An off-the-shelf financial valuation tool is great if you’re looking at a particular project and you don’t have the background or the industry knowledge that you need to look at something in detail. However, once you move forward more seriously on a venture, it’s time to build a customized financial model that allows you to view all the unique circumstances of your project.
During the early screening phase of a project, it’s often applicable to use a screening tool that you can purchase off the shelf to conduct high-level analysis based on generic assumptions or publicly available information to see if it passes your initial screening requirements. But when it’s time for you to really dig in and you want to spend more time and invest more energy in looking at the opportunity, you’re going to want a customized financial model because as you spend more time, you’re going to get more specific information for that particular investment opportunity. A custom, corporate financial model is useful for Asset Based Valuations, Equity Valuation and Financial Scenario Analysis across multiple industries such as Valuing E&P Companies.
People often ask us when should they use a customized financial model versus an off the shelf valuation tool. Oftentimes during a project, there’s an early screening phase of that project. That is a great time to use a screening tool that you can purchase off the shelf or you may already have an off the shelf tool that you can use for that. It’s great because it’s going to save you time when you’re probably working with generic assumptions or publicly available information and you want to run it through the screening model to see if it passes your high level and generic roles that you have.
But when it’s time for you to really dig in and you want to spend more time and invest more energy in looking at the opportunity, you’re going to want a custom economic model because as you spend more time, you’re going to get more specific information for that particular investment opportunity. You’re going to want to be able to look at all the what if scenarios that typically isn’t available in off the shelf tools that are customized for your particular project.
An off the shelf tool is also great if you’re looking at a particular project and you don’t necessarily have the background or the industry knowledge that you need to look at something in more detail, but once you decide that you’re going to invest a lot of time and put a lot of capital towards something, then it’s really time to start building that customized financial model and if you don’t, you’re likely not going to look at the investment through your lens and looking at if something happens to your particular project, how is it going to impact your value and what are all the unique circumstances that you’re looking at that particular project and how it’s going to fit into your portfolio.
There’s lots of moving parts with investments, particularly if you’re looking at investing into a project or a company that has cashflows. You’re going to want to look at the market forces and the things more within your control to impact the valuation. Off the shelf tools are great for high level screening or if you don’t have the particular background to dive more in, um, into particular project. Or if you don’t have the skills to build a customized financial model. Again, it’s great to look at an off the shelf tool.
Once it’s time to really invest time and energy and you’re trying to put together your business case, your justification, and then pulling together the sensitivities, the analysis, and absolutely before you head toward negotiations, you’re going to want to have that custom economic model to make sure you understand all the different value drivers and look at a project through your unique lens and to make sure that you understand the value trade-offs prior to negotiations.
So I hope that helps. Whether you’re conducting valuations for construction project valuation such as pipeline valuations, renewable energy valuation, valuing E&P companies or oil and gas asset valuations (including Oil & Gas Company Valuations, Upstream Company Valuations, Upstream Oil & Gas Valuation), you want a customized financial model, when’s the right time versus off the shelf tools that are great for different purposes.
I hope this video blog was helpful. If you’d like content on financial modeling and financial presentations, please check out more blogs at www.darbyfnance.com or visit our YouTube Channel at https://www.youtube.com/channel/UCp_9RfcyqiyZam1rmcHhdhw
About Darby Finance
Darby Finance helps clients make better financial decisions by transforming complex data into a compelling and easy-to-understand financial story. We work alongside our clients to develop customized financial models, valuations, and sophisticated investor presentations while utilizing more than 40 years of experience in energy, finance and investor relations.
- Asset Based Valuations
- Equity Valuation
- Financial Scenario Analysis