CEO - The Science of Building, Selling & Buying Perpetuities

CEO: THE SCIENCE OF BUILDING, SELLING & BUILDING PERPETUITIES
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Michael Herlache MBA
Doctor of Business Administration Candidate
VP, M&A at AltQuest Group
CEO
The Science of Building, Selling & Buying
Perpetuities

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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 investment banking training
program associated with this text, the Investment Banking University
(www.InvestmentBankingU.com) course’s syllabus is based upon the content of
this book.

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Contents
PERPETUITY SCIENCE:
Part I: Perpetuity Methodology
Chapter 1: What is a Perpetuity?
FOUNDATIONS OF VALUATION:
Part II: Tracking Value (Accounting)
Chapter 9: Tracking Value with Accounts
Part III: Analyzing Value (Finance)
Chapter 10: Analyzing Value with Finance
Part IV: Modeling Value
Chapter 11: Finance with Excel
Chapter 12: Financial Statement Modeling
BUILD-SIDE:
Part V: How to Build a Perpetuity?
Chapter 13: How to Build a Benefit Stream?
Chapter 14: How to De-Risk the Benefit Stream?
Chapter 14: The Consumption Process & Growth Hacking
Chapter 15; Reasoning to Platform
Part VI: Perpetuity Analysis
Chapter 16: How to Be a CEO?
Chapter 17: How to Be a Consultant?
Part VII: Perpetuity Management
Chapter 19: Perpetuity Management
Chapter 20: Valuation Methodologies
Chapter 21: Framing Valuation
Chapter 22: The Market for Perpetuities
Chapter 23: Index Building & Benchmarking
Chapter 24: Financial Data Sources
SELL-SIDE:
Part VIII: How to Sell a Perpetuity?

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Chapter 25: Investment Banking
Chapter 26: How to Become an Investment Banker Methodology
Part IX: The Middle Market
Chapter 27: Middle Market Breakdown
Part X: M&A Multiples
Chapter 28: M&A Multiples
Part XI: Investment Banking Coverage Methodology
Chapter 29: Investment Banking Coverage Methodology
Chapter 37: Index Building & Benchmarking
Chapter 38: Financial Data Sources
Chapter 39: Industry or Sector Newsletter
Chapter 40: Industry or Sector Report
Chapter 41: Rolodex Building
Part XI: M&A Origination Methodology
Chapter 29: M&A Origination Methodology
Part XII: Mandate/Target Matching Methodology
Chapter 30: Mandate/Target Matching Methodology
Part XIII: Deal Structuring
Chapter 31: Deal Structuring
Part XIV: M&A Process
Chapter 32: M&A Process
Part XV: Firm Building & Management
Chapter 33: How to Build a Boutique Investment Bank?
Chapter 34: Running the Boutique Investment Bank
Part XVI: Deliverables & Coverage
Chapter 35: Investment Banking Deliverables
Chapter 42: Adjusted EBITDA
Chapter 43: Valuation
Chapter 44: Teaser
Chapter 45: CIM (Confidential Information Memorandum)
BUY-SIDE:
Part XVII: How to Buy a Perpetuity?
Chapter 46: The Principle of Investing
Chapter 47: How to Be a Warren Buffett?
Chapter 48: The Operating Model
Chapter 49: The Financial Buyer aka Private Equity (LBO)
Chapter 50: The Strategic Buyer aka Corporation (Merger)
Chapter 50: Perpetuity Science & Portfolio Theory

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Chapter 48: How to Start a LMM Search Fund?
CASES:
Part XVIII: Cases
Chapter 52: Cases

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Preface
There are many investment banking texts out there that claim that financial
modeling and valuation is the core work of the investment banker. This is
simply not the truth. The core work of the investment banker is origination,
mandate/target matching, and deal structuring. It should follow that a
text/course on investment banking should be based upon the same. It is the
good fortune that the reader has encountered such a book/course. Investment
Banking: M&A Origination, Execution, Financial Modeling & Valuation explains
origination, mandate/target matching, and deal structuring (i.e. how
investment bankers actually make their money).
For those new to investment banking you are first going to want to clarify
whether you would like to work on the sell side for a few years or pursue a
career in investment banking. The skills that you will need to get started in
investment banking are different than those that you will need to have a long
and successful career in investment banking. The role in investment banking
transforms from one that is research, financial modeling & valuation based
into one focused on origination and facilitating the M&A process. M&A
(Mergers & Acquisitions) is the core product of investment banking, and the
other products, advisory & capital-raising, simply support this. We founded
Investment Banking University (www.InvestmentBankingU.com) to prepare
students for both bulge bracket and middle market investment banking career
opportunities.
We see a paradigm shift occurring in the field of investment banking. The idea
that you need to spend three years of your life as an analyst doing 80+ hour
workweeks building financial models to become an investment banker is a
faulty paradigm. The real value add of an investment banker is not financial
modeling & valuation, but rather origination, mandate/target matching, and
deal structuring. You don’t need Goldman Sachs’ permission to be an

