Asiansbook Book

ASIANSBOOK: THE ASIAN NETWORK & MARKETPLACE
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Michael Herlache MBA
Doctor of Business Administration Candidate
VP, M&A at AltQuest Group
Svitlana Herlache
Analyst, M&A at AltQuest Group
Asiansbook
The Asian Network & Marketplace

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For my wife, Svitlana, whom is my treasure.

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About the Author:
Michael Herlache is the VP of M&A at AltQuest Group, a middle market boutique
investment bank located in Fort Lauderdale, Florida. He lives in his home in Florida with
his wife, Svitlana. Michael has an MBA in Finance from Texas A&M University and is
getting his Doctorate in Business Administration with a focus on finance. To learn more
about AltQuest Group, please go to www.AltQuest.com.
For those interested in going through a formal perpetuity training program associated
with this text, the Unicon University (www.VCFounders.com) course’s syllabus is based
upon the content of this book.

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Contents
PERPETUITY:
Chapter 1: How to Build a Perpetuity Methodology
Chapter 2: Asiansbook
Chapter 3: Traction Methodology
PERPETUITY SCIENCE:
Part I: Perpetuity Methodology
Chapter 1: What is Business?
Chapter 2: What is a Perpetuity?
Chapter 3: What Education Teaches vs. What Education Should Teach
FOUNDATIONS OF VALUATION:
Part I: Tracking Value (Accounting)
Chapter 3: Tracking Value with Accounts
Part II: Analyzing Value (Finance)
Chapter 4: Analyzing Value with Finance
Part III: Modeling Value
Chapter 5: Finance with Excel
Chapter 6: Financial Statement Modeling
BUILD-SIDE:
Part I: How to Build a Perpetuity?
Chapter 49: How to Build a Benefit Stream?
Chapter 50: How to De-Risk the Benefit Stream?
Chapter 51: The Value Perpetuity
Part II: Perpetuity Analysis
Chapter 52: How to Be a CEO?
Chapter 53: How to Be a Consultant?
Part III: Perpetuity Modeling & Valuation
Chapter 58: Valuation Methodologies
Chapter 59: Framing Valuation
Part IV: Perpetuity Engineering
Chapter 54: How to Be an Engineer?

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Chapter 54: Knowledge Engineering
Chapter 55: Content Engineering
Chapter 56: Platform Engineering
Part V: Perpetuity Management
Chapter 57: Perpetuity Management
Chapter 61: Index Building & Benchmarking
Chapter 62: Financial Data Sources
Part VI: The Market for Perpetuities
Chapter 60: The Market for Perpetuities
SELL-SIDE:
Part I: How to Sell a Perpetuity?
Chapter 18: Investment Banking
Chapter 19: How to Become an Investment Banker Methodology
Part II: The Middle Market
Chapter 20: Middle Market Breakdown
Part III: M&A Multiples
Chapter 21: M&A Multiples
Part IV: Investment Banking Coverage Methodology
Chapter 22: Investment Banking Coverage Methodology
Chapter 23: Index Building & Benchmarking
Chapter 24: Financial Data Sources
Chapter 25: Industry or Sector Newsletter
Chapter 26: Industry or Sector Report
Chapter 27: Rolodex Building
Part V: M&A Origination Methodology
Chapter 28: M&A Origination Methodology
Part VI: Mandate/Target Matching Methodology
Chapter 29: Mandate/Target Matching Methodology
Part VII: Deal Structuring
Chapter 30: Deal Structuring
Part VIII: M&A Process
Chapter 32: M&A Process
Part IX: Investment Bank Management
Chapter 33: How to Build a Boutique Investment Bank?
Chapter 34: Running the Boutique Investment Bank
Part X: Deliverables & Coverage
Chapter 35: Investment Banking Deliverables

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Chapter 36: Adjusted EBITDA
Chapter 37: Valuation
Chapter 38: Teaser
Chapter 39: CIM (Confidential Information Memorandum)
BUY-SIDE:
Part I: How to Buy a Perpetuity?
Chapter 40: The Principle of Investing
Chapter 41: How to Be a Warren Buffett?
Chapter 42: The Operating Model
Chapter 43: The Financial Buyer aka Private Equity (LBO)
Chapter 44: The Strategic Buyer aka Corporation (Merger)
Chapter 45: Perpetuity Science & Portfolio Theory
Chapter 46: How to Start a LMM Search Fund?
CASES:
Part XVIII: Cases
Chapter 47: Cases

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Preface
We have all heard about the buy side and the sell side of finance, but who is actually
building the perpetuities. What if there was a third side of finance? What if there was a
build-side, with individuals possessing IB/PE and platform development talents to use in
the building of perpetuities? Shouldn't that be the logical course of events with
individuals taking their knowledge of valuation and industries and putting them to use in
building the next unicorns?
So what would this look like? IB/PE professionals joining startup labs such as the one I
run called Founders Ventures (www.VCFounders.com) to work on concepts that have a
legitimate chance of being a unicorn. Rather than leaving one's job to join a questionable
startup, join a startup lab and be directly involved in the build-side, even if it part-time.
The work of the build-side is syndication.
Shouldn't we all be working towards getting on the build-side?

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Perpetuity
The primary output in a capitalist economy is the perpetuity. The inputs include industry
as the uses and the capital markets as the sources of capital. The perpetuity is an asset
with a benefit stream that extends into the future continuously.

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Chapter 1:
How to Build a Perpetuity Methodology
At Founders Ventures, we are often asked, “How to build a perpetuity?” so we decided to
take our approach and build an official methodology around the process.
How to Build a Perpetuity Methodology:
1. The Case for a Perpetuity
2. MVP
3. Value Perpetuity
4. Financial Perpetuity
5. Growing Financial Perpetuity
6. Diversified Perpetuity

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Chapter 2:
Asiansbook
Asiansbook
Challenge & Opportunity:
The continent of Asia is massive making up 30% of the world's total land area and
possessing 4.4 billion people. It accounts for 40% of global GDP which has increased
from 20% the last century. India and China alone make up 36.4% of the world's
population and provide for 2.5 trillion and 12.5 trillion in GDP respectively. As you can
imagine, with a population that large, demand and consumption is currently disparate
and uncoordinated. Asian consumers consume locally and producers are focused on
those within their close proximity. With the advent of inexpensive smartphones and the
coming of a ubiquitous internet, we see the next billion both producing and consuming
in a more digital capacity. Asiansbook, the Asian network and marketplace has positioned
itself to be the very platform to facilitate this phenomena by allowing producers to offer
their goods/services to a scaled marketplace.
Key Question: How to Organize Asian Demand & Production?
Asiansbook Methodology:
Connecting Eastern and Western individuals in a social environment providing digital
infrastructure to address disparate and large numbers of people
Provide a simple marketplace with low/no fees for exchanging goods and services
allowing Eastern and Western individuals and businesses to transact

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In terms of messaging on social networks to drive followership, we utilized branded
photos to generate brand awareness:

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In terms of building the perpetuity we are building a following first based upon our
methodology on various social platforms including Facebook, Twitter and Instagram:

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In terms of converting followership into usership, the following are the conversion
metrics after we started requesting that our followers become users:

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Chapter 3:
Traction Methodology
Traction Methodology:
I. Facebook + Instagram + Twitter: “Follow followers’ followers”: Follow back at
20%
II. Deliverables & Snapshots of Progress (Methodology & Followership)
a. Deliverables:
i. Animated video commercial
ii. Book
iii. Perpetuity presentation
iv. Demo video with founders
v. Infographic
vi. Thumbnail and bar
vii. Png selfies of founders with logo/icon
III. Post snapshots of followership on one platform on the other platforms (social
proofing)
IV. Personal message to try platform: “Yes” at 6% follower to user
V. Valuation at $1 to $10 per user
Example:
Follow 1,000,000
X 20% follow back
= 200,000 followers
X 6% follower to user conversion
= 12,000 users
@ ~$5 per user
= $60,000 valuation of platform

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Perpetuity Science
The standard MBA curriculum at most business schools is broken down along siloed
subjects such as accounting, finance, management, operations, and marketing and
attempts to teach students how to be a mid-level manager at a large corporation for the
rest of their lives. Unfortunately, these jobs are mostly gone, having been shipped
overseas or automated. This MBA curriculum is thus outdated and not appropriate for
the 21st century when most individuals will have multiple jobs and roles throughout their
careers and lives.
The more appropriate field of study which has yet to make it to business schools is
known as Perpetuity Science. Perpetuity Science is the body of knowledge,
methodologies, and optimization models related to the building, selling, and buying of
perpetuities. It explains how perpetuities can be built, managed and exited from to create
wealth. Perpetuity science is a paradigm shift in business and finance education in that it
replaces the siloed subjects traditionally taught in undergraduate and graduate business

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schools with a holistic methodology that integrates industry and the capital markets into
one framework.
Instead of a disparate business taxonomy along the lines of economics, finance,
accounting, marketing, etc., we have an initial taxonomy broken down in relation to the
perpetuity, namely:
Build-side – the building of perpetuities (entrepreneurs, corporations)
Sell-side – the selling of perpetuities (investment bankers, wall street)
Buy-side – the buying of perpetuities (private equity, corporate M&A)
Within each of the three, we have various methodologies and optimization models that
may touch on various subjects such as accounting, finance, economics. By starting with
perpetuity science however, the student can better synthesize the various moving parts
of industry and the capital markets.
When first learning about industry and the capital markets, one should first understand
the nature of the perpetuity, which is the basis for industry & the capital markets. The
perpetuity can be modeled with the following formula:
Perpetuity value = CF / r
Where CF represents the benefit stream associated with the perpetuity and r represents
the discount rate associated with the perpetuity’s risk of receiving the benefit stream.

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After understanding the nature of the perpetuity in general, we can then analyze the
nature of the perpetuity within each industry. The nature of the CF, r, value chain, and
value being offered will be different. We investigate each industry according to these
variables by building an index for each industry and then sub-sector within the industry.
After building the index and sub-sector indices we can then begin analyzing the value
chain and leaders in each part of the value chain. We then build financial statement
models for the leaders in each section of the value chain and understand the drivers of
performance.
We analyze each leader or target in relation to the phases of perpetuity in terms of where
they are now and the next steps that they can take to move to the next phase. In doing
so, one begins to think in terms of being a CEO. The CEO’s role is to bring the
company/opportunity through the stages of the perpetuity by building recurring benefit
streams (i.e. cash flows) and at the same time de-risking those benefit streams. In doing

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so, the valuation of the perpetuity moves from backward looking towards forward
looking and the valuation is thus maximized (based upon a multiple of future earnings).
The CEO should thus be familiar with Perpetuity Science and the phases of the
perpetuity.
As the perpetuity changes, the formula for valuing the perpetuity changes as well. There
are five phases of perpetuity building. As we move through the phases, the role of the
owner of the perpetuity becomes more passive and the valuation becomes larger due to
size of EBITDA increasing, EBITDA multiple increasing, and the discount rate decreasing.
The perpetuity becomes less dependent on the owner to exist and run as an
organizational structure is formed coinciding with the division of labor, processes are
automated, and revenue becomes recurring.

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Phases of the Perpetuity:
I. Syndication (Getting to PMT)
II. Job Shop (From PMT1 to PMT2, PMT3, etc)
III. Perpetuity (From PMTi to CF/r)
IV. Growing Perpetuity (From CF/r to CF/r– g)
V. Diversified (Perpetuity 1 + Perpetuity 2)
The goal of Perpetuity Science is the building, growing, management, exit and buying of
perpetuities, so ultimately, while learning about Perpetuity Science itself, we are also
actively looking for:
1. Perpetuities to create
2. How to advance a perpetuity to the next phase
3. Perpetuities that should be exited from
4. Perpetuities that should be purchased

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Ultimately, Perpetuity Science transforms the individual from a one-dimensional
functional worker into a multi-dimensional value-creator able to execute on either of the
three sides of the perpetuity; build side, sell side, or buy side.
The Perpetuity Scientist vs. The Functional Specialist
The Perpetuity Scientist builds assets that generate passive benefits whereas the
functional specialist uses labor to generate active benefits. The quality of life of the
perpetuity scientist is thus higher than the functional specialist. It is the perpetuity
scientist that drives the primary value with functional specialists simply serving a role in
the process of building or operating a perpetuity.
The Perpetuity Scientist has the three capabilities associated with the key question of
each side of the perpetuity:
Build-Side:
Key Question: How to Build a Perpetuity?
Capability: The capability to build a perpetuity
Sell-Side:
Key Question: How to Sell a Perpetuity?
Capability: The capability to sell a perpetuity
Buy-Side:

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Key Question: How to Buy a Perpetuity?
Capability: The capability to buy a perpetuity
Capabilities that each business student should have are associated with the 3 key
questions of Perpetuity Science:
Perpetuity Science:
I. Build side: How to build a perpetuity?
II. Sell side: How to sell a perpetuity?
III. Buy side: How to buy a perpetuity?
The key questions are associated with capabilities to be built learning perpetuity science.

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From this methodology, Investment Banking University has built a body of knowledge
which turned into the course, How to Become an Investment Banker. The book,
Investment Banking, is meant to accompany the course which can be taken online, in the
weekend workshop, or in the month-long training.

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When asking the key question, “How to Become an Investment Banker?”, we are really
asking four questions simultaneously:
1. How to use finance to model the concept in a perpetuity format?
2. How to physically build the perpetuity?
3. How to sell/exit the perpetuity?
4. How to buy a perpetuity?
For each question, Investment Banking University has developed proprietary
methodologies which are the basis for building a capability which is the ultimate answer
to the question.
When the individual implements these models and builds the capabilities in finance, the
build side, the sell side and the buy side, one may claim to have become an investment
banker.

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Part I:
Perpetuity Methodology
Consistent with Perpetuity Science, the Perpetuity Methodology is broken down between
the three aspects of the perpetuity and also has the foundations of valuation to tie it all
together:

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Chapter 1:
What is Business?
When thinking about business we have to acknowledge the sources and uses associated
with a corporation where sources represent the capital markets and uses represents the
asset mix of the corporation. Business can be thought of as a process where the output is
a benefit stream with a given level of variability. This benefit stream with a given level of
variability is known as a perpetuity. Thus, the model for business is the perpetuity.
Since we know that a perpetuity is the model for business (the integration of industry
and the capital markets), we can then build a body of knowledge around the perpetuity
which serves as the basis for the science of the perpetuity (Perpetuity Science):

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The body of knowledge known as Perpetuity Science can be broken down in the
following manner:
The rest of this text goes into detail regarding the taxonomy of Perpetuity Science and
investigates each component.

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Chapter 2:
What is a Perpetuity?
Nature does not provide for man, so he must use reason to obtain value. Since his task is
both survival and pleasure, man must use philosophy and science to determine what is
valuable and then to build something to obtain said value. That which he builds should
not require the same work continually to operate; this is the basis for the perpetuity. A
perpetuity is an asset that generates a benefit stream continuously into the future.
Perpetuity is the basis for intrinsic value.
All of mans progress is towards the creation of assets that add value on behalf of the
human on a continuous basis into the future without the human having to replicate
previous work to receive benefits. This phenomena is referred to as the perpetuity. This
speaks to the advancement from the active benefit stream towards the passive benefit
stream (perpetuity). The perpetuity is both a philosophical and scientific phenomena
which embodies mans progress in both philosophy and science.

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Perpetuity can thus be broken down into:
1. Perpetuity Philosophy
2. Perpetuity Science
For the purposes of this book, we will be focusing on Perpetuity Science.
Standard of Living: Perpetuities
The Goal
To increase standard of living without sacrificing quality of life.
How to Get the Goal

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In order to increase standard of living without sacrificing quality of life, one is to build,
sell or buy perpetuities.
Perpetuity
Perpetuities increase standard of living without sacrificing quality of life by possessing
recurring revenue and automated work processes to achieve the revenue.
I. Building Perpetuities
The building of perpetuities is known as being on the build-side; commonly referred to
as entrepreneurship or corporations.
II. Buying Perpetuities
The buying of perpetuities is known as investment or being on the buy-side. The players
here are Private Equity (PE) or Corporate M&A Departments for major corporations.
III. Selling Perpetuities
The selling of perpetuities is known as the sell-side. The players here are investment
bankers (Wall Street).
The Lab of Perpetuities
The experimentation and optimization tool of finance is known as Excel.
Excel
Is the scientific computational tool of finance to aid us in the modeling and valuation of
perpetuities.
Demand for Perpetuities
There is always demand for perpetuities and especially by institutional investors which
means that the market for corporate control more closely mirrors the DCF (intrinsic value)
of the perpetuity (corporation). Institutional investors can pay higher multiples in order to
realize returns over longer periods of time.
Types of Perpetuities
Perpetuities can be created from companies that possess some aspect of recurring
revenue and automated work processes associated with product creation.
At a high level, types of perpetuities include:

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I. Commodity
a. Durables
b. Non-durables
II. Platform
a. Digital
b. Physical
III. Content
a. Educational
b. Entertainment
IV. Service
a. Analysis
b. Allocation
c. Engineering
d. Logistics
e. Management
f. Advocacy
g. Relationship
V. Infrastructure
a. Private
i. Real estate
b. Public
From the types of perpetuities, when applied to the main value themes of human
existence we arrive at industries associated with the perpetuities (according to Aswath
Damodaran at NYU):

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When looking at the different industries in which perpetuities are located, it becomes
helpful to understand the nature of the perpetuities including risk (as represented by the
discount rate in the perpetuity formula), return, growth, margins, multiples, and cash
flow:

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Risk (discount rate) on the following page:
Return:
Growth:

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Margins (Cash flow):
Multiples:

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Business: The Science of the Perpetuity
Introduction to Business
Business is the science of the perpetuity
Perpetuity value = CF / Discount rate
As you can see we can increase value by increasing CF (increasing revenues, decreasing
COGS, SG&A) or decreasing the discount rate.
The Corporation’s Goal
1. Become a perpetuity - as characterized by recurring revenue as automated work
processes.
2. Become a growing perpetuity
Value of growing perpetuity = CF / r – g
g decreases the discount rate
One should make the distinction between a perpetuity and a commodity. A commodity is
associated with a single benefit (cash flow) or a finite benefit stream, whereas the benefit
stream of a perpetuity is continuous into the future.
What is Intrinsic Value?
Something is intrinsically valuable inasmuch as it is a perpetuity. Perpetuity provides
certainty that the benefit stream will be recurring in the future and is thus, the basis for
intrinsic value. Perpetuities allow us to improve our standard of living while not sacrificing
quality of life by continually dealing with a problem/opportunity in nature and yielding
passive benefits.
How to Become Wealthy?

