How do I build an operating model from my due diligence findings?

An operating model, in this sense, is your own forward-looking picture of how the business will earn and spend under your ownership. It is built from what diligence showed you, not from the seller’s summary. BDC notes, quoting an adviser, that you are typically paying a purchase price based on previous results while your return depends on the future. The model is where that gap gets worked through, line by line.

Start from records you have reconciled

BDC lists what you and your accountant should be given: accountant-prepared year-end statements for several past years, interim statements, trial balances, tax returns, bank statements, and records on product margins, revenue by customer and inventory and receivable aging. It also advises checking that the numbers add up, for example that tax returns match the financial statements. Use only figures that pass that test as your base year.

Give every finding its own line

BDC’s list of things to look for includes tax liabilities, poor product margins, needed equipment repairs or investments, slow-paying customers, high employee turnover, working capital levels, owner compensation and the impact of potential normalizations. For each finding that applies, write what it changes in the model, the document that supports it, and who confirmed it. BDC also describes a quality of earnings report, which an accountant can prepare and which goes beyond standard financial statements to adjust for non-recurring items, accounting irregularities and risks.

Model the people and the handover

BDC says the biggest risk in an acquisition is typically transition risk: when the vendor leaves, do the customers leave too, and who runs the business day to day? Ask what your model shows if the seller’s role ends earlier than agreed, or if a key employee leaves. BDC says to decide before the sale whether you will take part in vendor financing or an earnout; if you do, the model should carry those payments.

Keep the model separate from your hundred-day plan. The plan says what you will do; the model records what you assume will happen. See how to write a hundred-day plan for a newly acquired business for the plan side.