3-Statement Model for M&A Planning

M&A deals rely on understanding how merging businesses will impact financial health. The 3-statement financial model - combining the income statement, balance sheet, and cash flow statement - offers a dynamic way to evaluate these impacts. Here's why it matters:

• Income Statement: Projects combined revenues, costs, and profits, factoring in synergies and integration expenses.
• Balance Sheet: Assesses the merged entity's financial position, including goodwill, new debt, and working capital adjustments.
• Cash Flow Statement: Tracks liquidity, showing how cash is generated and used, especially during integration.

This model helps forecast performance, test scenarios, and make informed decisions on deal structure and financing. By linking all three statements, it ensures consistent, accurate projections for M&A success.

Key Parts of the 3-Statement Model in M&A

Each financial statement plays a unique role in assessing the combined entity's overall financial health after a merger or acquisition.

Income Statement: Projecting Combined Profits

The income statement focuses on forecasting the merged company's profitability and potential value creation. It combines revenue streams from both companies while factoring in synergies and integration effects that influence profitability.

This involves merging historical sales data, adjusting for cross-selling opportunities, market expansion, and any revenue cannibalization. Cost synergies, like reduced operating expenses from eliminating redundant roles (e.g., overlapping sales teams or administrative functions), directly contribute to improved profitability.

However, integration costs - such as severance payments, system upgrades, or rebranding efforts - are typically incurred in the first one to two years post-merger. These costs may temporarily reduce profitability but are necessary to unlock long-term benefits.

Additionally, the income statement must account for changes in depreciation and amortization. These adjustments often arise from purchase price allocations, such as the creation of new intangible assets or asset write-ups. While these are non-cash expenses, they can significantly affect reported earnings.

Although the income statement highlights profitability, the balance sheet provides a snapshot of the combined entity's financial structure.

Balance Sheet: Assessing Financial Stability

The balance sheet lays the groundwork for evaluating the financial health and capital structure of the merged company. In M&A, this statement becomes more intricate due to purchase price allocation and its impact on asset values and liabilities.

When the acquirer pays more than the book value of assets, the excess is allocated to specific assets, with any remainder recorded as goodwill. These adjustments increase the asset base and often lead to new amortization expenses that flow into the income statement.

On the liabilities side, the balance sheet reflects existing obligations from both companies, along with any new debt taken on to finance the deal. Debt capacity analysis is critical here, as lenders will assess whether the combined entity can handle the increased debt load. The model should reflect realistic debt-to-equity ratios and compliance with potential covenant requirements.

Another key aspect is harmonizing working capital practices. Adjustments to accounts receivable, inventory, and payables must reflect the operational realities of the combined entity.

In cash deals, equity accounting is relatively straightforward. However, stock transactions introduce complexities, such as modeling the exchange ratio, the resulting share count, and any changes to book value per share.

While the balance sheet captures the financial position, the cash flow statement focuses on liquidity and cash management.

Cash Flow Statement: Tracking Liquidity and Cash Flow

The cash flow statement provides a clear view of actual cash generation and expenditures, often revealing a different picture than the income statement - especially in the early integration phase when costs are high, and synergies are still materializing.

Operating cash flow starts with net income from the income statement, adjusted for non-cash expenses like depreciation, amortization of new intangible assets, and stock-based compensation. Changes in working capital can also affect cash flow, particularly during the first few years as operations are integrated and optimized.

Integration costs and capital expenditures, such as severance payments, consultant fees, technology upgrades, facility consolidations, or equipment standardization, often peak within the first 12 to 18 months. These outflows can temporarily strain cash flow.

Financing cash flows depend on the deal structure. Cash transactions reflect the initial outlay and any new debt financing, while stock deals show changes in dividend policies or share repurchase programs. Debt service requirements from acquisition-related financing also create ongoing cash outflows, which must be carefully monitored.

Ultimately, the cash flow statement determines whether the combined entity has enough liquidity to meet its obligations and operate effectively. It also informs decisions about financing strategies, dividend policies, and the timing of integration efforts.

Together, these three financial statements form a comprehensive framework for analyzing mergers and acquisitions with precision and clarity.

Building a 3-Statement Model for M&A: Step-by-Step Guide

Here’s a clear, step-by-step approach to building a 3-statement model for mergers and acquisitions (M&A). Each step builds upon the principles of sound financial analysis, ensuring your model supports well-informed decision-making.