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The secret that the wealthy know and the middle class is unaware of is the perpetuity. A
perpetuity is an asset that generates a benefit stream continuously into the future. This
yields passive benefits rather than active benefits of which the middle class works for. The
wealthy know Perpetuity Science which is the science of building, selling & buying
perpetuities. There are three sides to the perpetuity:
1. Build-Side - How to Build a Perpetuity? (entrepreneurs, corporations)
a. How to Build a Benefit Stream?
i. Case for Value Perpetuity and Financial Perpetuity
ii. MVP
iii. Value Perpetuity
iv. Financial Perpetuity
v. Growing Financial Perpetuity
vi. Diversified
b. How to De-Risk the Benefit Stream?
i. Customer Concentration
ii. Owner Dependence
iii. Recurring Revenue
2. Sell-Side - How to Sell a Perpetuity? (investment bankers, wall street)
3. Buy-Side - How to Buy a Perpetuity? (private equity, corporate M&A)
Ultimately, the wealthy teach their children how to be 21st century perpetuity scientists
rather than 20th century functional specialists that will remain in the middle class.
In terms of order, the process is usually:
1. Begin on the build-side building a perpetuity which will take 3 to 5 years (initiate
coverage and syndicate within a vertical & sub-vertical)
2. Enter the sell-side and begin in investment banking after university/business school
(within existing investment bank or start own boutique investment bank)
3. From the sell-side, take advantage of strong opportunities and leverage this into a LMM
search fund

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FOUNDATIONS OF
VALUATION
In order to understand the role and work of the investment banker, we need to first have
a strong understanding of the foundations of valuation. This helps us to understand why
it is that the investment banking industry exists and where investment bankers fit into the
bigger picture.

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Part II:
Tracking Value (Accounting)
As a perpetuity is built, it becomes necessary to track the financial existence of the
perpetuity through time. Accounting is the set of concepts, methodologies, and models
that allows us to do exactly that.

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Chapter 6:
Tracking Value with Accounts
Value
The formula for value is:
Accounts and Accounting
In order to track valuation performance of the perpetuity (i..e business), companies create
accounts for each item of it’s financial existence. These accounts are the basis of
valuation. Valuation is the basis of actions taken in a capitalist economy.
Accounts, Accounting & Excel
Excel is the software used to model the accounts of the enterprise and determine the
valuation of the perpetuity (i.e. business).
Account Filings & Public Data
10-K annual
10-Q quarterly
Account Statements: P&L
Income statement (P&L):
Revenues
COGS
Gross Profit
Operating Expenses
EBIT
Interest Cost
EBT

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Taxes
Earnings
Account Statements: Balance Sheet
Assets = Liabilities + Shareholder’s Equity
Total Assets = Total Liabilities + Shareholder’s Equity
Current Assets + Long Term Assets = Current Liabilities + Long Term Liabilities + Value of
Shares Previously Issued + Retained Earnings – Treasury Stock
Account Statements: Statement of Cash Flows
CF from Operating
CF from Investing
CF from Financing
Statement of Cash Flows is the linkage between the income statement and the balance
sheet.
Get D&A from SCF (CF from Operations) and CAPEX from SCF (CF from Investing)
The following is a 10-K from Berkshire Hathaway:
The following is a 10-Q from Berkshire Hathaway:
The following is the IS from Berkshire Hathaway:
The following is the BS from Berkshire Hathaway:
The following is the SCF from Berkshire Hathaway:

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Part VI:
Analyzing Value with Models
(Finance)
As the economic existence of the perpetuity continues to grow, one becomes interested
in the value of the perpetuity. Enter finance, whose concepts, methodologies, and models
allow us to understand the valuation of the perpetuity.

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Chapter 7:
Analyzing Value with Models
Analyzing Value
Strategics, financials, and entrepreneurs undertake investment with the expectation of
NPV & IRR. They accept projects that have positive NPV and IRR higher than the cost of
capital. They actively find and structure positive NPV projects and then match financial
products to them.
The positive NPV project is ideally a perpetuity with the value of the business being the
perpetuity value:
Calculating NPV & IRR is the main analytical work of finance.
*Growth statistic CAGR (Compound Annual Growth Rate) is yearly IRR
From Accounts to Models
To go from accounts (accounting) to a finance number we use models. We only use Free
Cash Flow to determine valuation for major transactions in a capitalist economy including
restructuring, growth, M&A, and capital raising.
To go from account filings to models, we need to “clean the numbers”, “scrub the
financials”, “normalize the financials”. This amounts to recasting accounts to get to a
finance number. We try to get to a finance number to get to a valuation. We get to a
valuation to then take actions in a capitalist economy.

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*We want more add backs to get to a higher valuation
Modeling
After getting valuation, we can then model the different actions we can take in a
capitalist economy to increase the valuation of the strategic, financial or entrepreneurial
firm.
Modeling in Excel
Just like our account statements, our models are built and exist in Excel
Analysis of Account Statements
Analysis of account statements (ratio of analysis) has various uses including from a
liquidity perspective, commercial bank perspective, activity perspective, profitability
perspective, and growth perspective.
Ex. 4x-7x debt multiple for lending purposes
The following is the adjusted financials for Berkshire Hathaway:

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Part VII:
Modeling Value
Continuing deeper into the field of finance we now discuss the actual work associated
with understanding the value of a perpetuity. The work is done by modeling the
perpetuity in Excel.

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Chapter 8:
Finance with Excel
Finance with Excel
Express your decisions using Excel. Excel is the premier business computational tool
Implement financial analysis using the tool for financial analysis, Excel
Valuation process
Heart of finance is time value of money and discounting
Excel Concepts Needed for Finance
Write down variables (defining the parameters of the decision)
Absolute or relative values copying (=A1) (=$A$1) and formulas
Functions (=fx( ))
Data tables (“sensitivity tables”)
Express Decisions with Excel
Implement financial analysis with Excel

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Using a Financial Model for Decision Making: The Investment Decision
Ability to get financing from financial institutions depends on ability to make a financial
model for the new or existing business
The financial model projects future earnings from the organization
Predict the future performance of a firm.
Accounting statements report what happened to the firm in the past. A financial model
predicts what the firm’s accounting statements will look like in the future. Start by
taking the initial accounting statements and inputting them into Excel
Difference between accounting and financial model is in the current assets and current
liabilities. In financial model we are concerned only with operating assets and operating
liabilities. We exclude financing related
Financial model has three components:
Model parameters (value drivers)
Financing decision assumptions (i.e. Mix between debt and equity, what does firm do
with excess cash? Repay debt, payments to shareholders, or as cash balance)
Pro forma financial statements
Cash in the financial model is a plug. The plug is so that the balance sheet balances.
Cash = total liabilities and equity – current assets – net fixed assets
The plug is the balance sheet item that guarantees the equality of the future projected
total assets and future projected total liabilities and equity. Every financial model has a
plug and the plug is almost always cash, debt, or stock.
Financial Model and Valuation Process:
Assumptions (value drivers)

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Existing accounting statements (IS and BS)
Projected financial statements
Free cash flow calculation (FCFs)
Terminal value calculation
Valuation calculation
Sensitivity table for major value drivers to see range of valuation
Once the financial model is complete (i.e. accounting statements have been projected),
we can use the model to:
Value the firm by projecting free cash flows (FCFs)
Determine ability of firm to pay it’s debts (i.e. credit analysis)
Using a Financial Model for Decision Making: The Financing Decision
All companies must decide how to finance their activities
Proportion of debt and equity
The discount rate should be appropriate to the riskiness (i.e. variability or beta) of the
cash flows being discounted.
Discount rate is also called interest rate, cost of capital, opportunity cost.
Compute annualized IRR
The cost of capital of an investment is related to the risk of the cash flows of the
investment. The relationship of individual asset returns to the risk is called the security
market line (SML). You can use SML to get the discount rate for individual investments.
The SML is used for private companies.
The cost of capital of an organization is related to the risk of the combined riskiness of
the investments in the portfolio. The relationship of portfolio returns to the risk is called
the capital asset pricing model (CAPM). You use CAPM to get the discount rate (i.e. cost
of capital). When the investment is a public security, you use CAPM since the buyer of the
security will have a portfolio to diversify away risk.

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Portfolio risk is associated with statistics.
Wealth Maximizing Decisions
Investment decision – What is it worth? NPV of strategic alternative
Financing decision – What does it cost? IRR of financing alternative
Cash is King
Wealth maximization has to do with maximizing cash. Cash in the context or
organizations is known as cash flow.
Return is a word for cash flows
Cash Flow Definition (FCF)
Profit after taxes
+ Depreciation (noncash expense)
+ Change in net working capital (- increase in current assets and + increase in current
liabilities)
Capital expenditures (CAPEX)
+ After-tax interest payments
= Free Cash Flow (FCF)
Role of the Finance Professional
The role of the financial professional is to quantify the cash flows and risk of strategic
alternatives available to the individual or organization.
Investment bankers compute the IRR and NPV of strategic alternatives.
Capital Markets
The capital markets is made up of cash flows and discounts
Capital Markets and Information
Information is valuable in determining investment and financing decisions in the capital
markets. Overall, markets are weak form efficient meaning that their valuations reflect
previous stock price performance (i.e. stock price data) and are sometimes semistrong

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meaning that valuations incorporate all public information. Capital markets are not
strong form efficient meaning that valuations do not reflect private information.
Multiple Investment and Financing Decisions: Portfolio
When there is multiple investment and financing decisions, we have something called a
portfolio. The discount rate can be decreased by diversifying with a portfolio. When the
discount rate is decreased, the valuation of the portfolio increases as cash flows have
maintained more value.
A corporation/organization is simply a portfolio of sources and uses
Modeling a Strategic Alternative
Put all variables (“value drivers”) at the top of the spreadsheet
Never use a number where a formula will also work
Blue for hard codes
Black for links and outputs
Finance: Exchanging Value Through Time
Assets have a time dimension
Future value function =FV( )
Value in the future of a sum of money compounded into the future
Present value =PV( )
Value today of future payments discounted to present
Net present value (NPV) =-First payment + NPV( )
Incremental wealth increase earned by a strategic alternative. NPV tells you economic
value of an investment today. Always use NPV in the investment decision.
Internal rate of return (IRR) =IRR( )
Compound rate of return earned by a strategic alternative
VIII. Rate of Return vs. Cost of Capital
What is the asset’s IRR?

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Compare to the cost of capital (Effective annual interest rate – which is the annualized
IRR used to compare financing alternatives aka Compound Annual Growth Rate (CAGR))
Cost of Capital
Calculate IRR of financing alternatives to determine cost of capital
Need to get IRR in annual terms to facilitate comparison. May have to start with monthly
IRR then annualize
Annualized IRR = (1 + Monthly IRR)^n-1
Finding a Value in a Financial Model
When we want to find a value by setting a particular value to another cell, we use:
Goal seek – Alt, A, G
Financing Alternatives: Loan Amortization
=PMT( )
To calculate the debt payment per period
=IPMT( )
To calculate the interest portion of the payment of debt
=PPMT( )
To calculate the principal portion of the payment
VIII. Financing Alternatives: Direct Comparison
IRR of differential cash flows tells you the cost of the option
IRR tells you the cost of the financing alternative
CAGR is Effective Annual Interest Rate (EAIR) to allow for comparison

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Analyzing the Strategic Alternative: Sensitivity Table
Data Table is Alt, A, W, T
Tells you how output changes with incremental changes in the inputs (i.e. variables)
The Financing Alternative: Nominal vs. Real Cost
In determining the true cost of a financing alternative, it is important to use the real rate
of interest which incorporates inflation. The real rate of interest is determined by using
the real cash flows.
Inflation acts as a discount rate
Strategic Alternatives Analysis
For each strategic alternative, compute the NPV and IRR, then have decision rules for
investing including:
Minimum NPV
Hurdle rate (IRR)
You are using NPV and IRR to make investment decisions but you need the discount rate.
The discount rate is associated with the financing decision
Cash Flows and Risk
Are cash flows riskless (i.e. treasury bills) or are they risky (i.e. market portfolio)
Cost of Capital and Opportunity Cost
The returns of similar investments should be used as the cost of capital
The Discount Rate
An organization’s discount rate is the cost of equity and cost of debt. The cost of the
total capital structure is known as the Weighted Average Cost of Capital (WACC):
WACC = rE* (E/(E+D)) + rD (1-Tc)*(D/(E+D))
Value of Equity

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The value of equity is the present value of all future dividends
Sources & Uses
Uses Sources
Free Cash Flows WACC
CAPM to get cost of equity
Accounting Statements: Statement of Cash Flows
The purpose of the statement of cash flow is to explain the increase in the cash accounts
on the balance sheet as a function of the firm’s operating, investing, and financing
activities.
Valuation Methods: Total Enterprise Value (TEV) vs. DCF
Market valuation:
Total Enterprise Value (TEV) = MVE + MVD + Preferred – Cash
2. DCF Method (intrinsic value) = PV(FCFs) @ WACC + liquid assets
Accounting Value vs. Finance Value
Accounting value of firm is backward looking and thus incorrect to use in valuation.
Finance value is forward looking and consistent with the fact that the owner of an
organization or security has claims on the future cash flows of the business.
FCF and DCF
Free cash flow (FCF) calculations is DCF
Portfolio Analysis and the Capital Asset Pricing Model (CAPM)
Discount rate is a measure of risk associated with:
Horizon
Safety
Liquidity
We get the discount rate by analyzing the distribution of an investment’s returns. We
get the standard deviation which is a measure of variance in returns. Standard deviation
is a component to finding the discount rate:

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=STDEVP( )
What does the frequency distribution look like?
Determine risk measure known as beta and plug this into CAPM to get the discount rate
of equity. Derive the cost of debt and then calculate WACC to get the discount rate of the
firm.
Ex Ante vs. Ex Post Returns
Ex Ante is the expected return
Ex Post is the actual return
VIII. Statistics for Portfolios
=Average( )
To get mean return
=Varp( )
To get variance of returns
=Stdevp( )
To get standard deviation of returns
=Covar( )
To get covariance between two sets of returns
=Correl( )
To get correlation between two sets of returns
Trendline (regression) – click on points of XY graph and right click to Add Trendline with
linear regression and display equation and R-squared on chart
Portfolio Returns and The Efficient Frontier
Statistics are used to determine acceptable and unacceptable portfolios

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Diversification lowers standard deviation of the portfolio
Are the returns correlated? If no, then add security to the portfolio (i.e. diversify)
The efficient frontier is the set of all portfolios that are on the upward-sloping part of the
graph starting with the minimum variance portfolio (i.e. the market portfolio). Choose the
portfolio that is on the efficient frontier.
The Efficient Frontier and the Optimal Portfolio
The best investment portfolio is made up of the risk free asset and a risky asset
representing the market (i.e. the market portfolio)
Determine the market portfolio (the portfolio with the highest attainable sharpe ratio)
Market portfolio is the best combination of risky assets available to the investor
Security Market Line & CAPM
The security market line says that the expected return of an asset is a function of the
asset’s beta (i.e. sensitivity to the market).
Only relevant risk is systematic risk since the investors will all be diversified
Security Market Line & Investment Performance
Security Market Line & Investment Performance
VIII. Security Market Line & Investment Performance Continued
Investment performance:

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Risk adjusted performance; excess returns?
Risk Adjusted Performance
Market portfolio proxy is S&P 500
Beta is measure of riskiness of security
Alpha measures excess return
Market portfolio proxy is S&P 500
Beta is measure of riskiness of security
Alpha measures excess return
It is about investment performance versus the risk involved in the investment
CAPM & Investment Performance
Use CAPM to get the discount rate of equity and compare to cost of financing
alternatives
Is there risk adjusted overperformance or underperformance?
Is performance commensurate with risk?
Excess Return
Excess return is the investment’s spread over the one year treasury (i.e. risk free rate)
Use regression equation to determine if underperformance (negative alpha) or
overperformance (positive alpha)
When regressing asset’s returns against the market portfolio, alpha measures excess
returns over the market portfolio

