M&A Buyer Detects Manipulated Projections in a Target's Model
Executive Summary
Illustrative Scenario
This case study is a composite, educational scenario built from patterns commonly observed in financial model audits. It does not describe a specific, identifiable client engagement, and any resemblance to a particular transaction is coincidental.
Background¶
A mid-sized strategic acquirer was in advanced negotiations to purchase a target company operating in a capital-intensive services sector. The target's management team had provided a five-year financial model supporting the proposed purchase price, built around a projected revenue growth trajectory presented as the output of the company's standard planning assumptions.
As part of buy-side due diligence, the acquirer's deal team commissioned an independent structural audit of the target's model before signing, separate from the commercial and financial due diligence already underway. The audit was scoped to test the model's formula logic and structural integrity, not to assess whether the underlying commercial assumptions were reasonable.
The target's model was presented as internally consistent: a set of driver assumptions on one tab, feeding through named calculation schedules into a summary output. On its face, nothing about the workbook looked unusual.
The Problem¶
Management's model showed revenue growing at a rate consistent with the assumptions presented in the deal room, and the acquirer's initial review of the output tabs found nothing to flag. The projected revenue trajectory was the primary driver of the valuation being negotiated.
The audit was commissioned specifically to test whether the model's formulas actually produced the figures shown, rather than accepting the displayed output at face value. This distinction turned out to matter.
Findings¶
The audit traced each revenue forecast cell back to its formula rather than reading the displayed value. In three of the five forecast years, the revenue cells in the summary schedule did not contain a formula referencing the growth-rate assumption tab at all. They contained typed-in, fixed values, a hardcoded formula, as described in the Hardcoded Formulas technical guide, sitting in a row where every adjacent cell used a live calculation.
Recalculating what those cells should have shown, using the same growth-rate assumption applied consistently across all five years, produced a materially lower revenue figure in each of the affected years than the hardcoded values displayed. The gap compounded through the terminal year, since later-year projections in the same schedule referenced the artificially inflated earlier-year figures as their own base.
Root Cause¶
Tracing the workbook's version history and formula pattern indicated the hardcodes were most likely introduced during a later revision of the model, when a prior year's actual results were pasted in to replace a formula cell, and the paste was never reverted to a live formula in the subsequent forecast years that referenced it. Whether this originated as a manual correction that was never undone or a deliberate override, the audit's finding was the same: the displayed figures did not match what the model's own stated logic would calculate.
This is a structural finding, not a disagreement over assumption reasonableness. The audit did not evaluate whether the underlying growth-rate assumption itself was optimistic; it established that the model's displayed output did not match what that assumption, applied consistently, would actually produce.
Risk¶
If the hardcoded overrides had not been identified, the acquirer's offer would have remained anchored to a revenue trajectory the target's own model logic did not actually support. Because the valuation was built directly on the model's projected revenue figures rather than on independently recalculated ones, the uncorrected hardcodes could have resulted in a materially overstated purchase price.
Resolution¶
The audit findings were presented to the deal team ahead of signing, together with the recalculated revenue trajectory. The acquirer raised the discrepancy directly with the target's management, who acknowledged the hardcoded cells and provided a corrected model with the growth-rate formulas restored across all five years. The acquirer's advisory team used the corrected trajectory to re-run the valuation and adjusted the negotiated terms before proceeding to signing.
Lessons Learned¶
- A model's displayed output is not evidence of its underlying formula logic; only a structural audit that traces each cell's actual formula can confirm the two match.
- Hardcoded overrides are among the most common and most consequential structural findings in buy-side model due diligence, and are addressed in detail in the Financial Model Auditing pillar.
- Structural audit and commercial due diligence answer different questions and should be run as complementary, not substitute, workstreams, a distinction covered further in Audit vs Validation.
- Discrepancies of this kind are best surfaced before signing, when there is still room to adjust price or terms, rather than after close.
- A documented, repeatable audit checklist applied consistently across acquisition targets reduces the chance that a hardcode of this kind is missed under deal-timeline pressure.
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Frequently Asked Questions
Is this a real client engagement?
No. This is an illustrative, composite scenario built from patterns commonly observed in financial model audits. It does not describe a specific, identifiable transaction.
What is a hardcoded formula and why does it matter here?
A hardcoded formula is a cell that contains a fixed, typed-in value in a position where the rest of the model uses a calculated formula. It matters because it silently breaks the link between an assumption and its downstream output, letting a projection diverge from what the model's own logic would produce.
How is a hardcode different from an assumption a buyer might simply disagree with?
An assumption is a judgement call, for example an assumed growth rate, that a buyer can accept or challenge on commercial grounds. A hardcode is a structural break, a formula cell replaced with a fixed number, that misrepresents what the model's own stated logic actually calculates. The audit finds the latter, not the former.
How could this kind of issue be caught before it affects a negotiated price?
A structural audit performed before signing, checking every formula cell in the forecast schedule against its expected calculation logic, typically catches hardcoded overrides directly, since the audit traces each cell's actual formula rather than relying on the displayed output.
What audit stage typically catches this kind of error?
Pre-signing, buy-side due diligence is the most common stage, since it is the last point at which a discovered error can still affect price or deal terms before commitments are made.
Does finding a hardcoded override always mean the target's model was built to mislead?
Not necessarily. Hardcodes can also result from rushed model updates or copy-paste errors. The audit's role is to identify the structural break and its effect, not to determine intent.
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