Step 1: Gather and Input Historical Financial Data

Every M&A model starts with collecting historical financial data from both the acquiring and target companies. This data forms the baseline for your projections and scenarios.

For public companies, focus on sources like SEC filings (10-K and 10-Q reports), investor presentations, and press releases. These provide audited numbers and management insights. For private companies, data often comes from management and may need additional validation.

Aim to gather 3-5 years of historical data to identify trends in revenue, margins, and capital allocation. This timeframe helps smooth out unusual events and capture cyclical patterns.

When entering data into Excel, use consistent formatting and color-coding to keep things clear. For example:

• Use blue text for hard-coded numbers.
• Use black text for calculated formulas. Double-check totals to ensure accuracy.

Simplify smaller line items while keeping the most relevant details. For example, aim for 5-10 key items per side of the balance sheet and a few major sections on the cash flow statement. Even small input errors can throw off the entire model, so precision is key.

Step 2: Calculate Synergies and Integration Costs

Identifying synergies and estimating integration costs are critical for assessing whether the deal creates value.

Revenue synergies often include cross-selling, expanding into new markets, or improving product offerings. Evaluate these opportunities by analyzing customer overlap, sales team capacity, and market penetration.

Cost synergies tend to be more predictable. These might involve eliminating redundant functions, consolidating facilities, or renegotiating supplier contracts. For example, savings could come from merging IT systems or reducing overlapping corporate roles.

However, integration costs can offset these gains, especially in the short term. Examples include severance payments, IT integration expenses, and legal or consulting fees. Be conservative when estimating these costs.

Break down synergies and integration expenses into separate line items. This makes it easier to analyze different scenarios and pinpoint the factors that drive value.

Step 3: Build Pro Forma Financial Statements

With historical data, synergies, and costs in place, you can create pro forma financial statements to see the combined financial impact of the merger.

Start with the income statement by combining revenue from both companies. Then, layer in revenue synergies over a realistic timeline, such as 2-3 years. Cost synergies often materialize faster - within 12-18 months - but still require careful planning.

The balance sheet adjustments are more complex. For example, if the acquisition price exceeds the book value, allocate the premium to assets like technology or brand value. Any leftover amount becomes goodwill, which affects future amortization expenses.

For the cash flow statement, begin with pro forma net income and adjust for non-cash items like additional depreciation or amortization. Keep in mind that integration costs will likely cause significant cash outflows in the first 1-2 years, while synergy benefits gradually improve cash flow.

Step 4: Model Deal Structure and Financing

The way a deal is structured has a major impact on the financial profile of the combined entity, so it’s essential to model this carefully.

• Cash transactions: Account for funding sources, whether from cash reserves, new debt, or asset sales. If debt is involved, include interest expenses, repayment schedules, and any potential restrictions from loan covenants.
• Stock transactions: These require calculations for exchange ratios, dilution, and changes in ownership. Evaluate how this affects metrics like earnings per share and return on equity.
• Mixed transactions: Combining cash and stock can offer flexibility but requires careful modeling to balance costs, shareholder preferences, and market conditions.

Don’t forget transaction expenses like legal, banking, and financing fees. These costs, often 2-5% of the deal value, reduce the overall return.

If the deal includes performance-based payouts (contingent considerations), use probability-weighted scenarios to estimate the total cost.

Step 5: Run Scenario Analysis

Scenario analysis is where your model becomes a powerful decision-making tool. It allows you to test how different assumptions impact the deal.

• Build multiple scenarios for synergy realization: a conservative case (e.g., 70% of synergies achieved), a base case (100%), and an optimistic case (120% or more).
• Test integration cost variations, such as costs exceeding estimates by 25-50%. Integration challenges are common, and conservative estimates help prepare for unexpected expenses.
• Compare financing structures, such as all-cash, all-stock, or mixed deals, to find the best balance between leverage, dilution, and flexibility.
• Stress test key assumptions like growth rates, margins, and capital needs. Identify the break-even points where the deal no longer generates value.

Summarize your findings in clear tables that highlight the key metrics for each scenario. These results are invaluable for presentations to boards, lenders, or other stakeholders.

Using Model Results for M&A Decisions

Once you've built your 3-statement model and conducted scenario analysis, the next step is to turn those results into actionable insights for M&A decisions. This is where numbers transform into strategic guidance, bridging the gap between analysis and decision-making.