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Beta & R^2
High beta is an aggressive stock
Low beta is a defensive stock
R^2 is percentage of variability that is market related risk when returns are regressed on
the market portfolio
Diversification increases R^2 of the portfolio and decreases nonsystematic risk
Alpha and Efficient Markets
In efficient markets, there is no alpha and investments earn their risk-adjusted return
CAPM and the Cost of Capital
CAPM = rf + Beta [ E(rm) – rf]
In CAPM, use Beta of asset to calculate cost of equity
WACC is the discount rate based upon the capital structure of the investment
Valuing Securities in Efficient Markets
Market efficiency and the role of information in determining asset prices
Publicly available information should be reflected in market price

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Chapter 9:
Financial Statement Modeling
Financial statement modeling refers to the creation of a standalone operating model for
a company. The operating model is built using historical performance (i.e. historical
financial statements). We use the operating model to see pro forma performance of a
company given certain assumptions. These pro-formas are the basis for decision making
within the corporation.
Financial statement modeling best practices:
Blue is hard codes, black is formulas
Be consistent with millions and billions (keep conventions the same)
Footnote everything in presentation
Keep your model simple (1,000 cells is better than 10,000 cells)
Financial Modeling Steps:
1. Spread historical financial statements
a. 3 to 5 years history for IS, BS, and SCF
b. Public information for company 10K, 10Q
c. If private company, get audited financial statements provided by company
2. Adjust for non-recurrings
3. Build cases into the operating model
a. Best case
b. Base case
c. Worst case
d. Disruption case
4. Build assumptions based upon historical trends in assumptions tab (margins and growth
rates)
5. Project LIBOR and interest rates
a. Spread over LIBOR
b. LIBOR is the base that banks use to price spread their loans to make money (called “L”)
c. 3 month LIBOR is the standard reference

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6. Project IS and BS & two items on SCF (D&A and CAPEX (before gross PPE on BS))
a. Maintenance CAPEX vs. Discretionary (growth) CAPEX
7. Separate debt and interest schedule (calculate debt and interest schedule before
calculating BS items for revolver, term loan, and unsecured debt)
8. Project Working Capital
a. Days payable & Days receivable (360 day method)
9. Project rest of SCF (all items pulled from IS or BS)
a. AR goes up, need negative sign on SCF
b. AP goes up, need positive sign on SCF
c. BS cash is ending cash position on SCF
10. Calculate paydown/drawdown for revolver as minimum (Min function) of CF before
revolver and beginning revolver balance
11. Operating model is done when you finish SCF. Operating model check (zero for Assets –
(Liabilities + Owners Equity)
NEXT STEP IS TO USE THE OPERATING MODEL FOR VARIOUS ANALYSES INCLUDING
ORGANIC GROWTH & INORGANIC GROWTH (STRATEGIC ALTERNATIVES). THE KEY
QUESTION TO ASK IS: WHAT IS THE BEST STRATEGIC ALTERNATIVE FOR THE
CORPORATION (I.E. HOW TO BE A GROWING PERPETUITY OR PARENT COMPANY OF
MULTIPLE GROWING PERPETUITIES)?
The following is a financial statement model for Berkshire Hathaway:

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BUILD-SIDE
Related to the intentional creation of perpetuities following a methodology, we have
what is known as the build-side. The build-side is associated with the creation and
management of perpetuities. Participants on the build-side include startups, growing
businesses, and established corporations.

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Part I:
How to Build a Perpetuity?
The process for building a perpetuity is the following:
1. Challenge/opportunity and case for value perpetuity & financial perpetuity (total
addressable market that exceeds hurdle)
2. Key question associated with challenge/opportunity
2. Methodology that answers key question
3. Platform architecture consistent with methodology
4. MVP (Minimum viable product) of platform
5. Value Perpetuity
6. Financial Perpetuity
7. Growing Financial Perpetuity
8. Diversified Perpetuity
Perpetuity Science & The Perpetuity Scientist

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Within Perpetuity Science, there are definite phases of the perpetuity corresponding to
levels of development of the perpetuity including:
1. Levels of customer concentration where:
a. high levels of customer concentration correspond with a lower EBITDA multiple
and low levels of customer concentration correspond with a high EBITDA multiple
2. Levels of recurring revenue where:
a. high levels of recurring revenue correspond with a high EBITDA multiple and low
levels of recurring revenue correspond with a low EBITDA multiple
3. Levels of owner dependence where:
a. a high level of owner dependence corresponds with a lower EBITDA multiple and
low levels of owner dependence correspond with a high EBITDA multiple
The perpetuity scientist (CEO or consultant) is not only responsible for growing the
benefit stream (CF), but also these de-risking factors that determine the discount rate (r).
In doing so, the perpetuity scientist builds a highly sought after perpetuity for both
strategic and financial buyers corresponding with a premium valuation.
When providing coverage to a target perpetuity and originating an engagement, the
perpetuity scientist should follow these steps:
Stage of the Perpetuity:
1. Syndication:
(Getting to PMT)
Initial revenue generation
The key here is taking a concept that has a large enough total addressable market and
turning it into a single sale as represented by PMT. This demonstrates product market fit
between the minimum viable product/platform and allows the owner to invest additional
time/energy/resources into turning the syndication into a perpetuity. The syndication’s
value to the owner will be related to the NPV/DCF value, however, since there is an
inefficient market for syndications, the value is going to be discounted at a high rate, in
the 80% to 100% range. The syndication is entirely reliant on the owner’s active

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involvement. If the owner no longer works in the syndication, the syndication will cease
to operate.
The market here is inefficient.
2. Job Shop:
(From PMT1 to PMT2, PMT3, etc)
The initial efforts create a job shop
The key here is taking a syndication that has demonstrated product/market fit and
turning it into a job shop with multiple projects as represented by PMT1, PMT2, PMT3.
This demonstrates product market fit between the minimum viable product/platform and
allows the owner to invest additional time/energy/resources into turning the syndication
into a perpetuity. The job shop’s valuation is based upon a multiple of its EBITDA and is
usually in the range of 3x to 5x. The job shop is not entirely reliant on the owner’s active
involvement and there is thus a larger, albeit still inefficient market for the prospective
perpetuity with likely buyers being individuals and LMM strategic and financial buyers.
The owner’s primary responsibility is to first turn the company into a project or job shop
(PMT representing a given job). The company is looked at solely as the sum of the value
of its projects/jobs meaning that the valuation of the company is backward looking.
3. Perpetuity:
(From PMTi to CF/r)
Transitioning from a job shop to a recurring revenue stream
The key here is taking a job shop with disparate projects (PMT1, PMT2, PMT3) and
turning it into a perpetuity with a predictable if not recurring benefit stream. The
perpetuity’s value is based on a larger EBITDA multiple since there is a semi-strong
efficient market for perpetuities with likely buyers being middle market strategic and
financial buyers. The perpetuity is almost entirely not reliant on the owner’s active
involvement.
From here, the owner is to turn the company into a perpetuity as characterized by
predictable, preferably recurring revenue. This can be done by building an organizational
structure with division of labor, automated processes with technology, and a business

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model that is recurring by nature. When this is accomplished, the valuation becomes
forward looking.
4. Growing Perpetuity:
(From CF/r to CF/r– g)
Going from recurring revenue stream to a growing perpetuity
The key here is taking a perpetuity with a durable benefit stream (CF) and reasonable
amount or variability in that benefit stream (r) and turning it into a growing perpetuity
with a corresponding growth rate (g). The perpetuity’s value is based on an even larger
EBITDA multiple since there is a weak form efficient market for growing perpetuities with
likely buyers being middle market strategic and financial buyers and some public
strategic and financial buyers. The growing perpetuity is almost entirely not reliant on the
owner’s active involvement.
This can be accomplished by building a scalable platform as part of the core business.
The valuation of the company now has to incorporate a growth factor.
5. Diversified:
(Perpetuity 1 + Perpetuity 2)
From one growing perpetuity to growing another perpetuity organically or purchasing
one to grow inorganically
Finally, the owner is to diversify either organically (new product, new business) or
inorganically. If the diversification is organic, the new product/business will naturally
move through the phases of:
1. Syndication
2. Project/job shop
2. Perpetuity
3. Growing perpetuity
Since the valuation is forward looking, it has to incorporate the new product/business’
financial performance. Since the parent company is now becoming diversified, the
discount rate will now decrease which adds value to the parent company.

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Chapter 31:
How to Build a Benefit Stream?
The CEO’s role is to bring the company/opportunity through the stages of the perpetuity
by building recurring benefit streams (i.e. cash flows) and at the same time de-risking
those benefit streams. In doing so, the valuation of the perpetuity moves from backward
looking towards forward looking and the valuation is thus maximized (based upon a
multiple of future earnings).
Reasoning to Platform
The ultimate conclusion of reasoning applied to a challenge/opportunity in nature is the
building of a platform which in turn can be turned into a perpetuity.
1. Opportunity/challenge in nature
2. Key question associated with challenge/opportunity
3. Develop methodology that answers the key question
4. Build platform around the methodology
5. Perpetuity
Existing Platform to New Value Theme
A common way to begin on the build-side is to take an existing platform and apply the
concept to a new value theme. We will discuss this in great detail in the cases portion of
this text.
Platform vs. Mod

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Platform is associated with network and is the core value, the connecting of individuals in
an integrated platform. Platform is ultimately the basis for becoming a perpetuity.
Mod is associated with a specific functionality.
The Value of Technology & Science
Technology and science have value inasmuch as they are associated with a perpetuity.
Technology and science in isolation has no value.
The Consumption Process & Growth Hacking
It is important to have appropriate expectations regarding growth and returns. One does
not simply build an MVP and turn on users with a switch. Brands are built one person at a
time and consumption follows a definite process which is the following:
1. Awareness of methodology via being advocated to directly on a social network or via
email
2. Methodology adds value for individual (based in reason) and thus the user decides to be
a follower
3. Followership of brand adds value enough so that when the 'ask' is made, the individual is
willing to experiment with usage
4. Usage adds value enough so that the user becomes an active user
5. Active usage adds value enough so that individual is willing to recommend others to
become users
6. Active users willing to pay for usage
Since there is a definite process to consumption, one's growth hacking methodology
should be consistent with this fact. The Growth Hacking Methodology means manually
connecting with individuals on various social networks including Instagram, Facebook, &
Twitter to first advocate the startup's methodology:
1. Develop thought leadership (methodology)
2. Advocate methodology and first contact

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3. Acquire followership
4. Convert followership into users
5. Convert users into active users
The key here is to advocate the startup's methodology and then show traction on the
methodology which will be used to gain followership from influencers and turn them into
evangelists for the methodology.
Mechanisms like social proof can be helpful as they accelerate willingness to participate
in followership or experiment with usage, but they are not a replacement for one by one
advocacy of a methodology. Social proof kicks in incrementally as the startup hits an
extra zero at the end of its followership and user numbers (ex. 100, 1000, 10000, 100000,
1000000).

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Chapter 32:
How to De-Risk a Benefit Stream?

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Chapter 33:
The Value Perpetuity
Commodity -> Finite Benefit Job -> Active Benefit Perpetuity -> Passive Benefit
Perpetuity

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Part VIII:
Perpetuity Analysis
On the build-side, we are ultimately concerned with the creation and management of
perpetuities. We first explore the perpetuity analysis, perpetuity building process/timeline
(including sources and uses) and then move towards a methodology for perpetuity
management.
The goal of Perpetuity Science is the building, growing, management, exit and buying of
perpetuities, so ultimately, while learning about Perpetuity Science itself, we are also
actively looking for:
1. Perpetuities to create
2. How to advance a perpetuity to the next phase
3. Perpetuities that should be exited from
4. Perpetuities that should be purchased
Perpetuity analysis is performed with an understanding that a perpetuity’s ideal course of
action at any given time is related to one of the three sides of the perpetuity (Build-side,
Sell-side, Buy-side) which depends on the phase that the perpetuity is in:
I. Industry and sub-industry indices made up of public comps
II. Benchmark comps into Perpetuity Phases
III. Build financial statement models for each
IV. Determine DCF, Comp Companies & Precedent Transactions valuation football
field
V. Compare peers in Perpetuity Phase to intrinsic value to determine if this is a Buy-
Side, Sell-Side or Build-Side deal (where are peer multiples at in relation to intrinsic
value?)

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a. If Build-Side: What needs to be done to get to the next phase of the perpetuity?
b. If Sell-Side: How to exit the perpetuity?
c. If Buy-Side: How to acquire a target perpetuity?
Perpetuity science explains how perpetuities can be built, managed and exited from to
create wealth. As such, it inherently has an owner focus rather than simply a capital
markets focus which is manifested by the dual goals of decreasing the owner’s active
involvement in the day to day of the business and the maximizing of valuation.
Perpetuity Analysis can occur at three levels:
1. Vertical (Industry)
At the level of the industry, we can take the public comps as place them on the Market
for Perpetuities chart:
For example, we can take a look at the Oil & Gas vertical and see where the various
players at:

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2. Sub-Vertical
At the level of the industry, we can take the public comps as place them on the Market
for Perpetuities chart:

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For example, we can take a look at the Oil & Gas machine manufacturing sub-vertical and
see where the various players at:
3. Corporation
As discussed, a corporation is merely a portfolio of perpetuities. As such, we can map the
corporation in terms of its perpetuities and see the stage of each individual perpetuity:

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An example of Perpetuity Analysis at the corporate level would be Berkshire Hathaway,
which we have mapped below:

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Perpetuity science is where entrepreneurship, strategy & finance come together. It a field
of study complete with a body of knowledge, methodologies, and optimization models
towards improving the individual's quality of life by the building of a perpetuity that
accomplishes two dual goals:
1. ever decreasing involvement of the perpetuity owner in the perpetuity
2. ever increasing valuation of the perpetuity
Perpetuity science is ultimately about maximizing quality of life rather than just wealth by
building perpetuities with recurring revenue streams that are not reliant on the daily
participation of the owner of the perpetuity. We can take a look in a visual format of what
we are trying to accomplish:
As you will notice, the owner’s direct involvement in the perpetuity decreases as the
perpetuity moves through the phases of development. Also, valuation increases as the
perpetuity moves through the phases of development for three reasons; EBITDA increase,
EBITDA multiple expansion, decrease in discount rate.

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The key question is: How to build a perpetuity that minimizes the daily involvement of
the owner and at the same time maximizes it’s valuation.
Though applicable to all industries, the focus industries of perpetuity science are thus
those that do not require significant capital outlays which could otherwise be used to
invest in a diversified portfolio. These industries include:
1. Technology
2. Media
3. Education
4. Business Services
As you will notice, these industries have to do with knowledge working and benefit from
information arbitrage and/or network arbitrage. While it is possible to structure arbitrage
in other industries by preselling various products and services, knowledge working
industries offer genuine information/network arbitrage as well as allowing for recurring
revenue business models rather than being one time commodity or project-based. You
will also notice that margins are much larger in knowledge working industries which
translates into larger EBITDA multiples. Thus, the owner of the perpetuity is rewarded
multiple times more for the value that their perpetuity creates than they would for
commodity or project-based syndications.
Given that the human has a limited amount of time on earth and limited resources within
which to invest (energy, capital), one should invest their time in knowledge working
industries and build perpetuities there first. Only after a perpetuity has been built in a
knowledge working industry should the owner explore other non-knowledge related
industries.
One should thoroughly understand these industries overall and their sub-sectors when
syndicating a new perpetuity. We will go into these industries in detail after explaining
the perpetuity building process, the perpetuity management process, and perpetuity exit
process.
The science of the perpetuity can be broken down into three sequential categories
including:
I. Perpetuity Analysis

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II. Perpetuity Building
III. Perpetuity Management
Perpetuity Exit
Market Analysis
GDP
Industry Spend
Sub sector spending

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Sub sector spending by product
Value Chain Analysis
General
Industry
Sub-sector
Sub-sector by product
Gap Analysis
General
Industry
Sub-sector
Sub-sector by product
Product/Platform Analysis
Base
Mods
Perpetuity Science: A methodology that synthesizes industry and the capital markets in
relation to the perpetuity. The science of building, selling and buying perpetuities.
I. Nature of the Perpetuity
II. Phases of the Perpetuity
III. Sides of the Perpetuity

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IV. Perpetuity Analysis:
Industry and sub-industry indices
Determining where leaders are at in Perpetuity Phases
Build financial statement models for each
Compare Perpetuity Phase to intrinsic value
Determine if this is a Buy Side, Sell Side or Build Side deal (where are multiples at in
relation to intrinsic value?)
What needs to be done to get to the next phase of the perpetuity?

