When building a model, it is important that the model be flexible enough to consider a wide range of possible scenarios. Let's now add some assumptions about the transaction that, when changed, will flow through the model. The assumptions presented below are simply suggestions, and the specific transaction you are contemplating may call for other assumptions. In any case, most or all of the deal assumptions should be grouped into a single section of your model so that anyone can see, at a glance, what assumptions you are making.

Note that, in the spreadsheet below, we have left the tax rate blank. The tax rate used is the acquirer's tax rate, which we will determine in a subsequent step.

Since it may not be clear what the alternative assumptions are, you can use restrict certain assumptions to specific values. For example, we show that we are basing our model on a fiscal year-end ("FY"), but someone reviewing the model might not realize that the alternate input is "CY". To limit the range of possible values for this cell to "FY" and "CY", open Excel's Data Validation dialog box (Alt>d>l) and specify what values this cell will accept. Using the validation tool, you can create drop-down lists of values, restrict numbers to a specified range, and more. The validation feature also lets you create tool tips and generate custom error messages when invalid data is entered.

Note that we have commented many of our assumptions (denoted by red triangles in the upper-right corners of some cells). Comments are useful to help you remember why you entered a specificequation or piece of data, and to help others using your model understand your logic. To add a comment to a cell, hit Shift+F2. When you are done, use the Esc key to go back to the spreadsheet.

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