FA-301g · Module 2

Financial Model Validation

3 min read

Every acquisition target presents a financial model projecting future growth. Your job in due diligence is not to accept the model — it is to validate or invalidate each assumption independently. The model is the seller's best-case narrative. Your analysis should produce the buyer's realistic case. The gap between these two models is the negotiation range.

Do This

  • Rebuild the financial model from scratch using independently verified assumptions
  • Validate every growth assumption against trailing data: retention rates, expansion rates, win rates
  • Apply your own cost structure assumptions post-acquisition: will synergies actually materialize?
  • Run sensitivity analysis on the top 3 assumptions to understand the valuation range

Avoid This

  • Accept the seller's model and adjust the multiple — the model assumptions matter more than the multiple
  • Use the seller's retention and growth rates without verifying against actual cohort data
  • Assume synergies will be fully realized — history shows 50-70% of projected synergies materialize
  • Skip the downside case because "we are excited about this deal"
Financial Model — Seller vs. Buyer View:
──────────────────────────────────────────────────────
Assumption       Seller Model  Buyer Model  Gap
──────────────────────────────────────────────────────
Revenue growth      35%           22%       -13pp
Gross retention     93%           88%        -5pp
Net retention      115%          106%        -9pp
Gross margin        82%           78%        -4pp
CAC payback        8 mo          12 mo      +4 mo
──────────────────────────────────────────────────────

Seller 3-yr revenue:   $52M
Buyer 3-yr revenue:    $38M
Gap:                   27%

At 8x revenue multiple:
  Seller asks: $120M (8 × $15M current)
  Buyer values: $87M (8 × $15M × 0.73 adj.)

The $33M gap is negotiation range,
driven entirely by assumption differences.