Due Diligence Guidelines –
13.1.1 “Financial modeling” or “modeling” is a familiar and well understood concept.
13.1.2 It is commonly used in connection with IPOs, even though its formal / mandatory usage is normally limited to the exercise which supports (i) the formal working capital statement in the listing document and (ii) any profit forecast by the listing applicant included in the listing document.
Listing Applicant’s Model
13.2.1 To support the working capital statement and any such profit forecast, it is normal that the listing applicant prepares and formally adopts a combined profit forecast and cash-flow memorandum based on, and containing projections extracted from, a projective model normally containing cash-flow projections covering a period (commonly up to 18 months) beyond the date of the listing document. See the next section “Forecasts and Projections”.
13.2.2 Although this is a listing applicant-prepared output / document (and the sole responsibility of the listing applicant’s directors), it is common practice for the sponsor to review and comment on the listing applicant’s model as it is developed.
13.2.3 Familiarity with the model (in particular, the bases and assumptions on which it has been prepared), and reviewing and commenting, is an important part of the sponsor’s financial due diligence.
13.2.4 Beyond that, sponsors often prepare their own models. This depends on practice within individual firms, and is not in any way mandatory. Sometimes, separate models may be prepared within different parts of sponsor firms. For example, a model may be prepared within the sponsor team as a guide to considering valuation parameters.
13.2.5 As indicated, none of these models have any formal or official status and they are private workings. In cases where there are joint sponsors, each sponsor may often have its own internal model.
13.2.6 Nevertheless, where a model is prepared by the sponsor team, it may assist with the general understanding of the listing applicant’s financial statements, financial condition and performance which flows from the broader due diligence exercise.
13.3 Recommended Steps
13.3.1 It is not in any way mandatory that the sponsor prepares a model (either for any particular purpose or at all).
13.3.2 Where the execution team within the sponsor does prepare a model, this can assist with the sponsor’s understanding of financial presentation and underlying trends.
13.3.3 While again not mandatory (and not always feasible), involvement of team members with specialist sector experience will often assist in the effective performance of the sponsor’s financial due diligence.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.