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Chapter 10:
How to Be a CEO?
The CEO should thus be familiar with perpetuity science and the phases of the perpetuity.
As the perpetuity changes, the formula for valuing the perpetuity changes as well. There
are five phases of perpetuity building. As we move through the phases, the role of the
owner of the perpetuity becomes more passive and the valuation becomes larger due to
size of EBITDA increasing, EBITDA multiple increasing, and the discount rate decreasing.
The perpetuity becomes less dependent on the owner to exist and run as an
organizational structure is formed coinciding with the division of labor, processes are
automated, and revenue becomes recurring.
Phases of the Perpetuity:
I. Syndication (Getting to PMT)
II. Job Shop (From PMT1 to PMT2, PMT3, etc)
III. Perpetuity (From PMTi to CF/r)
IV. Growing Perpetuity (From CF/r to CF/r– g)
V. Diversified (Perpetuity 1 + Perpetuity 2)

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Chapter 10:
How to Be a Consultant?
The consultant’s role is to aid in the building, selling, or buying of a perpetuity. Since
the consultant’s value is in relation to the perpetuity, the consultant’s core
methodology/body of knowledge is Perpetuity Science. Perpetuity Science is the set of
methodologies related to building, selling, and buying of perpetuities which is referred to
as the build-side, sell-side, and buy-side respectively. The key questions related to each
side of the perpetuity are:
The consultant uses methodologies related to each one of these key questions which
serve as the basis for a consulting engagement:
1. Build-Side: How to move a company/opportunity to the next stage of the perpetuity
building process? The methodology for the phases of a perpetuity is the following:

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2. Sell-Side: How to obtain a valuation higher than the NPV of the perpetuity? The
methodology for doing so is to get a buyer to price in the next phase of the perpetuity
into the current valuation (ex. if the perpetuity is at the perpetuity phase, get the buyer to
pay for a growing perpetuity)
3. Buy-Side: How to locate and take ownership of a perpetuity that is being valued at less
than its NPV? The methodology for doing so is to get the seller to accept a price for the
previous phase of the perpetuity (ex. if the perpetuity is at the growing perpetuity phase,
get the seller to sell for at a perpetuity valuation)
What Should You Learn in Business School?
Since the perpetuity is the basis for both industry and the capital markets it follows that
business school thus focus on educating individuals on:
1. The Nature of the Perpetuity
2. The Phases of the Perpetuity
3. The Different Sides of the Perpetuity
The standard MBA curriculum at most business schools is broken down along siloed
subjects such as accounting, finance, management, operations, and marketing and
attempts to teach students how to be a mid-level manager at a large corporation for the
rest of their lives. Unfortunately, these jobs are mostly gone, having been shipped

101
overseas or automated. This MBA curriculum is thus outdated and not appropriate for
the 21st century when most individuals will have multiple jobs and roles throughout their
careers and lives.
The more appropriate field of study which has yet to make it to business schools is
known as Perpetuity Science. Perpetuity Science is the body of knowledge,
methodologies, and optimization models related to the building, selling, and buying of
perpetuities. It explains how perpetuities can be built, managed and exited from to create
wealth. Perpetuity science is a paradigm shift in business and finance education in that it
replaces the siloed subjects traditionally taught in undergraduate and graduate business
schools with a holistic methodology that integrates industry and the capital markets into
one framework.
Instead of a disparate business taxonomy along the lines of economics, finance,
accounting, marketing, etc., we have an initial taxonomy broken down in relation to the
perpetuity, namely:
Sell-side – the selling of perpetuities (investment bankers, wall street)
Within each of the three, we have various methodologies and optimization models that
may touch on various subjects such as accounting, finance, economics. By starting with
perpetuity science, the student can better synthesize the various moving parts of industry
and the capital markets.
1. The Nature of the Perpetuity: When first learning about industry and the capital markets,
one should first understand the nature of the perpetuity, which is the basis for industry &
the capital markets. The perpetuity can be modeled with the following formula:

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2. The Phases of the Perpetuity: After understanding the nature of the perpetuity in general,
we can then analyze the perpetuity within each industry. The nature of the CF, r, value
chain, and value being offered will be different. We investigate each industry according
to these variables by building an index for each industry and then sub-sectors within the
industry:
3. The Different Sides of the Perpetuity:

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Chapter 48:
How to Be an Engineer?
Engineer Methodology:
1. Identify challenges/opportunities in nature
2. Form key question
3. Develop methodology to answer key question
4. Build platform consistent with methodology
5. Turn platform into perpetuity

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Part IX:
Perpetuity Management
On the build-side, we are ultimately concerned with the creation and management of
perpetuities. We first explore the perpetuity analysis, perpetuity building process/timeline
(including sources and uses) and then move towards a methodology for perpetuity
management.

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Chapter 15:
The Purpose of the Company
Companies exist to create value
How Companies Create Value
Companies create value by investing capital at rates of return that exceed their cost of
capital. This is the principle of value creation.
The only thing that differs across companies is the implementation (i.e. different asset
and capitalization mix)
Strategy & Finance
Valuation Drivers

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The Role of the CEO

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Valuation

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Perpetuity Management with Discounted Cash Flows
Growth or Restructuring
Perpetuity Management Process

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Measuring Value Added: ROIC vs. Market Return
Measure return on invested capital (after-tax operating profits divided by capital invested
in working capital, PP&E) and compare it with stock market returns
Measuring Value Added: Economic Profit & NPV
Economic profit = ROIC spread % over cost of capital x invested capital
The objective is to maximize economic profit. When the company is larger, one should
use Net Present Value (NPV) which calculates economic profit in a more robust and
flexible fashion.
Valuation in the Public Markets
Valuation in the public markets has investors paying for the performance they expect the
company to achieve in the future; investors ultimately end up paying more since their
valuations are not based upon the past or cost of the assets.
The CEO should endeavor to have his company in the public markets since the largest
multiples are applied in valuation
Real Markets & Financial Markets
When a public company, the CEO has to both maximize the intrinsic (DCF) value of the
company and manage the expectations of the financial market
Differences between actual performance and market expectations and changes in these
expectations drive share prices. The delivery of surprises produces higher or lower total
shareholder returns
Perpetuity Planning & Control (i.e. Management)
Planning & control system should be put in place to monitor the NPV of every business
unit and summed to get the NPV of the corporation. Economic profit (i.e. NPV) targets
set annually for next three years, progress monitored monthly and managers’
compensation tied to economic profit against these targets

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Value Metrics
Metrics are to drive decisions and guide all employees toward value creation.
Perpetuity Planning & Control (i.e. Management) in Practice
Corporate management sets long-term value creation targets in terms of market value of
a company or total returns to shareholders (TRS)
Strategic alternatives valued in DCF (i.e. NPV)
Intrinsic value of chosen strategic alternative translated into short and medium term
financial targets and then targets for operating and strategic value drivers
Performance assessed by comparing results with targets on both financial indicators and
key value drivers. Managerial rewards linked to performance on financial measures and
key value drivers
Value Metrics: Market Value Added & Total Return to Shareholders
Market Value Added is the difference between the market value of a company’s debt and
equity and the amount of capital invested. Measures financial market’s view of future
performance relative to capital invested in business.
Total Return to Shareholders measure performance against the expectations of financial
markets and changes in these expectations. TRS measures how well a company betas the
target set by market expectations
Value Metrics: DCF vs. Earnings Multiple
DCF is intrinsic value. Earnings multiples are market values.
Earnings alone is inadequate without understanding the investment required to generate
the earnings. Should know ROIC
Cash Flow

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Cash flow equals the operating profits of the company less the net investment in working
capital and fixed assets to support the company’s growth.
Perpetuity Management Capability
1. Analyze where perpetuity is currently at (which phase)
2. Determine which phase is the goal
3. Determine steps to get to next phase of the perpetuity
4. Build Work Breakdown Structure (WBS) to get to next phase working backward from the
next phase
5. Execute the plan
Perpetuity Lifecycle:

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Chapter 16:
Valuation Methodologies
1. Public Company Valuation
2. Comp Companies – Also known as trading comps. Management team gives you 1 to 2
years projections or equity research comp reports to get forward multiples (x Revenue or
x EBITDA ) which may be used as the basis for this valuation. You can get comps from the
general overview as it will discuss the target’s comps in the 10K. Find comps with good
multiples to then tell your story to the marketplace to then get a certain valuation.
a. Select the universe of comparable companies – Choose 7, 8, 10 comps, need their 10K,
10Q, analyst reports to get TEV for each comp then divide by line item to get multiple.
b. Locate financial information on comp companies – Information must come from latest
filing (10K or 10Q). Print out 10K, 10Q, analyst reports.
c. Spread key financial information, ratios and multiples – Calculate TEV (in comp spread
tab). To get MVE, use TSM method. TSM = Exercisable options outstanding x (share price
– strike) / share price.
d. Benchmark comp companies – Get the multiple that the company is trading at for each
metric for each comp and get mean and median of comps for the metrics (ex.
TEV/EBITDA)

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e. Determine implied valuation – Multiply mean and median multiple x the revenue or
EBITDA to get the valuation range for your target company.
Notes:
The better the company, the higher the multiple and the better valuation you get.
In IB/PE/CorpFin, you need to know comp companies and transaction comps. “Here are
the comps in your sector…”
Higher multiple because…
Operating in better markets, better operations
The multiple tells you which company is better, margin analysis tells you why they are
better.
Sell side key question:
“Which comp would you use to guide potential buyers?”
3. Precedent Transactions – comp transactions
a. Select universe of comp transactions
b. Locate deal-related and financial information – Need press release of the deal, 8K, 10K,
and 10Q. Type of payment: cash, stock, cash & stock.
c. Spread financial information, ratios and multiples – Get transaction TEV (implied) &
transaction MVE (implied)
d. Benchmark precedent transactions
e. Determine implied valuation
Notes:
20% to 25% control premium paid with the transaction multiple being an implied one
based upon the valuation.
Determine whether the market is good or bad based upon whether people are paying
good premiums (control premiums).
When a transaction occurs, update client on the latest transaction to show them impact
on the control premiums being paid and implied multiple as well.

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Point to the transaction comps that have the highest control premium.
4. Discounted Cash Flow (DCF)
a. Spread historical financial statements (input historicals) and derive historical ratios, trends
and variables (drivers of future performance; margins and growth rates). Project financial
statements (proforma). Revolver modeling to link IS, BS, and SCF
b. Project free cash flow (FCF)
c. Determine Weighted Average Cost of Capital (WACC) – Discount rate
Cost of equity:
Rf = 10 year treasury
Market risk premium = Rm – Rf. Refer to Ibbotson. Ultimately this is S&P returns over 70,
80, or 90 years
Beta = Levered beta of comps to unlevered median and mean of comps (unlevered beta);
should be .5 to 2.5; 2 year to 5 year betas (taking out capital structure and relever to
actual capital structure. With beta, we are putting capital structure on unlevered beta
mean and median of comps to calculate WACC of own company.
Cost of debt: weighted average of tranches of debt tax effected; found in 10K. Rates from
the notes. If private company, get from clients the tranches and to get rates, go to DCM
to get approximation.
Cost of equity 20% to 25% in private markets. No use of debt is an inefficient use of
capital. Trying to optimize the D/E ratio to minimize cost of financing.
d. Determine terminal value – EBITDA multiple which is going to be almost 80% of the
company value. Terminal value = LTM multiple from comps x EBITDA. Perpetuity growth

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rate should be 2.5% to 3% and should not be larger than the size of the GDP of the
country
e. Calculate net present value (NPV) and determine implied valuation
Notes:
Need the valuation date; this determines stub year fraction (i.e. period left in the year).
Stub year fraction – investor does not have claim on revenues before that. DCF value
always moving through time consistent with valuation date.
IB interviews test you on DCF. Everything else that you know is a bonus.
Do DCF to find yield to decide whether or not to invest principal.
Creating value:
$ dollars of value increased by…
Changing multiple on valuation
Decreasing the discount rate

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Chapter 17:
Framing Valuation
We are not looking at each valuation methodology in isolation but are ultimately using
the methodologies together to frame the valuation in a valuation summary format. We
use a “football field” (valuation summary) to frame the valuation which looks like the
following:
Regarding the football field, we add control premiums to comp companies and DCF (%
addition that is equal to the control premium average for the transaction comps) if doing
valuation for selling the company.
Footnote everything (assumptions) in the football field. The football field takes one day
to a few days depending on how easy it is to obtain the precedent transactions data.
Banker should know what valuation the client expects to be at; 10% to 15% spread of
range of valuation (“tighten” the range if needed by eliminating comps that skew the
range)
For each valuation methodology we are going to do a sensitivity analysis to determine a
valuation range:

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Chapter 18:
The Market for Perpetuities
The market for the perpetuity at its initial stages is inefficient, but as it moves through the
stages of a perpetuity, the market becomes more efficient. You can observe the
coinciding cost of capital move from almost 100% going all the way down to 3.5%.
You can observe the EBITDA multiple for the perpetuity increasing as the perpetuity
moves through the phases of the perpetuity.

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SELL-SIDE
As perpetuities continue to grow, the builder of the perpetuity seeks to grow the
perpetuity inorganically or exit the perpetuity. This is the primary role of the sell-side,
which is to aid in the buying and selling of perpetuities. Investment bankers now enter
the picture as this is their core work.

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Part X:
How to Sell a Perpetuity?
On the sell side, the primary responsibility of the investment banker is to aid those
owning perpetuities in analyzing their strategic alternatives related to inorganic growth
or exit.
Which phase is the perpetuity in? (SMB, LMM, MM, UMM, L)
Which buyers are likely interested in the perpetuity? (Individual, Financial, Strategic,
Special Situation)
Each of these buyers have a different valuation range
Individual – Desire 30% to 40% IRR, 3x EBITDA
Financial – 4x to 7x EBITDA
Strategic – 5x to 10x EBITDA
Valuation is a range

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Determine valuation method (DCF, comp companies, precedent transactions)
Calculate benefit stream (synergistic vs. owner benefit)
Determine required rate of return given the phase of the perpetuity and the buyer
(discount rate)
Convert benefit stream into present value at the discount rate
Sensitize the variables for a range of values to see effect on valuation (sensitivity table)
Strategics and financials establish their filter criteria (hurdle IRRs for financial and
minimum EPS increase for strategics) and test targets against this filter
Strategics have a range of values with standalone value as the lower end and valuation
with all synergies on the higher end. A deal happens usually in the middle

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Chapter 19:
Investment Banking
Since M&A (Mergers & Acquisitions) is the core product of investment banking,
discussions around investment banking typically relate to M&A. M&A is the selling of a
perpetuity in the form of a corporation to either a financial or strategic buyer. Financial
and strategic buyers have what is known as investment/corporate M&A mandates which
detail the size and industry of prospective targets for acquisition. The investment banker
takes these mandates and matches them with targets and takes a fee for doing so.
Investment bankers typically focus on one industry and provide what is known as

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coverage by building an index of public companies and tracking changes in targets
relative to the index in terms of:
Revenue
EBITDA
Multiples
The investment banker monitors trends in these variables and determines the optimal
time to sell (when multiples are strong) or acquire (when multiples are weak) and advises
target management accordingly. When a target agrees to sell via an investment banker,
this relationship is known as a sell-side mandate and an M&A process will be led by the
investment banker. During the M&A process, there are definite steps and deliverables
including a teaser, CIM, and management presentation. The M&A process can include
many prospective buyers (broad auction) or few prospective buyers (targeted or
negotiated sale).
The investment banking core product is M&A. As such, the investment banker’s role is to
aid in the growth of perpetuities via an inorganic strategy (merger, acquisition).
The real work of M&A is origination, matching and deal-structuring. Financial modeling
and valuation is merely for decision support and deals often get done simply based upon
precedent transactions analysis. Thus, the priority of the investment bankers is to obtain
a base level understanding of financial modeling & valuation but then to immediately
start originating sell side and buy side mandates.
Investment bankers explore strategic alternatives (value creation opportunities) with
corporation’s CEO’s/owners.
Notes:
Valuation Football Field and the Midpoint is the final valuation of the company.
Calculate NPV and IRR to the sponsor in LBO or EPS Change and Balance Sheet Effects in
Merger
Compare NPV and IRR OR compare EPS change and BS effects to other strategic
alternatives and choose the highest return/EPS alternative

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Ultimately, as an investment banker, you are to:
Use valuation methodologies to determine valuation ranges of each strategic alternative
and see if capital sources match uses. IBankers should provide the client with tight ranges
on valuation.
Use an operating model of the target (and acquirer if strategic) and then tailor it to the
specific client:
Financial (LBO)
Strategic (Merger)
Determine:
NPV and IRR for financial in LBO
EPS change and balance sheet effects for strategic in merger M&A
Run the M&A process
Traditional Investment Bank Responsibilities:
Junior Banker:
Industry coverage
Comps and comp transactions (where are multiples)
Valuation
Mid Banker:
Operating model creation + tailored to transaction client (LBO or Merger)
Manage M&A process
Senior Banker:
Revenue center
Personal contacts at firms to win engagements

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Chapter 20:
How to Become an Investment Banker
Methodology
The following is the How to Become an Investment Banker Methodology:
1. Coverage
a) Index building
b) Vertical report
c) Vertical newsletter
2. Target screen & origination
3. Mandate/target matching
4. Deal structuring
5. Buyer/seller meeting logistics
6. Adjusted EBITDA calculation
7. Valuation
8. Offer analysis
9. Purchase agreement drafting/structuring
10. Due diligence data room
11. Closing & flow of funds
Decide on the industry/industries that you will cover, read/research the value
themes/players/multiples in the industry on the following levels:
1. Large cap

