Acquisition Model Checklist

What Is a Financial Model Audit?

A financial model audit is an independent, structured examination of an Excel based financial model to confirm that its mechanics, logic, and outputs are reliable enough to support a decision. It is not a check of whether the assumptions are optimistic or conservative. It is a check of whether the model actually calculates what its author believes it calculates. Every year, lenders extend debt, investment committees approve capital, and boards sign off on transactions using numbers that came out of a spreadsheet nobody outside the immediate deal team has independently verified. A financial model audit exists to close that gap before it becomes expensive.

What Is Model Risk?

Model risk is the risk that a decision is wrong not because the underlying business or investment case was flawed, but because the model used to evaluate it was. It is a distinct category of risk from market risk, credit risk, or operational risk, and it applies to any organisation that relies on a financial model, spreadsheet or otherwise, to support a material decision. Most published model risk content addresses statistical and regulatory capital models used inside banks. This page defines model risk specifically as it applies to Excel based financial models, the kind used every day for investment decisions, lending, and transaction evaluation, which is a related but distinct problem from the quantitative model risk literature most search results return.

Audit vs Validation — What's the Difference?

Financial model audit and model validation are frequently used as interchangeable terms, and specifying the wrong one in a lender requirement or an internal policy leads to real confusion about what has actually been checked. They test different things. An audit tests whether a model's mechanics are correct. Validation tests whether the model's methodology and assumptions are appropriate for its intended purpose. Both are legitimate, useful exercises. They are not substitutes for each other.

Merger Model and Accretion/Dilution Structure

A merger model tests whether a proposed acquisition increases or decreases the acquirer's earnings per share — the accretion/dilution result — by combining standalone projections for the acquirer and target with the mechanics specific to the transaction itself: purchase price allocation and the resulting goodwill, the financing structure (cash, new debt, or newly issued stock, in any combination), and any synergies expected from the combination. This guide covers the build sequence in full: standalone projections first, then purchase price allocation, then the financing structure and its effect on pro-forma shares and interest expense, then synergies traced to specific line items rather than a single aggregate assumption, and finally the accretion/dilution calculation itself, with the structural checks that catch the errors most specific to this model type.

Purchase Price Allocation

Purchase price allocation (PPA) is the process, required under both IFRS and US GAAP acquisition accounting, of allocating the price paid for an acquired business between its identifiable net assets, recorded at fair value as of the acquisition date, and goodwill, the residual representing value the acquirer paid beyond those identifiable assets. The allocation directly determines the combined entity's post-transaction depreciation and amortization, since revalued tangible assets and newly recognized intangible assets each carry their own schedule going forward, distinct from goodwill, which is not amortized but is tested periodically for impairment.

Synergies

Synergies are the cost savings or revenue benefits a combined entity is expected to achieve that neither the acquirer nor the target could achieve standalone — eliminating a duplicated corporate function, negotiating better procurement terms at greater combined scale, or cross-selling one company's products through the other's customer base. In a merger model, synergies should be traced to specific, named drivers and phased in over a stated, realistic timeline rather than entered as a single aggregate addition to combined EBITDA, since an untraceable synergy figure is one of the most common ways a deal's headline accretion is overstated.

Accretion/Dilution

Accretion/dilution analysis compares an acquirer's pro-forma (post-transaction, combined) earnings per share against its standalone (pre-transaction) earnings per share to determine whether a proposed acquisition would increase (accretive) or decrease (dilutive) the acquirer's EPS. It is the headline output of a merger model, and depends on the combined entity's pro-forma net income (driven by both companies' standalone earnings, synergies, and incremental depreciation and interest from the deal itself) and the pro-forma diluted share count (driven by the financing mix).