Overall, he said, “There’s a real problem with spreadsheets, which has always been a real problem: they have very poor error-checking capabilities. You can check for some things, like circular definitions, where two variables are codependent in a way they shouldn’t be.”
“But if you have a mistake on a spreadsheet, it’s actually very hard to detect—not like with a computer program, where there are tools for checking the software in general. The average computer program is much more reliable than the average spreadsheet.”
If you’re not careful, your discounted cash flow analysis can lead to a magic valuation and there’s barely any equivalent of unit testing. Maybe that’s how some deals are valued. In reality, I heard stories from ex-M&A bankers of dealmakers agreeing on a price first (hence the 20-30% premiums), then adjusting the financial models in Excel to fit the narrative. Dealmakers take fees which usually is a % of a valuation.
What could go wrong when the incentives aren’t aligned?