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2. Mid cap
3. Small cap
4. Middle market
5. Lower middle market
Pick an initial vertical and sub-vertical to cover. With AltQuest Group, our initial coverage
groups were the following:
1. Manufacturing
2. Software
4. Healthcare
After choosing your coverage, the investment banker is then to build an index for each of
the verticals and sub-verticals made up with the public comps. The AltQuest Group
coverage is broken down in the following manner:
1. Manufacturing
a. Durable consumer
b. Non-durable consumer
c. Aerospace & defense
d. Building products
e. Industrial
f. Medical
2. Software
a. Traditional software
b. SAAS
c. Internet
a. Education & Training
b. Business Process Outsourcing
c. Facility Services and Industrial Services
d. Human Resources
e. Information Services
f. Marketing Services
g. Real Estate Services
h. IT Services

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i. Specialty Consulting
4. Healthcare
a. Dental Product
b. Dental Providers
c. Medical Devices & Products
d. Medical Product Distribution
e. Specialty Providers
f. Pharma Services
g. Practice Management
h. Provider Services
i. Long Term & Behavioral Care
The investment banker then spreads each public comp and the financial data feeds into
the median and average for the vertical and sub-vertical which ultimately ends up in the
research (industry report, newsletter), pitchbooks, and CIMs of the investment bank. For
investment banks with an equity research department, financial statement models will be
built for each public comp that is being covered and consensus EPS data taken from
research reports will be used to establish the value of the public comp.
The investment banker ultimately uses the vertical index and sub-vertical index to
perform proprietary research and develop industry reports and newsletters which will aid
in coverage and ultimately origination. The research, which we will go into greater detail
on later in the book focuses on vertical and sub-vertical trends in margins, multiples, and
M&A.
After establishing one's coverage and then building an index for the vertical and sub-
vertical as well as establishing relationships with strategic and financial buyers within the
vertical and sub-vertical, the investment banker may begin advising targets on their
strategic alternatives using information gleaned from the vertical and sub-vertical indices.
Regarding the vertical index and sub-vertical index, the investment banker ultimately
tracks trends in:
Growth rates
Margins
Debt to Equity

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Multiples
The investment banker takes the index and establishes tiers which turn into peer groups.
This is why we pull public comps; to benchmark a target against the comps. By
comparing a target's level of performance to it's peers and the industry in general the
investment banker can determine when it is ideal to exit the business (when multiples are
strong) and when it is not (when multiples are weak). This is how investment bankers
advise on strategic alternatives.
Getting Started in Investment Banking
For those just getting started in investment banking, it is preferable to start with the
lower middle market and middle market building relationships with financial and
strategic buyers as well as potential targets. This means building your rolodex. Obtain the
investment mandates from the strategic and financial buyers and establish a fee
arrangement for buy-side deals. This will end up being the Lehman scale for the fee on
the buy-side. This is how I built the boutique investment bank, AltQuest Group
(www.AltQuest.com).
For example, with AltQuest Group, I chose to cover manufacturing. If you are starting in
the lower middle market, the goal is to get 10 sell side engagements at any given time. It
took me one year to get 10 sell side engagements working 40 hours per week and not on
weekends. Further, it is going to take you 6 months to one year to close a deal so stay
proactive with origination and mandate/target matching.
To give you an idea of the level of productivity that you should target, the following are
the investment banking statistics from year one with AltQuest Group:
3,000 introduction emails
30 sell side pitches (phone and in person)
10 sell side engagements won
4 IOIs from strategic/financial buyers
As you get better and establish a process, your email conversion rates will go up and you
will be pitching more and your ability to win sell side engagements will go up. I am at the

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point now that if a seller is interested in selling, I will either win the sell side mandate or I
will structure it as a buy side deal and receive the fee from the strategic/financial buyer.
Looking forward to year two, here are the projections:
1,000 introduction emails
50 sell side pitches (phone and in person)
20 (+18 existing = 38 total engagements) sell side engagements won
8 IOIs from strategic/financial buyers
2 closed M&A deals
$110,000 in M&A fees received
The statistics assume that you will be working full time at 40 hours per week and not
working on the weekends.
Regarding fees, here is a simplified understanding of fee structure for sell side
engagements. The key to remember here is that you do not make your money when you
quote your fee, you make your money when you close the deal. The point is that I would
rather win an engagement and give up 1% to 2% of the fee than have the seller think
that I am not being fair. The Lehman scale simplifies this a bit but often times the seller
will want to know the exact % that they will be paying you.
Large cap – Lehman scale
Mid cap – Lehman scale
Small cap – Lehman scale
Middle market – Double Lehman structure
Lower middle market – 3% to 10%

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Part XI:
The Middle Market
The majority of perpetuities are in what is known as the middle market, a classification for
mid-sized perpetuities. This is where the majority of the transactions occur and where the
average investment banker will make his living.

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Chapter 21:
The Middle Market
Because of the wide range of company sizes within the definition, the middle market can
be further broken down into the following:
Overview of Middle Market
Pitchbook defines the middle market as companies with total enterprise value between
$25 million and $1 billion and the “core middle market” as between $100 million and
$500 million.
Lower Middle Market: $5 - $50 million of revenue;
Companies with EBITDA below about $10 million (lower middle market) are typically
family or entrepreneur owned and individual customer wins and losses greatly impact
performance. Many of those sales relationships are concentrated in the family, and senior
management ranks are often populated with family members.
Middle Market: $50 - $500 million of revenue; and
We define the core middle market as companies with $10 to $75 million of EBITDA.
Upper Middle Market: $500 million - $1 billion of revenue.
Upper middle market companies typically have $75 million of EBITDA or more, and are
often publicly held or sponsor backed.

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Part XII:
M&A Multiples
It is crucial for investment bankers to understand the M&A marketplace in the middle
market and particularly for the industries that they cover.
It is important for the investment banker to have a strong understanding of multiples in
the M&A marketplace in general and then in his/her sector and sub-sector. In general in
the middle market, we typically see 7x - 7.5x EBITDA for companies that are larger than
$25M in TEV. For companies that are smaller than $25M in TEV, we typically see 5x - 5.5x
EBITDA. There are adjustments that need to be made for size and predictability of
revenues as well as for certain sectors (ex. software).

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Chapter 22:
M&A Multiples
Since the investment banker will most likely be starting in the lower middle market or
middle market, it is important to have a strong understanding of the multiples in the
M&A marketplace in general and then in your sector and sub-sector. The following are
2016 M&A multiples from the data provider, Pitchbook (Morningstar), that you can use
initially. Here are the EBITDA multiples for transactions in the lower middle market:
These are EBITDA multiples for transactions in the middle market:

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Finally, we have EBITDA multiples for transactions in the upper middle market:
Notice how the multiples increase as the size of the perpetuity increases due to the
scarcity value of larger perpetuities (increased demand for large perpetuities and less of
them).
The following is a chart depicting the average debt to equity breakdown for LBOs. You
will notice that equity levels are steadily increasing, indicating a tighter credit market:

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In this chart, you will see the average time that is it taking for deals to close. You will
notice that the majority of transactions get done in the 5-9 weeks and 10-14 weeks
timeframe:
Next, the following is a chart that depicts the % of deals getting done with some aspect
of an earnout, meaning portion of the purchase price contingent on future performance
of the business:

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Finally, we see a chart depicting activity for the buyers of perpetuities:

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Part XII:
Investment Banking Coverage
Methodology
It is crucial for investment bankers to understand the M&A marketplace in the middle
market and particularly for the industries that they cover.

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Chapter 29:
Investment Banking Coverage
Methodology
First, the investment banker is going to choose what size of companies he/she is going to
cover (ex. public co's, middle market, lower middle market). From there, the investment
banker chooses an initial vertical and sub-verticals to cover. With AltQuest Group, our
initial coverage groups were the following:
1. Manufacturing
2. Software
4. Healthcare
the verticals and sub-verticals made up with the public comps. The index and the
changes in the index are going to provide a measuring stick within which to evaluate
targets against.
It is important for the investment banker to have a strong understanding of multiples in
the M&A marketplace in general and then in his/her sector and sub-sector. In general in
the middle market, we typically see 7x - 7.5x EBITDA for companies that are larger than
$25M in TEV. For companies that are smaller than $25M in TEV, we typically see 5x - 5.5x
EBITDA. There are adjustments that need to be made for size and predictability of
revenues as well as for certain sectors (ex. software).

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For those just getting started in investment banking, it is preferable to start with the
lower middle market and middle market building relationships with financial and
strategic buyers as well as potential targets. This means building your rolodex. Obtain the
investment mandates from the strategic and financial buyers and establish a fee
arrangement for buy-side deals. This will end up being the Lehman scale for the fee on
the buy-side.
The investment banker will often focus on a product group (i.e. M&A) and/or an industry
(industrials, healthcare, technology). Proper coverage comes in the form of maintaining a
coverage index for a sector and its sub-sectors which is broken down in the following
manner:
I. Industry macroeconomics
a. Industry spending
b. Sub-sector spending
c. Stock market performance of industry
II. Public sub-sector financial and valuation performance
a. Sub-sector index
b. Sub-sector index: financial performance
c. Sub-sector index: public market multiples
d. Sub-sector index by product category
e. Sub-sector index by product category: financial performance
f. Sub-sector index by product category: public market multiples
III. Industry M&A Market Update
a. Industry M&A deal volume and spending
b. Industry M&A exit multiples
c. Sub-sector M&A deal volume and spending
d. Sub-sector M&A exit multiples
e. Sub-sector M&A deal volume by product category
f. Sub-sector M&A exit multiples by product category
IV. Appendix
a. Sub-sector index key metrics
b. Sub-sector index key metrics by product category
c. Industry most active buyers
d. Sub-sector most active buyers
e. Sub-sector most active buyers by product category

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Chapter 30:
Index Building & Benchmarking
tracks trends in:
Growth rates
Margins
Multiples
This is why we pull comps, to build an index and benchmark against the comps.
The indexing and benchmarking that is done for a target company is going to serve as
the basis for advising on strategic alternatives.
One should build indexes at the vertical level, then sub-vertical level and finally sub-
vertical by product level.

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Chapter 31:
Financial Data Sources
If you are at a larger investment bank, you will have various paid data sources at your
disposal. These include:
1. Bloomberg
2. CapitalIQ
3. FactSet
For those that are not at a larger bank, one can use the free sources of financial data
including:
 Yahoo Finance
 Google Finance
Yahoo Finance and Google Finance get their EBITDA numbers from CapitalIQ and their
analyst EPS consensus estimates from there as well.
Investment banks typically do not want you to use the EBITDA from CapitalIQ,
Bloomberg, FactSet and would prefer that you spread the comps individually to get to
EBITDA.
We are ultimately using the financial data sources to build and maintain our various
indices associated with our coverage group.

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Chapter 32:
Industry or Sector Newsletter
When maintaining coverage of an industry or sector, one prepares a newsletter to be
send to prospective sell side clients in the industry or sector. Investment bankers use the
index information to create this newsletter. The newsletter is about 2 to 6 pages.
For example, our AltQuest software industry coverage has produced the following
newsletter which is sent to potential targets:

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Chapter 34:
Industry or Sector Report
When maintaining coverage of an industry or sector, one prepares a report to be send to
prospective sell side clients in the industry or sector. Investment bankers use the index
information to create this report. The report goes more in depth than the newsletter. The
report can be about 15-20 pages.
For example, our AltQuest software industry coverage has produced the following
industry report which is sent to potential targets:

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Chapter 35:
Rolodex Building
As an investment banker it is important to establish relationships with the strategics in
your coverage group as well as relationships with targets and their potential buyers. After
building the index containing relevant strategics, one should go to RocketReach.co and
find the email addresses for each of the CEOs, CFOs, and/or corporate M&A department
head for the potential acquirer.
An example of a vertical specific rolodex would be the following:

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Part XIII:
M&A Origination Methodology

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The following methodology describes the primary work of the investment banker,
origination. The methodology arose through the work of Michael Herlache in his M&A
career and the lack of content about the actual work of senior M&A professionals. There
is plenty of knowledge around the technical support work of investment bankers
including financial modeling and valuation, but there are no current texts on origination,
let alone a methodology.

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Chapter 23:
M&A Origination Methodology
The M&A origination methodology is the following:
1. Determine coverage industries and sub-sectors
2. Build industry and sub-sector index
3. Pull national screens for the coverage area from Salesgenie
4. Collect emails for CEOs/owners from Salesgenie and RocketReach.co
5. Origination email to identify target considering selling and get price expectations
6. Obtain sell side mandate
7. If cannot, develop buyer list and pitch M&A idea to them in a buy side capacity clarifying
that the target is not running a process and that you do not have the mandate but that
you have been in talks with their CEO/owner. The target is willing to listen to reasonable
offers

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Step 1: Database Utilization & Emails Collected
The following email is used after pulling a county list from infousa.com or screening in
Salesgenie and screening for revenue size ($2.5M +) and contact person (owner, CEO,
President). Starting from the end of the database (Z), go through each account in the
database and determine the business owner’s primary email address either from the
database itself or by going to the website and acquiring the email address. Once 30 to 50
emails are obtained in one day, the process of emailing begins with the best practice
below. The response rate to the emails should be approximately 3%.
Step 2: Email Inquiry
John,
It's a pleasure. I work with AltQuest Group right here in Fort Lauderdale. Would you be
willing to take an offer on your business from a private equity group?
Please let me know.
Best,
Michael
Step 3: Offer & Price Inquiry
After receiving initial response, you will then message them that you will email them
when you have the offers and ask for the price of the business. The following is the email
that should be sent:

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John,
Alright. I'll notify you when I receive the offers. What is your expectation regarding the
price of your business?
Best,
Michael
Step 4: Phone Call Request (by Sellers) or Meeting Request
After requesting price, some sellers will request a phone call and provide their contact
information. If the seller provides price information, they reply with the following email:
John,
Alright. Let’s sit down and discuss next steps. Does Monday afternoon at 1pm work for
you?
Best,
Michael
If the seller accepts a meeting then the engagement is going to be sell side. If the seller
does not accept the meeting and instead states that he would like you to represent the
buyer then it will be buy side.
Sell side engagements get an RBCA. For buy side engagements, make a buyer list of the
largest likely buyers including public companies then contact the head of M&A at these
companies and ask:
Brian,
It's a pleasure. Would you care to take a look at a premier business group with a
presence in multiple states? $40M revenues and $6M EBITDA.
Please let me know.
Best,
Michael

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After hearing back from the heads of M&A, let them know that the seller has requested
that we represent the buyer and that the buy side fee will be 1.5%. You then ask them to
accept in writing to the fee and once they do you can tell them the target name and then
proceed to contact the seller and let them know that there is interest and ask what
multiple range they are targeting for a sale. From there you send an advisor NDA and
request financials. After giving financials to buyer, the company is assessed and a
valuation range is determined and an IOI with this valuation range is submitted to the
seller.
Step 5: Phone Call or Meeting
Phone call:
During the phone call you will introduce yourself and state that you work on behalf of
private equity firms in locating quality cash flowing companies and that is how you found
their company. From there you will state that you want to get an initial understanding as
to the price of the business. After the price of the business is found, ask how the business
performed last year (revenue and net income). Finally, request a meeting at the end of
the call (in person). The following is your outline for the phone call:
Price:
Revenue:
Net Income:
Meeting:
Meeting:
During the meeting you will introduce yourself and state that you work on behalf of
private equity firms in locating quality cash flowing companies and that is how you found
their company. From there you will state that you want to get an initial understanding as
to the price of the business. After the price of the business is found, ask how the business
performed last year (revenue and net income). If this information is already known, you
can move straight to giving the seller the signed NDA and explaining that any
information that we receive is confidential and will not be shared without the approval of
the business owner. Next you discuss the structure of the engagement that you are
requesting a non-exclusive relationship whereby you only get paid when your buyers
purchase the company. You can hand them the Registered Buyer Commission Agreement

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and have them sign right there or to have them review it. Finally, you ask if they have
their financials on hand to view and you view them. You can ask to keep a copy to aid in
recasting.
Step 6: Add Backs Calculated and Teaser Created
After the meeting, you now have the financials or financial data needed to do add backs
to get to an owner’s benefit or EBITDA number. From here you can input the recasted
financials into the teaser and then complete the teaser based upon the general
information (usually from the website and meeting conversation) of the business
Step 7: Contact Buyer List & Deal Put on M&A Marketplaces
Once the teaser is finished and financials recasted, you can contact the buyer list of
strategic and financial buyers and put the deal on the M&A marketplaces including
BizBuySell for smaller deals and Axial for larger deals.
Step 8: NDAs Signed with Buyers
Once inquiries are received from buyers from the M&A marketplaces, you will send NDAs
to the buyers which they will then sign and send back to you.
Step 9: Teaser with Name Given to Buyer
Once the NDA is received, you can give the buyer the name of the business on the teaser
and request an IOI from the buyer after reviewing the teaser and summary financials. The
following is the email to accompany the teaser:
Buyer,
After reviewing the teaser and summary financials, please submit your initial indication of
interest (IOI) and we will set up a buyer/seller meeting.
Best,
Michael
Step 9: Teaser with Name Given to Buyer
Often times a call will be requested by the buyer. On the phone the M&A professional
finds out the following, taking notes on the call:
Industry interest:

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Questions (that the buyer has):
Multiples that buyer is seeing or that they typically do:
Step 10: IOI from Buyer
After reviewing the teaser and summary financials, the buyer will notify you that they are
interested in purchasing the company (IOI).
Step 11: Buyer Seller Meeting
After submitting the IOI, you will arrange an in person meeting with the seller which is
called the buyer seller meeting. If the buyer is unavailable due to distance or timing, a
phone call can be set up.
Step 12: Purchase Agreement Given to Seller
After the buyer seller meeting, you prompt the buyer to submit a purchase agreement
and then give this purchase agreement to the seller.
Step 13: Signed Purchase Agreement with Different Terms
After the seller reviews the purchase agreement they will either sign the contract or
counter with different terms. They are to sign the contract with the contingencies written
into the contract.
Step 14: Enter Due Diligence
After receiving the counter, the buyer can sign the agreement with makes for a legally
binding purchase agreement contingent to the items that will now be explored during
the due diligence period. As items are explored, the buyer signs off that the items are no
longer in question one by one.
Step 15: Complete Due Diligence
After all the items in the due diligence list are completed, due diligence is now completed
and the closing can be scheduled. The documents are sent to the closing agent with
instructions as to the M&A fee as well.
Step 16: Closing & Checks Cut
After the both the buyer and seller sign at the closing, the checks are cut and you receive
your M&A fee and bring it to your bank.

