Visual Framework Map - Three-Model Business Analysis

Three-Model Business Analysis Framework

A systematic approach to analyzing business opportunities from strategy to financial returns 

┌─────────────────────────────────────────────────────────────────┐
│                    STRATEGIC CONTEXT                            │
│                                                                 │
│  Market Study          Competitive Analysis       Risk Mapping │
│  • TAM/SAM/SOM        • Positioning              • Key risks   │
│  • Growth rates       • Benchmarks               • Scenarios   │
│  • Segments           • Differentiation          • Mitigation  │
└────────────────────────┬────────────────────────────────────────┘
                         │
                         ▼
┌─────────────────────────────────────────────────────────────────┐
│                     BUSINESS MODEL                              │
│                 "How do we create value?"                       │
│                                                                 │
│                  Business Model Canvas (9 elements)             │
│  ┌──────────────┬──────────────┬──────────────┬──────────────┐ │
│  │ Key          │ Value        │ Customer     │ Customer     │ │
│  │ Partners     │ Propositions │ Relationships│ Segments     │ │
│  ├──────────────┼──────────────┼──────────────┼──────────────┤ │
│  │ Key          │              │ Channels     │              │ │
│  │ Activities   │              │              │              │ │
│  ├──────────────┤              ├──────────────┤              │ │
│  │ Key          │              │              │              │ │
│  │ Resources    │              │              │              │ │
│  ├──────────────┴──────────────┴──────────────┴──────────────┤ │
│  │        Cost Structure      │     Revenue Streams          │ │
│  └────────────────────────────┴──────────────────────────────┘ │
└────────────────────────┬────────────────────────────────────────┘
                         │
                         │ TRANSLATION LAYER
                         │ (Strategy → Numbers)
                         ▼
┌─────────────────────────────────────────────────────────────────┐
│                    OPERATING MODEL                              │
│                "How does the business make money?"              │
│                                                                 │
│  REVENUE                                                        │
│  - COGS                                                         │
│  = GROSS PROFIT                                                 │
│  - OPEX (S&M, Product Dev, G&A)                                │
│  = EBITDA                                                       │
│  - CapEx                                                        │
│  - Δ Working Capital                                            │
│  - Cash Taxes                                                   │
│  = FREE CASH FLOW TO FIRM (FCFF)                               │
└────────────────────────┬────────────────────────────────────────┘
                         │
                         │ HANDOFF LAYER
                         │ (EBITDA/FCFF → Capital Structure)
                         ▼
┌─────────────────────────────────────────────────────────────────┐
│                    FINANCING MODEL                              │
│            "How is value distributed to stakeholders?"          │
│                                                                 │
│  CAPITAL STRUCTURE                                              │
│  • Debt (Senior, Mezzanine)                                     │
│  • Equity (Common, Preferred)                                   │
│                                                                 │
│  CASH DISTRIBUTION                                              │
│  EBITDA → Interest → Principal → Equity Distributions          │
│                                                                 │
│  RETURNS ANALYSIS                                               │
│  • IRR by stakeholder                                           │
│  • MOIC                                                         │
│  • Waterfall                                                    │
└────────────────────────┬────────────────────────────────────────┘
                         │
                         │ FEEDBACK LOOPS
                         │ (Returns → Strategy Adjustment)
                         ▼
              ┌──────────────────────┐
              │  Investment Decision │
              │   • Proceed          │
              │   • Restructure      │
              │   • Kill             │
              └──────────────────────┘

Core Principles

1. Separation of Concerns: Business Model is independent of financing; Operating Model is independent of capital structure; Financing Model depends on Operating Model outputs.

2. Explicit Translation: Clear mapping from strategy to numbers with documented assumptions.

3. Consistent Depth Scaling: Adapt analysis depth to stage (Screening → DD → IC).

Translation Rules: Business Model → Operating Model

This is where strategy becomes numbers. Each Canvas element maps to specific Operating Model line items.