Key Metrics to Track in M&A Models

When evaluating M&A opportunities, keep an eye on two key metrics:

• Earnings accretion/dilution: Compare the projected EPS of the combined entity to the standalone EPS of the acquirer. It's important to note that even deals with long-term benefits might show initial dilution due to integration costs or financing requirements.
• Cash flow impact: Look at how the merger affects liquidity. Higher earnings don’t always translate into better cash flow, especially if the target company requires ongoing investments to maintain or grow operations.

Presenting Results for Negotiations and Board Meetings

After analyzing these metrics, the focus shifts to effectively communicating the findings to stakeholders.

Start with a concise executive summary that highlights the EPS accretion/dilution and cash flow projections. Use visuals like charts or tables to clearly present different outcomes and the assumptions driving them. Tailor your presentation to your audience - internal teams may prioritize financial feasibility, while investors or lenders will want to see the broader deal impact.

A well-structured presentation ensures stakeholders fully understand the strategic reasoning behind the M&A decision, aiding both negotiations and board-level discussions.

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How Phoenix Strategy Group Supports M&A Financial Modeling

Creating precise 3-statement models for M&A transactions requires a unique blend of expertise and advanced tools. Phoenix Strategy Group brings exactly that to the table, offering growth-stage companies a combination of deep financial modeling experience and cutting-edge technology. This comprehensive support forms the backbone of every stage in the M&A modeling process.

Expertise in Complex Financial Modeling

Phoenix Strategy Group takes financial modeling for M&A beyond the usual advisory framework. They dive into company data, generating key metrics and building detailed financial models. From there, they create forecasts and set actionable, realistic targets. This structured process ensures 3-statement models accurately reflect both a company’s current financial health and its future potential.

Since 1998, they’ve been involved in over 100 M&A transactions, including building and selling multiple businesses valued in the nine-figure range. Over the past year alone, they’ve managed more than 240 companies and helped raise over $200 million. This hands-on experience gives them a practical understanding of what works in the real world of M&A.

"PSG and David Metzler structured an M&A deal during a very chaotic period in our business", said Lauren Nagel, CEO of SpokenLayer.

Their fractional CFO services cover FP&A, strategic finance, forecasting, and budgeting, all of which are key to creating strong 3-statement models. Additionally, their investment banking services - spanning valuation, due diligence, deal structuring, and negotiations - are all built on a foundation of accurate financial modeling.

Leveraging Advanced Tools and Technology

Phoenix Strategy Group incorporates AI technologies and proprietary systems into its financial modeling process, pushing the boundaries of what’s possible. Their AI tools automate parts of due diligence by scanning documents, spotting patterns, and flagging risks that could impact financial projections.

In June 2025, partner Ethan Lu showcased how AI-driven insights simplify integrations and boost operational performance for growth-stage firms navigating M&A. These AI algorithms dig deep into critical documents - like contracts and financial records - and use the findings to fine-tune assumptions in 3-statement models.

Their financial models also offer real-time updates, keeping forecasts flexible and accurate as deal terms evolve or new data surfaces during due diligence. The platform ensures these updates are seamlessly integrated while maintaining strict data security through advanced encryption and authentication measures.

Tailored Support for Growth-Stage Companies

Phoenix Strategy Group stands apart by offering more than just technology. Their approach ties financial modeling directly to strategic decision-making, ensuring that the insights gained truly drive business growth.

A key differentiator is their ability to align finance and revenue functions. Their finance team works closely with revenue operators, a collaboration that’s especially valuable when modeling synergies and integration scenarios during M&A. This approach helps growth-stage companies see the full picture - how an M&A opportunity will affect not just their financials but their broader business model.

Their AI tools also play a role in post-merger integration, analyzing operational data to uncover synergies and growth opportunities. These insights feed back into financial models, keeping projections relevant and actionable.

"As our fractional CFO, Phoenix Strategy Group accomplished more in six months than our last two full-time CFOs combined", shared David Darmstandler, Co-CEO of DataPath.

From basic bookkeeping to high-level M&A advisory, Phoenix Strategy Group supports companies throughout their growth journey. This continuity ensures that 3-statement models created for M&A planning are seamlessly aligned with the company’s overall financial systems and strategic goals. By integrating finance and strategy, they ensure businesses are well-prepared for every step of the M&A process.

Conclusion: The Value of 3-Statement Models in M&A Planning

3-statement financial models play a central role in driving successful M&A deals. When used effectively, these models turn complex decisions into actionable, data-driven strategies that enhance value. They provide the clarity and insights necessary to navigate the intricacies of mergers and acquisitions.