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Chapter 24:
Mandate/Target Matching Methodology
After determining one’s coverage and then initiating coverage in the form of index-
building, it is important for the investment banker to then begin matching investment
mandate’s of strategic and financial buyers to targets within the investment banker’s
coverage. The Mandate/Target Matching Methodology is the following:
1. Build relationships with strategic and financial buyers in a given industry sector or
subsector
2. Indicate your interest in sourcing deals on their behalf and obtain their investment
mandate. This will usually be detailed in a one-page teaser or presentation that they will
send to you
3. Screen for companies that match the mandate(s) in Salesgenie and obtain CEO/owner
emails and phone numbers
4. Begin emailing and calling CEO/owners and soliciting interest in taking an offer on their
business from a financial or strategic buyer
5. Structure as a sell-side engagement or a buy-side engagement depending on
CEO/owner’s level of interest in selling
6. Collect historical financial data for the last three years
7. Introduce the financial and/or strategic buyer to the opportunity with the summary
financial information and have them sign an NDA
8. Have a call with the financial and/or strategic buyer and then make the formal
introduction to the CEO/owner and have a buyer/seller meeting

181

182
Chapter 25:
Deal Structuring
After matching a financial or strategic buyer’s mandate with a target, it is up to the
investment banker to work with the buyer and seller to structure a deal. Deal structures
can be along the following lines:
I. Majority vs. Minority
II. Cash vs. Stock vs. Cash & Stock
III. Seller financing
IV. Earn out
V. Seller stays on as management vs. consulting agreement for shorter term

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Part XIV: M&A Process
When the owner of a perpetuity has decided to grow inorganically or exit the perpetuity,
the M&A process must be executed/run.

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Chapter 26:
M&A Process
From Origination to M&A Execution
Once the investment banker has originated 8 to 10 multimillion dollar listings, one should
transition from origination to M&A execution process creating a shortlist for each deal
(10 in the shortlist). The investment banker should concurrently prepare the marketing
package which includes the teaser and the executive summary. Once the teaser is
finished, the investment banker should begin emailing the shortlist with the teaser. From
this shortlist, a percentage will reply seeking additional information on the target. NDAs
should be sent out and after being signed, the executive summary should be sent to the
shortlist member. After the executive summary is sent, a percentage will decide to
request a buyer/seller meeting. After the buyer/seller meeting, a percentage will decide
to make an offer.
Building the Buyer Shortlist
The shortlist should include strategic and financial buyers and the investment banker
should screen each that make it onto the shortlist for financial capacity to pay. The
investment banker should use Salesgenie to pull the geographic competitors (geography
screen with SIC code screen) and have 10 strategics. The investment banker should use
the massinvestor database to determine which 10 financials to include in shortlist:
Strategic
Competitors - synergies
Indirect Competitor

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Financial
Hybrid strategic – financial buyer with asset in the sector
Pure financial
For deals that are $500k earnings and above, BizBuySell.com and DealNexus.com should
be used to find buyers. For deals below $500k in earnings, only BizBuySell.com should be
used.
The Teaser
The teaser will contain an overall financial profile: three years of historical revenue and
EBIT/EBITDA and at least two years of projected revenue and EBIT/EBITDA
Indicate type of transaction
Professional font (Times New Roman or Arial)
Send as PDF
Do not capitalize words or use flowery language
No grammar or spelling errors
Indicate sustainable growth potential based upon competitive advantage:
Customer entrenchment and high switching costs (ex. Software)
Long term contracts (ex. Equipment service companies)
Brand recognition (ex. Consumer products)
Intellectual property
Stable management teams
Culture
The NDA
The NDA in a sell side engagement is a unilateral NDA meaning that only one side has to
not disclose confidential information
Teaser With Name of Business & Financials
After the NDA is signed, a teaser with the business name is then sent to the buyer along
with the financials in PDF form.
The CIM
Executive summary
Company history
Sales process and/or manufacturing capabilities

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Management team structure
Growth opportunities
Competitive landscape or industry outlook
Intellectual property overview and/or company assets
High-level financials (preferably five years of historical data and projections, if available)
The IOI (Indication of Interest)
Approximate price range. This can be expressed in a dollar value range (e.g., $10-15
million) or stated as a multiple of EBITDA (e.g., 3-5x EBITDA).
Buyer's general availability of funds, including sources of financing
Necessary due diligence items and a rough estimate of the due diligence timeline
Potential proposed elements of the transaction structure, e.g., asset vs. equity, leveraged
transaction, cash vs. equity, etc.
Management retention plan and role of the equity owner(s) post-transaction
Time frame to close the transaction
The Buyer/Selling Meeting
First conference call
In person meeting & tour the facilities
In person handshake meeting
The LOI (Letter of Intent)
Official deal structure and terms. Acceptance of engagement means that company
cannot receive other offers
Deal Structure. Defines the transaction as a stock or asset purchase. Generally, the seller
prefers a stock transaction from a tax and legal perspective. Asset transactions are
preferred by the buyer to protect against prior liabilities and provides a stepped-up tax
basis.
Consideration. Outlines the form(s) of payment — including cash, stock, seller notes,
earn-outs, rollover equity, and contingent pricing.
Closing Date. The projected date for completing the transaction. This date is an
estimation and often changes based on due diligence or the purchase agreement.

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Closing Conditions. Lists the tasks, approvals, and consents that must be obtained prior
to or on the Closing Date.
Exclusivity Period (Binding). It is common practice for a buyer to request an exclusive
negotiating period to ensure the seller is not shopping their deal to a higher bidder while
appearing to negotiate in good faith. Expect to see requested periods of 30 to 120 days.
The duration may be negotiable, but the presence of the exclusivity term rarely is.
Break-up Fee (Binding). A fee to be paid to the buyer if the business owner decides to
cancel the deal. Break-up fees are relatively common in larger deals (above $500 million).
The fee can either be a percentage (typically 3%) or a fixed amount.
Management Compensation. Outlines plan for senior-management post-sale. This term
describes who in the management will be provided employment, equity plans, and
employment agreement. This term is often vaguely worded to provide the buyer with
latitude since they may not be prepared to make commitments to senior management.
Due Diligence. Describes the buyer’s due diligence requirements, including time frame
and access.
Confidentiality (Binding). Although both parties have probably signed a confidentiality
agreement at this point, this additional term ensures all discussions regarding the
transaction are confidential.
Approvals. Lists any approvals needed by the buyer (e.g., board of directors) or seller
(e.g., regulatory agencies, customers) to complete the transaction.
Escrow. Provides the summary terms of the buyer's expected escrow terms for holding
back some percentage of the purchase price to cover future payments for past liabilities.
The escrow is typically highly negotiable and often excluded from the LOI and presented
for the first time in the purchase agreement.
Representations and Warranties. This clause will include indemnifications in the purchase
agreement. It is best practice to include any terms that may be contentious or non-
standard.
Due Diligence

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Financial books and records
Incorporation documents
Employee benefits, policies and compliance issues
Internal systems and procedures
Customer contracts
Intellectual property
Condition of assets
Any key area of concern identified while negotiating the letter of intent
Digital deal rooms are now used (ex. Firmex and V-rooms). Due Diligence is usually 60 to
90 days
The Purchase Agreement
Incorporates all terms of the LOI and is written to address issues discovered in due
diligence. The agreement will lay out a structure to handle this (a hold back account,
deductions from future payments, price adjustment, etc.)
Pitchbook Table of Contents (exploring strategic alternatives to win a mandate):
I. Executive summary
II. Industry specific market update (discuss control premiums and multiples)
III. Review of company’s strategic priorities
IV. Potential strategic targets
a. Vertical I
b. Vertical II
c. Vertical III
Sell side after winning the mandate:
I. Discuss and demonstrate knowledge of buyer universe (strategic vs. financial)
II. Discuss valuation range (“I believe that you can get $_____, providing that these things
hold true”)
III. Process and timing
IV. Tax consequences
V. What is going to happen to key management and employees
Confidential Information Memorandum (CIM) Table of Contents:
I. Executive summary
II. Key investment considerations

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III. Growth opportunities
IV. Industry overview
V. Company overview
a. Overview
b. Products and services
c. Sales and marketing
d. Operations
e. Organization
VI. Financial overview
Confidentiality – Discuss in terms of project name, never mention name of company. “No
comment” and refer press to PR department.
M&A Banker’s Role: M&A banker is hired to run a process:
1. Defining exit options and strategies (4 types: auction process, controlled sale, targeted
high level solicitation, closed negotiation)
2. Valuation
3. Recast financials
4. Presentation and packaging
5. Buyer qualifications
6. Marketing
7. Management coaching
8. Due diligence facilitation (data room)
9. Price and contract negotiation
From 100 buyer universe, narrow it down to 20 to 30 target buyers
Auction Process:
100-150 companies initial call
4 months; 6-12 months actual
Initial call interest, then send teaser
If interested after teaser, sign NDA, send CIM
Controlled Sale:
10-12 companies
4 months, 6-8 months actual

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Targeted High Level Solicitation:
4-5 companies
2-4 months
Closed Negotiation:
1-2 parties
1-3 months
Regarding valuation, the investment banker will form the story which is either:
I. Growth story
II. Well operating story
Presentation and Packaging
CIM (1st round):
Week 1: interviews with CEO, CFO
2-3 weeks to create
70, 80, 90 pages
Teaser (1st round)
Management presentation (2nd round) – all info in CIM
Buyer Qualification:
Finalize to list of 50, bankers begin making phone calls
Marketing:
Sign NDAs, send CIM
Weekly calls with client to update (buyer list updates)
Pitching:
To win new business. Pitching can take years. This is ultimately deal sourcing with MDs
calling on clients for 10-15 years.
Bake Off to Win Mandate:
To win sell side mandate there are 9 to 10 banks with 2 to 3 banks in the next round.
They present to management and the board.
The Pitchbook to Win Business:

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I. Intros and quals
II. Industry overview
III. Capital market overview (capital markets and products perspective (ex. M&A and IPO))
IV. Company and situation overview
V. Valuation (football field)
VI. Process
VII. Buyers/investors

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193

194

195
Part XV: Investment Bank
Management
Since the M&A market is so fragmented in the middle market, it may become necessary
for the investment banker to run his own M&A practice.

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Chapter 27:
How to Build a Boutique Investment Bank
At Investment Banking University, we are often asked , "How to build a boutique
investment bank?", so we created a methodology for doing so consistent with that which
built AltQuest Group (www.AltQuest.com), the middle market boutique investment bank.
This methodology is known as the Boutique Investment Bank Methodology which goes
as follows:
1. Decide on IB product (M&A, capital-raising, growth advisory)
2. Decide on size of market to cover (public co's, middle market, lower middle market)
3. Decide on industry coverage (AltQuest's coverage is broken down between Healthcare,
Manufacturing, Software, and Business Services)
4. Break down industry into sub-verticals to cover
5. Build indices for industry and sub-verticals made up of public co's
6. Utilize Coverage & Origination Methodology to advise targets on strategic alternatives
7. Utilize Mandate/Target Matching Methodology to match strategic and financial buyers'
mandates to targets
8. Gather financials, recast & IB deliverables (adjusted EBITDA, valuation, teaser, CIM,
management presentation)
9. Offer analysis
10. Purchase agreement drafting/structuring
11. Due diligence data room
12. Closing & flow of funds
Decide on the industry/industries that you will cover, read/research the value
themes/players/multiples in the industry on the following levels:
1. Large cap
2. Mid cap

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3. Small cap
4. Middle market
5. Lower middle market
Pick an initial vertical and sub-vertical to cover. With AltQuest Group, our initial coverage
groups were the following:
1. Manufacturing
2. Software
4. Healthcare
the verticals and sub-verticals made up with the public comps. The AltQuest Group
coverage is broken down in the following manner:
5. Manufacturing
a. Durable consumer
b. Non-durable consumer
c. Aerospace & defense
d. Building products
e. Industrial
f. Medical
6. Software
a. Traditional software
b. SAAS
c. Internet
a. Education & Training
b. Business Process Outsourcing
c. Facility Services and Industrial Services
d. Human Resources
e. Information Services
f. Marketing Services
g. Real Estate Services
h. IT Services
i. Specialty Consulting

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8. Healthcare
a. Dental Product
b. Dental Providers
c. Medical Devices & Products
d. Medical Product Distribution
e. Specialty Providers
f. Pharma Services
g. Practice Management
h. Provider Services
i. Long Term & Behavioral Care
The indices for AltQuest Group look like the following:
1. Manufacturing
a. AltQuest Durable Consumer Index
i. Newell Brands Inc. NYSE:NWL
ii. Whirlpool Corp. NYSE:WHR
iii. Hanesbrands Inc. NYSE:HBI
iv. Gildan Activewear Inc. NYSE:GIL
v. Brunswick Corporation NYSE:BC
vi. Tupperware Brands Corporation NYSE:TUP
vii. G-III Apparel Group, Ltd. NasdaqGS:GIII
viii. La-Z-Boy Incorporated NYSE:LZB
ix. Culp, Inc. NYSE:CFI
x. Flexsteel Industries Inc. NasdaqGS:FLXS
xi. Johnson Outdoors Inc. NasdaqGS:JOUT
xii. CSS Industries Inc. NYSE:CSS
xiii. Delta Apparel Inc. AMEX:DLA
xiv. Escalade Inc. NasdaqGM:ESCA
xv. Black Diamond, Inc. NasdaqGS:BDE
b. AltQuest Non-Durable Consumer Index
i. Colgate-Palmolive Co. NYSE:CL
ii. General Mills, Inc. NYSE:GIS
iii. Campbell Soup Company NYSE:CPB
iv. The Clorox Company NYSE:CLX
v. Church & Dwight Co. Inc. NYSE:CHD
vi. Coty Inc. NYSE:COTY

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vii. Edgewell Personal Care Company NYSE:EPC
viii. Avon Products Inc. NYSE:AVP
ix. Inter Parfums Inc. NasdaqGS:IPAR
c. AltQuest Aerospace & Defense Index
i. Honeywell International Inc. NYSE:HON
ii. The Boeing Company NYSE:BA
iii. General Dynamics Corporation NYSE:GD
iv. Airbus Group SE ENXTPA:AIR
v. Mohawk Industries Inc. NYSE:MHK
vi. TransDigm Group Incorporated NYSE:TDG
vii. Textron Inc. NYSE:TXT
viii. Spirit AeroSystems Holdings, Inc. NYSE:SPR
ix. B/E Aerospace Inc. NasdaqGS:BEAV
x. Bombardier Inc. TSX:BBD.B
xi. HEICO Corporation NYSE:HEI
xii. Curtiss-Wright Corporation NYSE:CW
xiii. Esterline Technologies Corp. NYSE:ESL
xiv. Triumph Group, Inc. NYSE:TGI
xv. RBC Bearings Inc. NasdaqGS:ROLL
xvi. Aerojet Rocketdyne Holdings, Inc. NYSE:AJRD
xvii. Ducommun Inc. NYSE:DCO
d. AltQuest Building Products Index
i. Mohawk Industries Inc. NYSE:MHK
ii. USG Corporation NYSE:USG
iii. Armstrong World Industries, Inc. NYSE:AWI
iv. Advanced Drainage Systems, Inc. NYSE:WMS
v. Apogee Enterprises, Inc. NasdaqGS:APOG
vi. Builders FirstSource, Inc. NasdaqGS:BLDR
vii. American Woodmark Corp. NasdaqGS:AMWD
viii. Gibraltar Industries, Inc. NasdaqGS:ROCK
ix. Continental Building Products, Inc. NYSE:CBPX
x. Insteel Industries Inc. NasdaqGS:IIIN
xi. Armstrong Flooring, Inc. NYSE:AFI
e. AltQuest Industrial Index
i. United Technologies Corporation NYSE:UTX
ii. Illinois Tool Works Inc. NYSE:ITW
iii. Eaton Corporation plc NYSE:ETN

