Blog · Territory, capacity and quota planning · Finance and FP&A teams
An acquisition financial workbook connects operating assumptions, funding and projected cash. Work through a combined-company example, change customer retention and check that each schedule reconciles.
Mergers and acquisitions financial modeling connects buyer and target forecasts to purchase funding and projected cash. The workbook should identify post-close assumptions and prove that the operating, financing and cash schedules reconcile.
Finance needs separate schedules for combined earnings, transaction funding and cash after operating and financing requirements.
CFA Institute's corporate restructuring reading describes pro forma statements as estimated financial statements incorporating a restructuring. Transaction effects depend on the circumstances.
Corporate development supplies transaction terms; operating leaders own retention and integration assumptions. Treasury owns debt terms, while accounting and tax specialists supply their adjustments. FP&A coordinates the schedules. The broader financial modeling workflow covers assumption ownership.
Bring buyer and target monthly statements, customer revenue and cost schedules. Add closing, funding and integration assumptions. Identify the entity, period, account, currency and scenario in each table.
Align accounting definitions and reporting periods, remove relevant intercompany amounts and identify nonrecurring items. The financial statement analysis for mergers and acquisitions guide covers that preparation.
Keep purchase accounting and tax allocation separate. For qualifying business asset sales, the IRS explains the residual method for allocating consideration. Bring specialist-approved depreciation, amortization and tax effects into the forecast; tax allocation does not replace acquisition accounting.
An illustrative US distributor acquires another distributor at the projection year's start. These supplied planning assumptions use a full post-close year, no intercompany transactions and USD. They do not establish transaction value.
| Input | Buyer (USD unless %) | Target or transaction (USD unless %) |
|---|---|---|
| Standalone annual revenue (USD) | 20,000,000 | 8,000,000 |
| Revenue retained after closing | 100.0% | 95.0% |
| Variable operating costs or rate | 14,000,000 | 65.0% of retained target revenue |
| Fixed operating costs including depreciation (USD) | 2,500,000 | 1,600,000 |
| Realized annual cost savings (USD) | — | 600,000 |
| Integration operating spending (USD) | — | 450,000 |
| Existing buyer debt (USD) | 1,000,000 | — |
| Existing debt interest rate | 6.0% | — |
| New acquisition debt (USD) | — | 6,000,000 |
| New debt interest rate | — | 8.0% |
| Assumed cash tax rate on pretax income | — | 25.0% |
Integration spending is expensed and paid during the year. Principal is repaid at year-end, so opening debt determines interest. The assumed tax rate applies to pretax income; actual transactions need separate tax schedules.
| Step | Calculation | Result (USD) |
|---|---|---|
| Retained target revenue | 8,000,000 × 95.0% | 7,600,000 |
| Combined revenue | 20,000,000 + 7,600,000 | 27,600,000 |
| Target variable costs | 7,600,000 × 65.0% | 4,940,000 |
| Combined variable costs | 14,000,000 + 4,940,000 | 18,940,000 |
| Combined contribution margin | 27,600,000 − 18,940,000 | 8,660,000 |
| Fixed costs before savings | 2,500,000 + 1,600,000 | 4,100,000 |
| Operating earnings | 8,660,000 − 4,100,000 + 600,000 − 450,000 | 4,710,000 |
| Interest | 1,000,000 × 6.0% + 6,000,000 × 8.0% | 540,000 |
| Pretax income | 4,710,000 − 540,000 | 4,170,000 |
| Cash tax assumption | 4,170,000 × 25.0% | 1,042,500 |
| Net income | 4,170,000 − 1,042,500 | 3,127,500 |
Savings are added once, after standalone fixed costs. Integration spending is subtracted separately. This makes the gross benefit and the cost of achieving it visible instead of hiding both in a net adjustment.
| Closing use | Amount (USD) | Funding source | Amount (USD) |
|---|---|---|---|
| Purchase consideration | 10,000,000 | New acquisition debt | 6,000,000 |
| Transaction fees | 200,000 | Buyer cash contribution | 4,500,000 |
| Additional cash retained in business | 300,000 | — | — |
| Total uses: 10,000,000 + 200,000 + 300,000 | 10,500,000 | Total sources: 6,000,000 + 4,500,000 | 10,500,000 |
That zero funding gap is a closing check. The following table measures cash generated during the subsequent operating year, excluding the closing payment.
| Post-close cash step | Calculation | Amount (USD) |
|---|---|---|
| Net income | From operating schedule | 3,127,500 |
| Add depreciation included in fixed costs | Supplied combined depreciation schedule | 700,000 |
| Less capital spending | Supplied capital budget | −900,000 |
| Less increase in operating working capital | Supplied balance sheet forecast | −350,000 |
| Less year-end debt principal payment | Supplied debt schedule | −600,000 |
| Cash generated after debt principal | 3,127,500 + 700,000 − 900,000 − 350,000 − 600,000 | 1,977,500 |
This bridge assumes no other noncash or timing adjustments. Depreciation must match fixed costs. The working capital guide explains the separate balance sheet forecast for receivables, inventory and payables.
Reduce target retention to 90.0%. Keep the target variable cost rate, fixed costs, savings, integration spending, funding and cash adjustments unchanged.
| Measure | Retention 95.0% (USD) | Retention 90.0% (USD) | Change (USD) |
|---|---|---|---|
| Target revenue | 7,600,000 | 7,200,000 | −400,000 |
| Target variable costs | 4,940,000 | 4,680,000 | −260,000 |
| Combined operating earnings | 4,710,000 | 4,570,000 | −140,000 |
| Pretax income | 4,170,000 | 4,030,000 | −140,000 |
| Cash tax assumption | 1,042,500 | 1,007,500 | −35,000 |
| Net income | 3,127,500 | 3,022,500 | −105,000 |
| Cash generated after debt principal | 1,977,500 | 1,872,500 | −105,000 |
The earnings proof is $400,000 of lost revenue less $260,000 of avoided variable costs: a $140,000 pretax decline. The cash difference equals the after-tax earnings difference only because the other cash assumptions were deliberately held constant. A fuller downside case should revisit collections, inventory and integration timing.
Bring the prepared acquisition workbook with scenario labels, operating assumptions and funding and cash schedules. Covirage maps the columns, and its tools compute and check the supplied figures; the external AI model explains the results with every figure traced to its rows. Create a free Covirage account in about a minute, then set up your business and bring a sample of your own data.
See Covirage for finance teams reviewing acquisition assumptions.
Start with consistent buyer and target statements, purchase terms, funding assumptions and the expected closing date. Add revenue retention, cost savings, integration spending, capital expenditure and working capital. Identify the owner and evidence for every assumption, and distinguish operating projections from accounting and tax adjustments.
Record each proposed saving or revenue benefit separately, with an owner, start date and implementation cost. Show gross benefits and the spending needed to achieve them. Check that a saving has not already reduced the target's standalone cost forecast before adding it to the combined case.
No. Profit does not show the purchase funding requirement, debt principal, capital spending or collection timing. Decision makers also need valuation, execution and risk assessments. An operating scenario workbook helps test assumptions, but its projected earnings alone do not establish that a transaction should proceed.
Choose an assumption that matters to the transaction, such as customer retention, delayed savings or integration spending. First change that input alone to show its effect. Then prepare a separate combined downside case where appropriate, keeping its changed assumptions clearly identified.