Key Points for M&A Success

Having accurate financial models is essential for achieving success in M&A. Research shows that more than 70% of failed M&A deals attribute poor financial due diligence and inaccurate modeling as major reasons[1]. This highlights why companies that prioritize well-built 3-statement models consistently outperform those that rely on less detailed approaches.

By integrating the income statement, balance sheet, and cash flow projections, these models offer a comprehensive view of the combined entity’s financial health. This integration helps stakeholders forecast synergies, estimate integration costs more realistically, and evaluate different deal structures with precision. According to a 2023 Deloitte survey, companies using integrated 3-statement models in their M&A planning achieved a 25% higher rate of post-merger financial target success compared to those using simpler methods[2].

Scenario analysis is another critical advantage. Testing various factors - such as integration costs, market conditions, and financing structures - allows companies to prepare for a range of outcomes, reducing the risk of unexpected challenges after the deal closes. This capability supports better strategic decisions and minimizes surprises.

Additionally, tracking key performance metrics ensures that deals deliver real value for shareholders. Take Microsoft’s $19.7 billion acquisition of Nuance Communications in 2022 as an example. Their detailed 3-statement model projected combined revenues, integration costs, and cash flow impacts. This analysis helped Microsoft justify the acquisition premium and plan for a smooth post-merger integration.

For growth-stage companies, the focus now shifts to securing the right expertise and tools to make these models work effectively.

Next Steps for Growth-Stage Companies

Growth-stage companies often face challenges with limited resources and expertise for advanced financial modeling. To overcome this, they should invest in robust models and seek expert advisory support to validate assumptions and refine deal structures.

While technology platforms can automate data collection and improve model accuracy, the real value lies in combining these tools with experienced guidance. Partners like Phoenix Strategy Group specialize in turning financial models into strategic assets. By blending advanced technology with deep M&A knowledge, they help transform modeling from a routine task into a powerful tool for decision-making.

Achieving success requires thorough analysis, the right tools, and high-quality financial projections. Companies that embrace these principles can close deals that not only succeed in the short term but also deliver the long-term value their stakeholders expect.

[1] Harvard Business Review, 2022
[2] Deloitte Survey, 2023

FAQs

How do the income statement, balance sheet, and cash flow statement work together to assess the financial health of a merged company?

The income statement, balance sheet, and cash flow statement work together to give a well-rounded view of a merged company’s financial health, each offering a unique perspective.

The income statement focuses on profitability, breaking down revenues and expenses over a specific time frame. In contrast, the balance sheet provides a snapshot of the company’s financial standing at a particular moment, outlining its assets, liabilities, and equity. Meanwhile, the cash flow statement tracks the movement of cash - whether it’s coming in or going out - across operating, investing, and financing activities, highlighting liquidity and cash management.

When combined, these financial statements paint a clear picture of the merged entity's profitability, stability, and cash-handling capabilities - all essential for assessing the success of a merger or acquisition.

What are the main challenges in estimating synergies and integration costs in a 3-statement M&A model?

Estimating synergies and integration costs in a 3-statement M&A model is no easy task. The uncertainty surrounding cost savings and revenue improvements often complicates the process. These projections hinge on how well the post-merger integration is handled, and the effectiveness of that can vary greatly from one deal to another. On top of that, getting the timing of these benefits right adds another layer of difficulty.

Integration costs, which include legal fees, restructuring expenses, and operational changes, are just as tricky to pin down. These costs are often underestimated or pushed back, which can throw off the accuracy of the financial model. The time-sensitive nature of synergies and the possibility of costs going beyond initial estimates make precise forecasting a real challenge.

How can growth-stage companies use a 3-statement model to plan for mergers and acquisitions more effectively?

Growth-stage companies often turn to a 3-statement financial model to better understand how mergers or acquisitions might influence their financial stability, cash flow, and profitability. By linking the income statement, balance sheet, and cash flow statement, this model serves as a powerful tool for forecasting, running scenarios, and gauging the financial impact of potential deals.

This approach helps businesses determine whether a deal will add to or dilute their earnings, uncover possible risks and opportunities, and confirm that the acquisition supports their overall strategic objectives. Beyond that, it enhances decision-making by spotlighting critical metrics and providing valuable insights for negotiations and integration planning. For companies aiming to grow effectively, the 3-statement model is an indispensable resource.

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• Revenue and Expense Analysis for M&A Preparation
• Contingency Planning for M&A Success