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investment banker just like you don’t need McKinsey’s permission to be a
consultant. Investment banking for private companies in the middle market is a
great way to build your initial coverage and career as an investment banker
without sacrificing a family life or your health.

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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

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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:
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.

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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 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?

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Capability: The capability to sell a perpetuity
Buy-Side:
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:

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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.
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?

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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 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.
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.

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Standard of Living: Perpetuities
The Goal
To increase standard of living without sacrificing quality of life.
How to Get the Goal
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

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

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Return:

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Growth:

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Margins (Cash flow):

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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)

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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 V:
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
Taxes

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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)

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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.
*We want more add backs to get to a higher valuation

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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

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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:

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Assumptions (value drivers)
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

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public security, you use CAPM since the buyer of the security will have a
portfolio to diversify away risk.
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

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are sometimes semistrong 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

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What is the asset’s IRR?
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

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CAGR is Effective Annual Interest Rate (EAIR) to allow for comparison
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):

50
WACC = rE* (E/(E+D)) + rD (1-Tc)*(D/(E+D))
Value of Equity
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

51
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:
=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

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Statistics are used to determine acceptable and unacceptable portfolios
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

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VIII. Security Market Line & Investment Performance Continued
Investment performance:
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)

54
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
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

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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
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)?

57
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.

58
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

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8. Diversified Perpetuity
Perpetuity Science & The Perpetuity Scientist
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

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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 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

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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 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

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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.

63

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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
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.

65
Platform vs. Mod
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

66
social networks including Instagram, Facebook, & Twitter to first
advocate the startup's methodology:
1. Develop thought leadership (methodology)
2. Advocate methodology and first contact
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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68

69

70

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

72

73
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

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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?)
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 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:

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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.
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

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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
II. Perpetuity Building
III. Perpetuity Management
Perpetuity Exit
Market Analysis
GDP

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Industry Spend
Sub sector spending
Sub sector spending by product

78
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

84
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 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:

85
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.
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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87

88
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

90
Valuation Drivers
The Role of the CEO

91
Valuation

92
Perpetuity Management with Discounted Cash Flows
Growth or Restructuring
Perpetuity Management Process

93
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

94
(i.e. NPV) targets set annually for next three years, progress monitored monthly
and managers’ compensation tied to economic profit against these targets
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

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Cash Flow
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).

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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.
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.

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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 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)

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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

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Financial – 4x to 7x EBITDA
Strategic – 5x to 10x EBITDA
Valuation is a range
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

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as 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

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Compare NPV and IRR OR compare EPS change and BS effects to other
strategic alternatives and choose the highest return/EPS alternative
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

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Debt to Equity
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

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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 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:
Lower Middle Market: $5 - $50 million of revenue;
Middle Market: $50 - $500 million of revenue; and
Upper Middle Market: $500 million - $1 billion of revenue.
Overview of Middle Market
We view the middle market as having three distinct segments, defined by a
company's ownership type, prospects, and access to capital. 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. Such
companies are generally well served by local banking relationships,
government-sponsored entities such as Small Business Investment Companies
(SBICs) in the U.S., or public entities such as Business Development
Corporations (BDCs).
At the other extreme, upper middle market companies typically have $75
million of EBITDA or more, and are often publicly held or sponsor backed.
These companies, given their size, typically ebb and flow with their respective
industries. They have myriad options for accessing capital, notably including
the public high yield market. Some institutional investors who are looking to
write large checks ($100 million or more) also participate in this space, though

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volume is limited. Given the relatively lower yields in this segment, as well as
structural disadvantages such as the lack of maintenance covenants and
limited information rights.
We define the core middle market as companies with $10 to $75 million of
EBITDA and this is the segment where we are most active. Companies are
typically sponsor owned with several opportunities for growth, from taking
share to expanding into related products or new geographies.
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.

