That’s going to make you burn out and you’ll probably think I’m never going to be good at this.

Start with a simple business, simple drivers, single entity. Build it up. We build models of businesses like that for one or two grand for clients and they love them. That’s just starting, and then you build up on that.

Each time you start feeling comfortable, take on something a bit more complicated. Throw in a multi-business analysis. Throw in a discounted cash flow evaluation. Over time you’ll be a financial modeller and it will be easy. It’s sort of like playing. When you start enjoying the sound of the music you’re playing, that’s when you become valuable to your firm and that’s when you become hugely appealing to employers and the whole world starts changing.

Joanna: This is brilliant. So let’s recap then. I think that the top four action items that we’ve talked about here is:

  1. Get trained up on the fundamentals and understand how accounting is different to modelling.
  2. Look at examples of financial models.
  3. Get your hands dirty but start with something easy.
  4. Start communicating the value of modelling to your best clients.

 

Michael: Absolutely. That is, as I say, an educational exercise. What we find people write to most on that front is case studies. We love case studies like Grill’d and JB Hi-fi because they are household names. But the most important thing is to find a relevant case study and that gets easier over time. So if you can say we worked with a franchise business just like yours and they’re now able to do X Y and Z, you hit a nerve and they’ll finally say “Oh it drives me crazy how I can’t do that!” And that’s when they’ll come and say we want that too, because envy is a huge driver.

Joanna: Yeah, absolutely. Look, this has just been really great. I think really interesting information for our listeners in relation to financial modelling. Certainly very exciting. I’ve never felt so excited about the topic of financial modelling before.

Michael: I’m glad I saw you. Obviously we love it. It’s almost a disease. I think my wife didn’t like it so much. But we just love it. Right at the core of the action. So we love modelling and we love seeing people convert to modellers because they convert and never go back. The more modellers the merrier as far as we’re concerned.

Joanna: That’s amazing. I can really see the opportunity here. The opportunity for accounting practices to get something that’s a differentiator and something that really adds value to their best clients and help build their profile but also their fee base from their clients, and importantly to stop leakage of your best clients. I think that was a really good example you gave of the problems of putting it off until tomorrow because you can lose your best clients in the meantime who really need this insight in their business.

Michael: Most accounting firms assume their existing client bases are a given. They look at ways of growing it. I think in this day and age you need to be thinking both ways about that equation; that is if you’re not providing these services and somebody else is, can you afford not to? And if that’s what it takes to motivate you, that’s still a good thing. Whatever makes you move forward.

Joanna: Brilliant! Wonderful! And I think the really big takeaway that I heard and that I really subscribe to as well is ensuring that our clients are transaction ready. I think that’s key and that’s fundamental.

Brilliant! Thank you so much Michael for coming along. Once again if people want information they can go to your web site at modano.com.

Michael: I really appreciate you having me. We don’t get much opportunity to talk about this to the broader market. We’ve always been part of the inner sanctum of financial modelling, working with bigger firms and it is exciting for us going out and dealing with people, that it is becoming a part of this world. Our ambition is to take financial modelling to the masses the way mobile phones have got to the masses over the last 20 years. Big firms have big clunky financial models just like big ugly phones back in the 80s. We want all businesses to have access to high quality analysis and things like this are really helpful so thanks for having me. It’s been a real pleasure.

Joanna: Thanks so much for coming along Michael!

Thanks a lot for tuning in to the Deal Room podcast. Just a quick recap. In this episode, we talked about the wonderful world of financial modelling and how it can create planning for the future of a business whereas accounting is often backwards-looking. We see financial modelling as forward-looking and allowing organizations and accountants and brokers and consultants acting for their clients to be forward-looking on behalf of their clients, for accountants and brokers and consultants.

This is certainly an opportunity to provide a real value add, to provide a differentiator for your practices and also to stop leakage of your best clients for many accountants. And as I said in the interview I really think one of the key messages is keeping organizations transaction ready. Certainly, from a legal perspective that is a really important area to be on top of and things to note with your clients is the importance of being transaction ready from a legal perspective. I think Michael really spoke well today about the importance from a financial modelling perspective of ensuring that your clients are transaction ready.

If you’d like more information about this topic head over to our website at thedealroompodcast.com.

Through that website, you’ll be able to download a transcript of this podcast episode if you’d like to read it in more details. There you’ll also find details of how to contact Michael at Modano or to contact our lawyers at Aspect Legal if you’d like help with any of the items we covered today.

We can’t talk about financial modelling. You’ll have to talk to Michael and Modano about that. But we can certainly assist when it comes to dealing with businesses getting transaction ready, ready for a sale, ready for a purchase or a merger. And finally, if you enjoyed what you heard today please pop over to iTunes and leave as a review. Thanks again for listening in! I’m Joanna Oakey and this has been the Deal Room podcast.

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