Companies require an accurate financial model that will have the company running smoothly from day one. Lawyers, for whatever reason, tend to avoid anything related to finances. However, as a corporate lawyer, it is important to understand financial models well enough commercially and conceptually to inform the drafting process and ensure that the legal substance of the agreeement is consistent with the financial models underpinning the transaction and, by extension, the agreement giving effect to the transaction. Thus, it is important for corporate lawyers to be financially literate so that they help to ensure that their clients' financial and business needs are adequately catered for in the contracts intended to give effect to these finance and business needs.
What does a financial model entail?
A financial model contains details related to the business’ expenditure and revenue. As a result, the model provides an outline of the business’ financials and thereby gives investors an idea of how the business is doing and what it requires to be successful. Hence, having a well-equipped financial model is essential to a successful business.
Aligning contracts and financial models
The legal agreements drafted by the corporate lawyer need to align with the transaction's financial model. As such, extensive due diligence must be performed by the lawyer and the auditing team. As part of the process the financial model will be subject to an audit to ensure that the provisions of the contracts that have been agreed to by the parties are in line with the financial model of the transaction. This entails looking at any inconsistencies between the model and the contracts and ensuring that the relevant ratios and loan covenants are not breached.
It is essential for a corporate lawyer to understand the functions of a financial model for a company and to ensure their client’s business remains an economically viable business through well-structured legal agreements which are consistent with well-equiped financial models. This helps corporate lawyers to understand the debt cover ratios, what financial models produce and in what manner to assess ratios in long- and short-term deals.
By Tariro Chipato, Candidate Attorney