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iv. Ingersoll-Rand Plc NYSE:IR
v. Parker-Hannifin Corporation NYSE:PH
vi. Rockwell Automation Inc. NYSE:ROK
vii. Crane Co. NYSE:CR
viii. Hubbell Inc. NYSE:HUBB
ix. Colfax Corporation NYSE:CFX
x. Barnes Group Inc. NYSE:B
xi. Actuant Corporation NYSE:ATU
xii. Albany International Corp. NYSE:AIN
xiii. EnPro Industries, Inc. NYSE:NPO
xiv. Chart Industries Inc. NasdaqGS:GTLS
xv. Columbus McKinnon Corporation NasdaqGS:CMCO
f. AltQuest Medical Index
i. Medtronic plc NYSE:MDT
ii. DENTSPLY SIRONA Inc. NasdaqGS:XRAY
iii. Hologic Inc. NasdaqGS:HOLX
iv. Abaxis, Inc. NasdaqGS:ABAX
v. Analogic Corporation NasdaqGS:ALOG
vi. Integer Holdings Corporation NYSE:ITGR
vii. AngioDynamics Inc. NasdaqGS:ANGO
viii. Misonix, Inc. NasdaqGM:MSON
ix. Amedica Corporation NasdaqCM:AMDA
x. Allied Healthcare Products Inc. NasdaqCM:AHPI
2. Software
a. AltQuest Traditional Software Index
b. AltQuest SAAS Index
i. 2U TWOU NasdaqGS
ii. Amber Road AMBR NYSE
iii. Athenahealth ATHN NasdaqGS
iv. Bazaarvoice BV NasdaqGS
v. Benefitfocus BNFT NasdaqGS
vi. Callidus Software CALD NasdaqGM
vii. Castlight Health CSLT NYSE
viii. ChannelAdvisors ECOM NYSE
ix. Cornerstone OnDemand CSOD NasdaqGS
x. Covisint COVS NasdaqGS
xi. Ebix EBIX NasdaqGS

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xii. FireEye FEYE NasdaqGS
xiii. Fleetmatics FLTX NYSE
xiv. HortonWorks HDP NasdaqGS
xv. HubSpot HUBS NYSE
xvi. inContact SAAS NasdaqCM
xvii. IntraLinks Holdings IL NYSE
xviii. J2 Global JCOM NasdaqGS
xix. Jive Software JIVE Nasdaq
xx. Live Person LPSN NasdaqGS
xxi. Marin Software MRIN NYSE
xxii. Medical Transcript MTBC NasdaqCM
xxiii. Medidata Solutions MDSO Nasdaq
xxiv. Netsuite N NYSE
xxv. New Relic NEWR NYSE
xxvi. Paylocity Holding PCTY NasdaqGS
xxvii. Q2 Holdings QTWO NYSE
xxviii. Qualys QLYS NasdaqGS
xxix. RealPage RP Nasdaq
xxx. RingCentral RNG NYSE
xxxi. Salesforce.com CRM NYSE
xxxii. Service-now.com NOW NYSE
xxxiii. SPS Commerce SPSC NasdaqGS
xxxiv. Tableau Software DATA NYSE
xxxv. TangoeTNGO NasdaqGS
xxxvi. The Ultimate Software Group ULTI NasdaqGS
xxxvii. TrueCar TRUE NasdaqGS
xxxviii. Upland Software UPLD NasdaqGM
xxxix. Veeva Systems VEEV NYSE
c. AltQuest Internet Index
i. 1-800-FLOWERS.comFLWS NasdaqGS
ii. 58.com WUBA NYSE
iii. 8x8 EGHT NasdaqGS
iv. Akamai TechnologiesAKAM NasdaqGS
v. AlibabaBABA NYSE
vi. Amazon.com AMZN NasdaqGS
vii. Angie's List ANGI NasdaqGS
viii. Baidu.com BIDU NasdaqGS

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ix. Bankrate RATE NYSE
x. Bitauto Holdings BITA NYSE
xi. BlueNile NILE NasdaqGS
xii. Brightcove BCOV NasdaqGS
xiii. BroadSoft BSFT NasdaqGS
xiv. Carbonite CARB NasdaqGS
xv. Care.com CRCM NYSE
xvi. ChangYou.com CYOU NasdaqGS
xvii. Chegg CHGG NYSE
xviii. Cimpress CMPR NasdaqGS
xix. Coupons.com QUOT NYSE
xx. Criteo SA CRTO NasdaqGS
xxi. Ctrip CTRP NasdaqGS
xxii. DemandMedia DMD NYSE
xxiii. eBay EBAY NasdaqGS
xxiv. eHealth EHTH NasdaqGS
xxv. Everyday Health EVDY NYSE
xxvi. Expedia EXPE NasdaqGS
xxvii. Facebook FB NasdaqGS
xxviii. GoDaddy GDDY NYSE
xxix. Google GOOG NasdaqGS
xxx. Groupon GRPN NasdaqGS
xxxi. GrubHub GRUB NYSE
xxxii. Harmonic HLIT NasdaqGS
xxxiii. Interactive Intelligence ININ NasdaqGS
xxxiv. LendingClub LC NYSE
xxxv. LifeLock LOCK NYSE
xxxvi. Limelight Networks LLNW NasdaqGS
xxxvii. LinkedIn LNKD NYSE
xxxviii. Liquidity Services LQDT NasdaqGS
xxxix. Mail.ru Group 61HE.L LSE
xl. MakeMyTrip MMYT NasdaqGS
xli. MaxPoint Interactive MXPT NasdaqGM
xlii. Mercadolibre MELI NasdaqGS
xliii. Mitel Networks MITL NasdaqGS
xliv. Monster Worldwide MWW NYSE
xlv. NCSoft 036570.KS KSE

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xlvi. Netease NTES NasdaqGS
xlvii. Netflix NFLX NasdaqGS
xlviii. Overstock.com OSTK NasdaqGS
xlix. Pandora P NYSE
l. PetMed Express PETS NasdaqGS
li. Priceline PCLN NasdaqGS
lii. QuinStreet QNST NasdaqGS
liii. Renren RENN NYSE
liv. Rocket Fuel FUEL NasdaqGS
lv. SeaChange International SEAC NasdaqGS
lvi. ShoreTel SHOR NasdaqGS
lvii. Shutterfly SFLY NasdaqGS
lviii. Shutterstock SSTK NYSE
lix. SINA SINA NasdaqGS
lx. Sohu.com SOHU
lxi. Sonus Networks SONS NasdaqGS
lxii. Stamps.com STMP NasdaqGS
lxiii. Synacor SYNC NasdaqGS
lxiv. Tencent Holdings NNN1.F
lxv. The Rubicon Project RUBI NYSE
lxvi. TheStreet.comTST NasdaqGM
lxvii. Travelzoo TZOO NasdaqGS
lxviii. Lending Tree TREE NasdaqGS
lxix. Tremor TRMR NYSE
lxx. TripAdvisor TRIP NasdaqGS
lxxi. TubeMogul TUBE NasdaqGS
lxxii. TucowsTCX NasdaqCM
lxxiii. Twitter TWTR NYSE
lxxiv. VeriSign VRSN NasdaqGS
lxxv. WebMD Health WBMD NasdaqGS
lxxvi. Wix.com WIX NasdaqGS
lxxvii. XO Group XOXO NYSE
lxxviii. Xunlei XNET NasdaqGS
lxxix. Yahoo! YHOO NasdaqGS
lxxx. Yandex YNDX NasdaqGS
lxxxi. Yelp YELP NYSE
lxxxii. YuMe YUME NYSE

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lxxxiii. YY YY NasdaqGS
lxxxiv. Zillow Z NasdaqGS
a. AltQuest Education & Training Index
i. Graham Holdings Company NYSE:GHC
ii. GP Strategies Corp. NYSE:GPX
iii. Pearson plc LSE:PSON
iv. John Wiley & Sons Inc. NYSE:JW.A
v. Capella Education Co. NasdaqGS:CPLA
vi. Bridgepoint Education, Inc. NYSE:BPI
vii. Strayer Education Inc. NasdaqGS:STRA
viii. K12, Inc. NYSE:LRN
ix. DeVry Education Group Inc. NYSE:DV
x. Career Education Corp. NasdaqGS:CECO
b. AltQuest Business Process Outsourcing Index
i. Wipro Ltd. BSE:507685
ii. Cognizant Technology Solutions Corporation NasdaqGS:CTSH
iii. Sykes Enterprises, Incorporated NasdaqGS: SYKE
iv. Convergys Corporation NYSE: CVG
v. West Corporation NasdaqGS:WSTC
vi. TeleTech Holdings Inc. NasdaqGS:TTEC
vii. Virtusa Corporation NasdaqGS:VRTU
viii. Unisys Corporation NYSE:UIS
c. AltQuest Facility Services and Industrial Services Index
i. Cintas Corporation NasdaqGS:CTAS
ii. ABM Industries Incorporated NYSE:ABM
iii. SP Plus Corporation NasdaqGS:SP
iv. Aramark NYSE:ARMK
v. Iron Mountain Incorporated NYSE:IRM
vi. UniFirst Corp. NYSE:UNF
vii. FirstService Corporation TSX:FSV
viii. Waste Management, Inc. NYSE:WM
ix. Republic Services, Inc. NYSE:RSG
x. Waste Connections US, Inc. NYSE:WCN
xi. Stericycle, Inc. NasdaqGS:SRCL
xii. US Ecology, Inc. NasdaqGS:ECOL
xiii. Casella Waste Systems Inc. NasdaqGS:CWS

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xiv. Covanta Holding Corporation NYSE:CVA
xv. Clean Harbors, Inc. NYSE:CLH
xvi. United Rentals, Inc. NYSE:URI
xvii. H&E Equipment Services Inc. NasdaqGS:HEES
xviii. CECO Environmental Corp. NasdaqGS:CECE
xix. Team, Inc. NYSE:TISI
d. AltQuest Human Resources Index
i. Robert Half International Inc. NYSE:RHI
ii. ManpowerGroup Inc. NYSE:MAN
iii. WageWorks, Inc. NYSE:WAGE
iv. On Assignment Inc. NYSE:ASGN
v. 51job Inc. NasdaqGS:JOBS
vi. Insperity, Inc. NYSE:NSP
vii. TriNet Group, Inc. NYSE:TNET
viii. Korn/Ferry International NYSE:KFY
ix. TrueBlue, Inc. NYSE:TBI
x. Kelly Services, Inc. NasdaqGS:KELY.A
xi. Kforce Inc. NasdaqGS:KFRC
xii. Automatic Data Processing, Inc. NasdaqGS:ADP
xiii. Heidrick & Struggles International Inc. NasdaqGS:HSII
e. AltQuest Information Services Index
i. Thomson Reuters Corporation TSX:TRI
ii. Acxiom Corporation NasdaqGS:ACXM
iii. Gartner Inc. NYSE:IT
iv. Alliance Data Systems Corporation NYSE:ADS
v. The Dun & Bradstreet Corporation NYSE:DNB
vi. comScore, Inc. NasdaqGS:SCOR
vii. Fair Isaac Corporation NYSE:FICO
viii. Experian plc LSE:EXPN
ix. Equifax Inc. NYSE:EFX
x. The Advisory Board Company NasdaqGS:ABC
xi. Verisk Analytics, Inc. NasdaqGS:VRSK
xii. CoreLogic, Inc. NYSE:CLGX
xiii. CoStar Group Inc. NasdaqGS:CSGP
xiv. FactSet Research Systems Inc. NYSE:FDS
xv. Moody's Corporation NYSE:MCO
xvi. Forrester Research Inc. NasdaqGS:FORR

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xvii. IHS Markit Ltd. NasdaqGS:INFO
f. AltQuest Marketing Services Index
i. WPP plc LSE:WPP
ii. Omnicom Group Inc. NYSE:OMC
iii. Publicis Groupe SA ENXTPA:PUB
iv. The Interpublic Group of Companies, Inc. NYSE:IPG
v. MDC Partners Inc. NasdaqGS:MDCA
vi. InnerWorkings Inc. NasdaqGS:INWK
vii. Ipsos SA ENXTPA:IPS
viii. UBM plc LSE:UBM
g. AltQuest Real Estate Services Index
i. CBRE Group, Inc. NYSE:CBG
ii. CoStar Group Inc. NAsdaqGS: CSGP
iii. Jones Lang LaSalle Incorporated NYSE:JLL
iv. Realogy Holdings Corp. NYSE:RLGY
v. SouFun Holdings Ltd. NYSE: SFUN
vi. NM Kennedy-Wilson Holdings, Inc. NYSE:KW
vii. E-House (China) Holdings Limited NYSE:EJ
viii. RE/MAX Holdings, Inc. NYSE:RMAX
ix. Altisource Portfolio Solutions S.A. NasdaqGS:ASPS
h. AltQuest IT Services Index
i. International Business Machines Corporation NYSE:IBM
ii. Accenture plc NYSE:ACN
iii. Cognizant Technology Solutions Corporation NasdaqGS:CTSH
iv. CGI Group Inc. TSX:GIB.A
v. Booz Allen Hamilton Holding Corporation NYSE:BAH
vi. Leidos Holdings, Inc. NYSE:LDOS
vii. Teradata Corporation NYSE:TDC
viii. EPAM Systems, Inc. NYSE:EPAM
ix. Interxion Holding NV NYSE:INXN
x. CACI International Inc. NYSE:CACI
xi. ManTech International Corporation NasdaqGS:MAN
xii. Virtusa Corporation NasdaqGS:VRTU
xiii. The Hackett Group, Inc. NasdaqGS:HCKT
xiv. Unisys Corporation NYSE:UIS
xv. ServiceSource International, Inc. NasdaqGS:SREV
i. AltQuest Specialty Consulting Index

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i. CEB Inc. NYSE:CEB
ii. FTI Consulting, Inc. NYSE:FCN
iii. Exponent Inc. NasdaqGS:EXPO
iv. The Advisory Board Company NasdaqGS:ABC
v. Huron Consulting Group Inc. NasdaqGS:HUR
vi. ICF International Inc. NasdaqGS:ICFI
vii. Navigant Consulting Inc. NYSE:NCI
viii. Resources Connection, Inc. NasdaqGS:RECN
ix. CBIZ, Inc. NYSE:CBZ
4. Healthcare
a. AltQuest Dental Product Index
i. Zimmer Biomet Holdings, Inc. NYSE:ZBH
ii. DENTSPLY SIRONA Inc. NasdaqGS:XRAY
iii. Henry Schein, Inc. NasdaqGS:HSIC
iv. Align Technology Inc. NasdaqGS:ALGN
v. Patterson Companies, Inc. NasdaqGS:PDCO
vi. Cantel Medical Corp. NYSE:CMN
vii. BIOLASE, Inc. NasdaqCM:BIOL
viii. Milestone Scientific Inc. AMEX:MLSS
ix. Pro-Dex Inc. NasdaqCM:PDEX
b. AltQuest Dental Providers Index
i. Birner Dental Management Service OTCPK:BDMS
c. AltQuest Medical Devices & Products Index
i. Medtronic plc NYSE:MDT
ii. Abbott Laboratories NYSE:ABT
iii. Stryker Corporation NYSE:SYK
iv. Becton, Dickinson and Company NYSE:BDX
v. Boston Scientific Corporation NYSE:BSX
vi. Baxter International Inc. NYSE:BAX
vii. Intuitive Surgical, Inc. NasdaqGS:ISRG
viii. Zimmer Biomet Holdings, Inc. NYSE:ZBH
ix. St. Jude Medical Inc. NYSE:STJ
x. Edwards Lifesciences Corp. NYSE:EW
xi. CR Bard Inc. NYSE:BCR
xii. ABIOMED, Inc. NasdaqGS:ABMD
xiii. Integra LifeSciences Holdings Corporation NasdaqGS:IART
xiv. Wright Medical Group N.V. NasdaqGS:WMGI

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xv. Johnson & Johnson NYSE:JNJ
d. AltQuest Medical Product Distribution Index
i. Danaher Corp. NYSE:DHR
ii. Stryker Corporation NYSE:SYK
iii. McKesson Corporation NYSE:MCK
iv. Cardinal Health, Inc. NYSE:CAH
v. AmerisourceBergen Corporation NYSE:ABC
vi. Henry Schein, Inc. NasdaqGS:HSIC
vii. Patterson Companies, Inc. NasdaqGS:PDCO
viii. Owens & Minor Inc. NYSE:OMI
ix. PharMerica Corporation NYSE:PMC
x. Aceto Corp. NASDAQGS:ACET
e. AltQuest Specialty Providers Index
i. Fresenius Medical Care AG & Co… NYSE:FMS
ii. DaVita HealthCare Partners Inc. NYSE:DVA
iii. MEDNAX, Inc. NYSE:MD
iv. AmSurg Corp. NasdaqGS:AMSG
v. HEALTHSOUTH Corp. NYSE:HLS
vi. Surgical Care Affiliates, Inc. NasdaqGS:SCAI
vii. American Renal Associates Holdings, NYSE:ARA
viii. Adeptus Health Inc. NYSE:ADPT
ix. LHC Group, Inc. NasdaqGS:LHCG
x. AAC Holdings, Inc. NYSE:AAC
f. AltQuest Pharma Services Index
i. CVS Health Corporation NYSE:CVS
ii. Express Scripts Holding Company NASDAQGS:ESRX
iii. Perrigo Company plc NYSE:PRGO
iv. Allscripts Healthcare Solutions, Inc. NasdaqGS:MDRX
v. Magellan Health, Inc. NasdaqGS:MGLN
g. AltQuest Practice Management Index
i. WellCare Health Plans, Inc. NYSE:WCG
ii. HealthEquity, Inc. NasdaqGS:HQY
iii. Team Health Holdings, Inc. NYSE:TMH
h. AltQuest Provider Services Index
i. Cerner Corporation NasdaqGS:CERN
ii. Healthcare Services Group Inc. NasdaqGS:HCSG
iii. HMS Holdings Corp. NasdaqGS:HMSY