Revenue Translation

Canvas Element Operating Model Item Method
Customer Segments → Revenue by segment # customers × ARPU
Value Proposition → Pricing strategy Premium/market/value positioning → price point
Channels → Channel mix & S&M costs Direct vs. partner % → commission rates
Customer Relationships → Revenue type & CAC Transactional vs. recurring → CAC/LTV model
Revenue Streams → P&L revenue lines Each stream = separate line item

Cost Translation

Canvas Element Operating Model Item Method
Key Activities → COGS + OpEx allocation Direct activities → COGS; Support → OpEx
Key Partners → COGS + OpEx (outsourced) Supplier costs → COGS; Service partners → OpEx
Key Resources → CapEx, D&A, OpEx Physical → CapEx; People → OpEx; IP → D&A
Cost Structure → Complete cost model Fixed vs. variable classification

Capital Translation

Canvas Element Operating Model Item Method
Key Resources → CapEx schedule Physical assets → growth + maintenance CapEx
Customer Relationships → DSO (receivables) Payment terms → Days Sales Outstanding
Key Partners → DPO (payables) Supplier terms → Days Payable Outstanding
Key Activities → DIO (inventory) Production/fulfillment → Days Inventory Outstanding

Translation Example: SaaS Revenue

Business Model Canvas:

  • Customer Segments: Enterprise (50 customers), SMB (500 customers)
  • Value Proposition: Premium solution, 20% above market
  • Revenue Streams: SaaS subscription, Professional services
Revenue Buildup: Enterprise: 50 × $120k/year = $6.0M SMB: 500 × $12k/year = $6.0M Professional Services: 15% of subscription = $1.8M TOTAL REVENUE = $13.8M Pricing Assumptions: - Market average SaaS = $100k (Enterprise) - Our pricing = $120k (+20% premium) - Premium justified by vertical-specific features

Translation Example: Cost Structure

Business Model Canvas:

  • Key Activities: Software development (20 engineers), Sales (10 people), Customer success (5 people)
  • Key Partners: Cloud hosting (AWS), Payment processing
  • Key Resources: Engineering team, Proprietary software
COGS: - Cloud hosting: $300k (2% of revenue) - Payment processing: $140k (1% of revenue) = COGS = $440k (3% of revenue) GROSS PROFIT = $13.8M - $0.4M = $13.4M (97% margin) OPEX: Product Development: - 20 engineers × $150k = $3.0M Sales & Marketing: - 10 people × $120k = $1.2M - Marketing programs = $1.0M = S&M = $2.2M (16% of revenue) General & Administrative: - 5 customer success × $80k = $400k - G&A overhead = $600k = G&A = $1.0M (7% of revenue) TOTAL OPEX = $6.2M (45% of revenue) EBITDA = $13.4M - $6.2M = $7.2M (52% margin)

Handoff Rules: Operating Model → Financing Model

The Operating Model outputs become the Financing Model inputs. This handoff is critical for returns analysis.

Primary Inputs

Operating Model Output Financing Model Input Purpose
EBITDA → Debt capacity Leverage multiple (Debt/EBITDA)
EBITDA → Entry/Exit valuation EV = EBITDA × Multiple
FCFF → Debt service capacity Coverage ratios (FCFF/Debt Service)
FCFF → Available for distribution Cash available to stakeholders
Growth Rate → Exit EBITDA Terminal year EBITDA for exit value
CapEx → Funding requirements Growth CapEx → equity needs
Working Capital → Cash flow impact NWC drain → additional funding
Tax Rate → After-tax cash flow Effective rate → FCFE calculation

Handoff Example: Complete Flow

Operating Model Outputs:

Year 1 EBITDA: $7.2M Year 5 EBITDA: $15.0M (15% CAGR) Year 1-5 Average FCFF: $5.0M/year Effective Tax Rate: 25% Average CapEx: $1.0M/year

Financing Model Inputs:

Entry Valuation: EV = $7.2M × 8.0x = $57.6M Debt Capacity: Max leverage = 3.0x EBITDA Senior Debt = $7.2M × 3.0x = $21.6M Equity Required: Purchase Price = $57.6M Debt = $21.6M Equity = $36.0M Debt Service Coverage: FCFF = $5.0M Interest (8% on $21.6M) = $1.7M Principal (5-year amortization) = $4.3M Total Debt Service = $6.0M Coverage = $5.0M / $6.0M = 0.83x → INSUFFICIENT → Action: Reduce debt OR improve FCFF Exit Valuation: Year 5 EBITDA = $15.0M Exit Multiple = 8.0x (conservative, same as entry) Exit EV = $15.0M × 8.0x = $120.0M
Critical Reminder: EBITDA = Earnings BEFORE Interest. Interest expense affects Net Income, not EBITDA. This separation is essential for proper model construction.

Feedback Loops: When to Revisit Prior Models

If returns are insufficient, work backwards through the models to identify the constraint.