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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:

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These are EBITDA multiples for transactions in the middle market:
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).

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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:
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:

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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:
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
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).
For those just getting started in investment banking, it is preferable to start
with the lower middle market and middle market building relationships with

128
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
Regarding the vertical index and sub-vertical index, the investment
banker ultimately tracks trends in:
Growth rates
Margins
Multiples
The investment banker takes the index and establishes tiers which turn
into peer groups. 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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143

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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
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,

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Michael
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

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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 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

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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:
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

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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

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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.

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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.
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

164
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
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:

165
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
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

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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
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

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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:
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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169

170

171
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

173
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
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
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

174
e. Information Services
f. Marketing Services
g. Real Estate Services
h. IT Services
i. Specialty Consulting
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

175
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
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

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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
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

177
vii. Castlight Health CSLT NYSE
viii. ChannelAdvisors ECOM NYSE
ix. Cornerstone OnDemand CSOD NasdaqGS
x. Covisint COVS NasdaqGS
xi. Ebix EBIX NasdaqGS
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. Tangoe TNGO 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.com FLWS NasdaqGS
ii. 58.com WUBA NYSE
iii. 8x8 EGHT NasdaqGS

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iv. Akamai Technologies AKAM NasdaqGS
v. Alibaba BABA NYSE
vi. Amazon.com AMZN NasdaqGS
vii. Angie's List ANGI NasdaqGS
viii. Baidu.com BIDU NasdaqGS
ix. Bankrate RATE NYSE
x. Bitauto Holdings BITA NYSE
xi. BlueNileNILE 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. LifeLockLOCK 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

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xli. MaxPoint Interactive MXPT NasdaqGM
xlii. Mercadolibre MELI NasdaqGS
xliii. Mitel Networks MITL NasdaqGS
xliv. Monster Worldwide MWW NYSE
xlv. NCSoft 036570.KS KSE
xlvi. NeteaseNTES NasdaqGS
xlvii. Netflix NFLX NasdaqGS
xlviii. Overstock.com OSTK NasdaqGS
xlix. PandoraP 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.com TST NasdaqGM
lxvii. Travelzoo TZOO NasdaqGS
lxviii. Lending Tree TREE NasdaqGS
lxix. Tremor TRMR NYSE
lxx. TripAdvisor TRIP NasdaqGS
lxxi. TubeMogul TUBE NasdaqGS
lxxii. Tucows TCX NasdaqCM
lxxiii. Twitter TWTR NYSE
lxxiv. VeriSignVRSN NasdaqGS
lxxv. WebMD Health WBMD NasdaqGS
lxxvi. Wix.com WIX NasdaqGS
lxxvii. XO Group XOXO NYSE

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lxxviii. Xunlei XNET NasdaqGS
lxxix. Yahoo! YHOO NasdaqGS
lxxx. Yandex YNDX NasdaqGS
lxxxi. Yelp YELP NYSE
lxxxii. YuMe YUME NYSE
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

181
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
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

182
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
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

183
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
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

184
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
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

185
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
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.

186
Growth rates
Margins
Debt to Equity
Multiples
How to Advise on Strategic Alternatives?
Growth rates
Margins
Debt to Equity
Multiples

187

188

189
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.

190
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.

191
Part XVI: Investment
Banking Deliverables
Investment banking requires a certain set of deliverables from coverage, to
origination through sell side representation.

192
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

193
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:

194

195
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:

196
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:

197
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.

198
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.

199
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).

200
Part XVII:
How to Buy a Perpetuity?
On the buy-side, we are concerned with the purchasing of perpetuities.

201
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.

202

203
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:
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.
All finance content can be broken down in relation to the perpetuity,
namely:

204
Sell-side – the selling of perpetuities (investment bankers, Wall Street)
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:

205
Low CAPEX as a % of EBITDA
Predictable if not recurring revenue model
Low levels of customer concentration
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.

206
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).

207
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).

208
You can use the following as a general rule of thumb for a private equity
group:
15% IRR don’t do the deal
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

209
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
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

210
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?
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.

211
PE interview:
Interview 1 – Experience
Interview 2 – You have 2 hrs to build an LBO model and tell me whether or not
to invest

212
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

213
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?
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)

214
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.

215
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.

CEO - The Science of Building, Selling & Buying Perpetuities

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