209
iv. The Advisory Board Company NasdaqGS:ABCO
v. Omnicell, Inc. NasdaqGS:OMCL
vi. Evolent Health, Inc. NYSE:EVH
vii. Providence Service Corp. NasdaqGS:PRSC
i. AltQuest Long Term & Behavioral Care Index
i. National HealthCare Corporation AMEX:NHC
ii. The Ensign Group, Inc. NasdaqGS:ENSG
iii. Civitas Solutions, Inc. NYSE:CIVI
iv. Acadia Healthcare Company, Inc. NasdaqGS:ACHC
v. SunLink Health Systems Inc. AMEX:SSY
vi. AAC Holdings, Inc. NYSE:AAC
The investment banker then spreads each public comp and the financial data feeds into
the median and average for the vertical and sub-vertical which ultimately ends up in the
research (industry report, newsletter), pitchbooks, and CIMs of the investment bank. For
investment banks with an equity research department, financial statement models will be
built for each public comp that is being covered and consensus EPS data taken from
research reports will be used to establish the value of the public comp.
The investment banker ultimately uses the vertical index and sub-vertical index to
perform proprietary research and develop industry reports and newsletters which will aid
in coverage and ultimately origination. The research, which we will go into greater detail
on later in the book focuses on vertical and sub-vertical trends in margins, multiples, and
M&A.
tracks trends in:
Growth rates
Margins
Debt to Equity

210
Multiples
How to Advise on Strategic Alternatives?
tracks trends in:
Growth rates
Margins
Debt to Equity
Multiples

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212
Chapter 27:
Running the Boutique Investment Bank
In building AltQuest’s initial book of business, we sent over 2,000 emails to our initial
coverage group, industrials/manufacturers. The response rate was approximately 2%. Of
those that responded approximately 50% were interested in seller and 50% were
interested in taking an offer on their business. Of those that were interested in selling
their business, approximately 50% accepted our fee agreement.
When first starting the M&A firm, majority of time should be spent originating sell side
mandates. Once the investment banker gets to 20 sell side mandates, one can ease up on
origination and transfer those responsibilities to analysts and associates hired as interns
which then turn into full time analysts/associates.
This means that all of the investment banker’s time will now be spent in M&A execution
with sell-side pitches from time to time when the analyst/associate originates an
opportunity.
Good analysts and associates will originate 2 to 3 sell-side pitch opportunities per week
so the investment banker will stay busy on the phone with these
CEOs/Founders/Partners.
Realistically it will take a year to a year and a half to close your first deal if you are just
starting out in M&A. If you have been in M&A and have a book of business, the
timeframe shortens to the typical time it takes to close a deal which is shown below.
It is important for the M&A professional to plan for this extended time frame and not to
get discouraged when deals blow up, get delayed, or change. All deals associated with an
actual perpetuity close, it is just a matter of time.

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214
Part XVI: Investment Banking
Deliverables
Investment banking requires a certain set of deliverables from coverage, to origination
through sell side representation.

215
Chapter 28:
Investment Banking Deliverables
Investment banking deliverables include the following in order from left to right:
I. Pitchbook (origination)
II. Adjusted EBITDA
III. Valuation
IV. Teaser & CIM (sell side mandate)
V. Purchase Agreement

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Chapter 36:
Adjusted EBITDA
After receiving the financials for the target, the investment banker must calculate
adjusted EBITDA. The calculation for EBITDA looks like the following:

217

218
Chapter 37:
Valuation
After arriving at adjusted EBITDA, the investment banker will determine public comps and
extrapolate a multiple for the target company adjusting for size of the company. From
there, precedent transactions will be spread to determine a mean multiple. Finding the
midpoint of the valuation methodologies can be used for determining valuation but the
range is often communicated to the client or potential buyers:

219
Chapter 38:
Teaser
After finding adjusted EBITDA and determining valuation, the investment banker can
build the marketing material for the target company which includes a teaser and a CIM.
The teaser can be broken down in the following manner:

220
Chapter 39:
CIM (Confidential Information
Memorandum)
After creating the teaser, the investment banker goes into greater detail in a marketing
document called a CIM. This document is distributed to buyers after the teaser and is for
the serious buyers to do an in depth analysis of the target.

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Chapter 39:
Purchase Agreement
After the strategic or financial buyer decides to draft an LOI and proceed with an
acquisition of a given target, the purchase agreement will need to be drafted. In the
LMM, the investment banker may draft the agreement himself/herself, but as
transactions get larger, M&A attorneys will be involved and take the lead with the
creation of the purchase agreement. The investment banker will stay actively involved in
the drafting of the agreement.

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BUY-SIDE
For those that have already built perpetuities and their representation, there is another
category known as the buy-side. The buy-side is made up of financial (private equity) and
strategic buyers (corporate).

223
Part XVII:
How to Buy a Perpetuity?
On the buy-side, we are concerned with the purchasing of perpetuities.

224
Chapter 40:
The Principle of Investing
The principle of investing is to only invest in perpetuities or in risk free assets. The key is
to determine whether the company/opportunity is a perpetuity or not. We are going to
employ financial statement modeling and valuation to make this determination. Financial
statement modeling begins with the building of the operating model of the company.
After determining whether the company/opportunity is a perpetuity, strategic and
financial buyers attempt to maximize the difference between NPV (as measured by DCF)
of the company/opportunity and the contributed capital to acquire the opportunity. The
difference between these two is the real wealth transfer from the seller to the buyer in
today’s dollars. For example, if the NPV (i.e. intrinsic value) of a company is $100M based
upon a DCF and the acquirer actually purchases the asset for $75M, the acquirer has
received a transfer of wealth from the seller to the buyer in the amount of $25M in
today’s dollars. This is the game of buying perpetuities.
Wealth Increase in Today’s Dollars From Opportunity/Company (Margin of Safety) = DCF
NPV – Contributed Capital
One can further maximize their returns by employing leverage in the form of OPM (other
people’s money). Ideally, the financial or strategic buyer would continue to make such
acquisitions using separate entities (i.e. SPVs) allowing them to use debt financing for
each as well as public equity/LP capital.

225

226
Chapter 41:
How to Become the Next Warren Buffett
In order to become the next Warren Buffett, you should first understand the nature of the
perpetuity, which is the basis for finance and his approach. Finance is the set of concepts,
methodologies, and optimization models associated with the perpetuity. The perpetuity
can be modeled with the following formula:
All finance content can be broken down in relation to the perpetuity, namely:
Sell-side – the selling of perpetuities (investment bankers, Wall Street)

227
The principle of investing (and Buffett's approach) is to only invest in perpetuities or in
risk free assets. The key is to determine whether the company/opportunity is a perpetuity
or not. We are going to employ financial statement modeling and valuation to make this
determination. Financial statement modeling begins with the building of the operating
model of the company.
Warren Buffett often speaks of a margin of safety. After determining whether the
company/opportunity is a perpetuity, strategic and financial buyers attempt to maximize
the difference between NPV (as measured by DCF) of the company/opportunity and the
contributed capital to acquire the opportunity. The difference between these two is the
real wealth transfer from the seller to the buyer in today’s dollars. For example, if the NPV
(i.e. intrinsic value) of a company is $100M based upon a DCF and the acquirer actually
purchases the asset for $75M, the acquirer has received a transfer of wealth from the
seller to the buyer in the amount of $25M in today’s dollars. This is the game of buying
perpetuities.
Wealth Increase in Today’s Dollars From Opportunity/Company (Margin of Safety) = DCF
NPV – Contributed Capital
So we are either going to purchase perpetuities or not invest (i.e. risk free assets). The
larger the perpetuity the better. Characteristics of a perpetuity include:
Low CAPEX as a % of EBITDA
Predictable if not recurring revenue model
Low levels of customer concentration

228
In terms of capital, you are going to want to have 'evergreen' sources of capital, which
means that there is no required timeline on the return of capital. This is different than
traditional private equity where LPs expect a return of their original contributions in ~ 7
years. This forces GPs to sell their portfolio companies in ~5 years from acquisition.
Taking the evergreen or Buffett approach allows one to accumulate the wealth associated
with the cash flows in the terminal value (of a DCF) and to use the aggregate cash flows
to purchase additional perpetuities. This is what built Berkshire Hathaway.
Ultimately, you are going to want to either build a perpetuity yourself or start a private
equity search fund and acquire a small perpetuity and then scale up from there to larger
perpetuities. Using one perpetuity to purchase additional perpetuities is what made
Warren Buffett what he is today.

229
Chapter 42:
The Operating Model
We are going to start with the operating model previously built (integrated financial
statement model). From here we are going to build on a transaction (ex. LBO, Merger,
ECM, DCM).

230
Chapter 43:
Financial Buyer aka Private Equity (LBO)
There are over 4,000 financial buyers in the world. They command over $2 trillion in
capital and are broken down into the following categories:
Leveraged buyout
Growth
Mezzanine
While each of these private equity firms have different hurdle rates, each perform an LBO
analysis to determine whether or not to purchase a perpetuity. There are two types of
private equity plays:
1. Platform – standalone company that is the basis for a strategy including consolidation
2. Add on – additional company acquired that is “bolted” onto an existing platform
Private equity firms have 7 to 8 years to invest and get returns and be done with the
fund. They have a 2% management fee generally. They are targeting 20% to 25% and
think in terms of spread over treasuries. IRR is the name of the game which the main
drivers of returns being; acquisition price, amount of debt raised, and future operating
performance (model projections). There is an aspect of buy low, sell high regarding
multiples (ex. 11x entry and 13x exit). You can use the following as a general rule of
thumb for a private equity group:
15% IRR don’t do the deal

231
25% IRR do the deal
30% IRR, you must do the deal
Regarding ideal private equity targets, the private equity firm will specialize in a few
sectors and does not want a lot of discretionary CAPEX. They will however do
maintenance CAPEX. They will look to rework AR and AP contracts.
Furthermore, after an acquisition, the PE group will look to pay debt down as fast as
possible. They ideally want dividend recaps (add additional cash and then pay self a
dividend after paying back additional debt).
The PE firm when considering an investment will run multiple cases to determine what
case to bid on. They will do sensitivity tables as well.
The PE group will work with LevFin, SLF & DCM within a given investment bank with SLF
syndicating the loans and then selling the paper. The IB charges a financing fee, advisory
fee, and syndication fee.
Leveraged Buyout (LBO) Analysis:
1. Locate financial information
2. Build the operating model
3. Input transaction structure
4. Complete LBO model with new structure
5. Run the LBO analysis
Notes:
Banks want 20% to 30% for financial sponsor. This depends on the industry; 50%
necessary for technology company. Bank looks at leverage ratios and interest coverage to
determine which covenants to put in place.
Construction of LBO Model
Purchase price and considerations
Sources and uses
Cap structure alternatives (sources)
Integrate proforma BS into operating model (change in debt level and intangibles)
IS, BS, and SCF projections integration

232
IRR analysis for FS and hybrid debt lender (to find what is EBITDA, how much is cash and
how much is debt
Sensitivity tables
Credit ratios
PIK allows you to get more leverage
LBO model is an M&A & DCM transaction in one
EBITDA multiple determined from midpoint of the football field
Transaction fees:
Financing fees – SLF & DCM
IB fees – M&A
Legal – Lawyer
Other fees
Leverage is spoken in terms of x leverage which means x EBITDA
SLF & DCM go through cases of operating model to find optimal tranche of debt to
provide highest leverage to the FS but can still be sold in the marketplace
Proforma is AS IF after the transaction. Adjustments (changes) -> Proforma (after
changes)
Retained earnings: Old RE gets wiped out and new RE starts negative due to financing
fees.
Assumptions for projects:
Operating model start with base case without transaction
Sponsor upside case
Sponsor downside case
Each case underneath line item in Assumptions tab
Use choose function to choose case
Key question: Is capital structure correct to allow you to pay down amortized debt and
other tranches of debt?

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Look at net cash flow being generated and then determine if unsecured needs to be PIK
(if not enough net CF, then need PIK)
Talk to credit officer to get to capital structure that is optimal
Need to do accounting quality of earnings analysis to get to true EBITDA?
Financial sponsors want to see sensitivity table with highlighted options that make sense.
Sensitize entry multiple and exit multiple for IRR.
Reverse LBO: If I have a hurdle rate of x%, what is the max price I can pay for the asset?
Also get an implied entry multiple.
PE transaction rationale: Offense (growth) vs. defense (protecting territory aka maintain
margins)
Credit officer meeting:
25-30 page deck
Industry
Sponsor thesis
1 sheet summary of relevant financial statistics (one for each capital structure)
How quickly do you draw on revolver? Do not want to draw on revolver too quickly
Credit officer looks at BS/CF statistics, leverage ratios, and interest coverage statistics
Want to see debt ratios steadily going down; want a few turns of the company being
delivered
How quickly does this company get delivered?
PE work: 10, 20, 30 CIMs (confidential information memorandums) per month.
PE interview:
Interview 1 – Experience
Interview 2 – You have 2 hrs to build an LBO model and tell me whether or not to invest

234
Chapter 44:
Strategic Buyer aka Corporation (Merger)
There are over 3,000 strategic buyers in the world.
While each of these strategic buyers have different hurdle rates, each perform a merger
analysis to determine whether or not to purchase a perpetuity.
Merger Analysis:
1. Locate financial information
2. Build the standalone operating model for target & acquirer
3. Input transaction structure
4. Complete merger model with new structure
5. Run the merger consequences analysis (accretion/dilution, balance sheet effects,
contribution analysis)
Notes:
Merger Modeling
2 operating models put together with synergies
Don’t want to give away more than 50% of your synergies in your bid
Accretion (EPS goes up with combined company)/dilution merger model to see impact of
acquisition on acquirer’s EPS
Offensive play vs. defensive play (protecting your market or size)
Dilution is proforma decrease in EPS. What causes dilution?

235
Buyer with higher PE multiple than target, then accretive as the target is less expensive. If
target has PE that is higher than the acquirer, always dilutive. If premium paid causes PE
of target to be higher, then dilutive.
Accretion/dilution always forward looking as it takes years to get synergies
Proforma ownership structure want to control 50.1% of company
Pretax synergies required to break even: How much synergies does acquirer need to have
for the transaction to be accretive:
((Proforma EPS – Acquirer EPS) x proforma shares outstanding) / (1 – tax rate))
We then take this number as a % of revenue or EBITDA of combined company
Know where your stock’s value is going:
If undervalued, then don’t use stock
If overvalued, then use stock to fund the transaction
Collars: When announce transaction, establish exchange ratio as the stock price will
move so have either:
A. Fixed value collar – favors target
B. Fixed share collar – favors acquirer
Sensitivity tables are used to help structure deals and in negotiations
Surviving entity (acquirer)

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Chapter 45:
Perpetuity Science & Portfolio Theory
One should not diversify away from perpetuities but rather concentrate wealth In them.
Diversification is not to be among asset classes but among perpetuities; asset classes that
are not perpetuities In nature are commodities and thus not actually investments.
Perpetuities are investments, commodities are not.

237
Chapter 45:
How to Start a LMM Search Fund
For those just getting started in private equity and are looking to buy a perpetuity, it is
advisable to begin in the LMM with TEVs south of $25M. There are fund sponsors
dedicated to working with PE search funds. They partner with operators that have access
to perpetuities being sold by owners. The typical structure to this process is to meet with
the fund sponsor and demonstrate the capabilities and plan for taking a perpetuity to the
next phase. An example of this would be taking a job shop and turning it into a
perpetuity or taking a perpetuity and turning it into a growing perpetuity. One should be
intimately familiar with Perpetuity Science and have participated on at least one side of
the perpetuity with a track record. The real key is access to a quality perpetuity where the
principle of investing can be applied.
The search fund does not commit capital directly but instead forms an agreement that
capital will be supplied providing that a target meets hurdle criterion set forth by the
fund sponsor. It is the LMM PE search fund’s responsibility to find the target and
negotiate with the owner.

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CASES
For those that have already built perpetuities and their representation, there is another
category known as the buy-side. The buy-side is made up of financial (private equity) and
strategic buyers (corporate).

239
Chapter 40:
FameLinked

240

241
In terms of the methodology that is used by FameLinked, we have the FameLinked
Methodology as described in the book, FameLinked: The Fame Network & Marketplace:

242

243

244
The following is the FameLinked Perpetuity Presentation by Founders Ventures:

245
Chapter 40:
Asiansbook

246

247
In terms of the methodology that is used by Asiansbook, we have the Asiansbook
Methodology as described in the book, Asiansbook: The Asian Network & Marketplace:

248

249

250
The following is the Asiansbook Perpetuity Presentation by Founders Ventures:

251
Chapter 40:
DegreeLinked

252

253
In terms of the methodology that is used by DegreeLinked, we have the DegreeLinked
Methodology as described in the book, DegreeLinked: The Student Network &
Marketplace:

254

255
The following is the DegreeLinked Perpetuity Presentation by Founders Ventures:

Asiansbook Book

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