┌─────────────────────────────────────────────────────────┐
│ FINANCING MODEL: Returns Below Target                  │
└────────────┬────────────────────────────────────────────┘
             │
             ▼
    ┌────────────────────┐
    │ Can we optimize    │
    │ capital structure? │──YES──> Adjust debt/equity mix
    └────────┬───────────┘        Optimize leverage
             │ NO                 Change exit timing
             ▼
┌─────────────────────────────────────────────────────────┐
│ OPERATING MODEL: EBITDA or Growth Insufficient         │
└────────────┬────────────────────────────────────────────┘
             │
             ▼
    ┌────────────────────┐
    │ Can we improve     │
    │ operations?        │──YES──> Increase margins
    └────────┬───────────┘        Accelerate growth
             │ NO                 Reduce costs
             ▼
┌─────────────────────────────────────────────────────────┐
│ BUSINESS MODEL: Strategic Flaw                         │
└────────────┬────────────────────────────────────────────┘
             │
             ▼
    ┌────────────────────┐
    │ Can we pivot       │
    │ business model?    │──YES──> Change customer segments
    └────────┬───────────┘        Adjust value proposition
             │ NO                 Revise cost structure
             ▼
    ┌────────────────────┐
    │   KILL DEAL        │
    └────────────────────┘

Specific Feedback Scenarios

Symptom Likely Model Action Required
IRR < hurdle rate Financing Optimize capital structure first
EBITDA margin < industry Operating Revisit cost structure assumptions
Revenue growth unsupportable Business Reassess market size and positioning
Debt service coverage < 1.2x Operating/Financing Reduce leverage OR improve EBITDA
Working capital drain excessive Operating Renegotiate payment terms (Business Model)
Exit multiple unrealistic Business Reassess competitive positioning and moats
CAC > LTV Business Fix value proposition or customer targeting
Churn > 5% monthly Business Strengthen customer relationships strategy

Complete Workflow Example: SaaS Acquisition

Strategic Context

Market Study:

  • TAM: $10B cloud infrastructure
  • Growth: 15% CAGR
  • Target's SAM: $2B mid-market

Competitive Analysis:

  • Target ranked #4 (5% share)
  • Differentiation: Vertical-specific

Business Model

Customer Segments:

  • Healthcare: 200 customers
  • Financial Services: 150

Revenue Streams:

  • Subscription: $50k avg
  • Prof Services: 15%

Key Activities

  • Engineering: 30 people
  • Sales: 15 people
  • Cloud hosting costs
  • G&A overhead

Step 1: Business Model → Operating Model Translation

REVENUE BUILDUP: Subscription Revenue: Healthcare: 200 × $50k = $10.0M Financial Services: 150 × $50k = $7.5M Total Subscription = $17.5M Professional Services: $17.5M × 15% = $2.6M TOTAL REVENUE = $20.1M COST STRUCTURE: COGS: Cloud hosting = $0.6M → 3% of revenue OPEX: Product Development: 30 × $150k = $4.5M → 22% Sales & Marketing: 15 × $120k + $1M programs = $2.8M → 14% General & Administrative = $1.5M → 7% Total OpEx = $8.8M → 44% OPERATING MODEL OUTPUT: Revenue: $20.1M COGS: $0.6M (3%) Gross Profit: $19.5M (97%) OpEx: $8.8M (44%) EBITDA: $10.7M (53%) CapEx: $0.5M/year NWC change: $0.3M/year Cash taxes (25%): $2.7M FCFF = $10.7M - $0.5M - $0.3M - $2.7M = $7.2M

Step 2: Operating Model → Financing Model Handoff

HANDOFF INPUTS: Current EBITDA: $10.7M Projected Year 5 EBITDA: $20.0M (13% CAGR) Average FCFF: $7.2M → $12.0M growing CAPITAL STRUCTURE DESIGN: Entry EV = $10.7M × 9.0x = $96.3M Debt = 3.0x EBITDA = $32.1M at 7% interest Equity = $96.3M - $32.1M = $64.2M RETURNS ANALYSIS: Exit Year 5 EV = $20.0M × 9.0x = $180.0M Less: Remaining Debt = $32.1M - (5 × $4M principal) = $12.1M Equity Value = $180.0M - $12.1M = $167.9M Equity MOIC = $167.9M / $64.2M = 2.6x Equity IRR = 21%

