Why Most Acquisition Models Are Too Optimistic, Including Some of My Own

After enough deals, you notice a pattern: the model is never wrong in a random direction. It's wrong up. Revenue grows a little faster than history, margins expand a little more than peers because of "synergies." Each assumption may be defensible alone. However, together they describe a company that has never existed.

This isn't because dealmakers can't do math. It's because every incentive in the process points the same way.

Who wants the model to be right?

Think through the team. The banker is paid on close. The attorney and diligence team are looking for "deal breakers only." The sponsor needs to deploy the fund. The CEO wants the growth to make his bonus. The corp dev team's job is doing deals, not not-doing deals. The seller — the one person with perfect information — is the one person whose incentive is to confirm every optimistic assumption you bring them.

Nobody on that team is paid to make the model smaller. The skeptic's reward is that the deal dies and they get nothing — no fee, no headline, no war story. Optimism compounds through the process like interest.

Three corrections that actually help

1. Model the base rate, not the sales goals. Before you touch the company's projections, ask: what revenue growth did they have over the last few years, what are their historical costs and margins. Start essentially at zero growth and make the seller argue you up.

2. Separate the "is" model from the "could be" model. Underwrite to what the business does today, run it by the people who will actually run the business and pay close attention to what they say.

3. Make someone own the downside case. Not a sensitivity table — a person. Someone senior whose explicit job is to present the version where it goes wrong, with the same energy the deal team brings to the version where it goes right.

The market doesn't punish you for the deals you didn't do. The model that matters is the one you'd still believe if nobody got paid on Friday.