Step 3: Feedback Loop in Action

Problem: IRR of 21% is below 25% hurdle rate
ITERATION 1: Optimize Financing - Increase leverage to 4.0x EBITDA? → Debt = $42.8M → Interest = $3.0M/year → Principal = $8.6M/year → Total Debt Service = $11.6M → Coverage = $7.2M / $11.6M = 0.62x → TOO RISKY ITERATION 2: Improve Operating Model - Can we accelerate growth to 15% CAGR? → Requires additional $500k/year S&M investment → Year 5 EBITDA = $21.5M → Exit EV = $21.5M × 9.0x = $193.5M → Equity IRR improves to 24% → STILL INSUFFICIENT ITERATION 3: Revisit Business Model Questions to explore: - Can we expand to new customer segments? - Can we increase pricing (justify premium)? - Can we reduce churn through better relationships? - Can we add new revenue streams? If YES → Rework Operating Model with new assumptions If NO → RECOMMEND: Pass on deal or reduce purchase price

Depth Scaling by Stage

Screening (1 Day)

Business Model:

  • High-level canvas
  • Desktop research
  • 1-2 sentences per element

Operating Model:

  • Top-down revenue
  • Industry benchmark margins
  • Simple assumptions

Financing Model:

  • Single debt line
  • Simple IRR
  • High-level return estimate

Output: Go/No-Go decision

Due Diligence (1-2 Weeks)

Business Model:

  • Validated canvas
  • 5-10 customer interviews
  • Competitive benchmarking

Operating Model:

  • Bottom-up revenue
  • Detailed COGS/OpEx
  • 3-statement model

Financing Model:

  • Multiple tranches
  • Full debt schedule
  • Returns by security type

Output: Investment thesis validation

Investment Committee (2-4 Weeks)

Business Model:

  • Comprehensive canvas
  • Evolution scenarios
  • Strategic alternatives

Operating Model:

  • Detailed sensitivities
  • Multiple scenarios
  • Stress testing

Financing Model:

  • Full waterfall
  • Covenant tracking
  • Downside protection

Output: Final investment decision

Quick Reference Checklists

Translation Checklist

Business Model → Operating Model:

  • Each customer segment mapped to revenue line
  • Value proposition translated to pricing strategy
  • Channels mapped to S&M costs and revenue split
  • Customer relationships mapped to CAC and churn
  • Revenue streams explicitly listed in P&L
  • Key activities allocated to COGS or OpEx
  • Key partners costs captured in COGS or OpEx
  • Key resources translated to CapEx and D&A
  • Cost structure classified (fixed vs. variable)
  • Working capital drivers identified (DSO/DIO/DPO)

Handoff Checklist

Operating Model → Financing Model:

  • EBITDA calculation verified (pre-interest, pre-tax)
  • FCFF calculation complete (EBITDA - CapEx - NWC - Tax)
  • Debt capacity justified (leverage multiple × EBITDA)
  • Interest coverage adequate (EBITDA / Interest > 2.5x)
  • Debt service coverage confirmed (FCFF / Debt Service > 1.2x)
  • Exit EBITDA projected (growth rate applied)
  • Exit multiple justified (entry multiple or better)
  • Tax shield captured (interest × tax rate)
  • All cash flows to equity calculated (FCFE)
  • Returns by stakeholder calculated (IRR, MOIC)

Feedback Loop Checklist

When Returns Are Insufficient:

  • Financing optimization attempted (debt/equity mix)
  • Operating improvements identified (margin, growth)
  • Business model reassessed (strategy, positioning)
  • Sensitivity analysis run (key driver impact)
  • Downside scenario evaluated (capital preservation)
  • Decision made (proceed / restructure / kill)

Key Principles to Remember

1. Separation of Concerns

Business Model = Independent of financing (Same canvas with 0% or 70% debt) Operating Model = Independent of capital structure (EBITDA doesn't change with leverage) Financing Model = Dependent on Operating Model (Returns require EBITDA + structure)

2. Information Flow

Strategy → Numbers → Distribution ↓ ↓ ↓ Business → Operating → Financing Model Model Model

3. Feedback Direction

If returns inadequate: Financing ← Operating ← Business (work backwards to find constraint)
Critical Insight: Good financing maximizes returns on good businesses. No financing structure saves bad businesses. If the math doesn't work after optimization, the problem is usually in the business model or operating model, not the financing structure.

Framework Summary

This framework transforms business analysis from art to systematic process by:

  • Separating strategy (Business Model) from economics (Operating Model) from value distribution (Financing Model)
  • Providing explicit translation rules from qualitative strategy to quantitative financials
  • Enabling consistent depth scaling from quick screening to comprehensive analysis
  • Creating feedback loops to iterate and improve analysis quality

Three-Model Business Analysis Framework
A systematic approach to analyzing business opportunities from strategy to financial returns