Confidential Information Memorandum Tips

Confidential Information Memorandum Tips: 9 Pointers to Maximize Value

The best buyer for your business has a problem. Only you can solve it. By following these Confidential Information Memorandum Tips you can lead your buyer to your view of valuation without having an “asking price”. This is only one of many caveats to writing an effective book. The other major one is having an experienced, qualified advisor write it for you. Either way, these Confidential Information Memorandum tips will help you understand how to maximize enterprise value with this important tool.

First, prospective buyers need to know you exist, like what sets your business apart and trust your financial situation. The industry standard in the Mergers and Acquisitions sell-side business involves writing a book that includes all of the value driving information about your company. This book is called a Confidential Information Memorandum, or CIM.

This begs the question: what financial situation? A major portion of your CIM involves (1) historical adjusted financial statements, (2) current period or trailing twelve months (TTM) with an accompanying narrative and (3) financial projections. You will also include relevant KPIs for the same periods. You are going to prepare the financial and KPI components in a thorough, detailed and accurate financial model. Don’t underestimate the importance of this.

Second, your book is only one piece of the puzzle. It is only one piece of the process. Maximizing the value of your business in an M&A sale is your absolute number one priority. Achieving this is the hard part, but don’t worry. You will learn how by following these Confidential Information Memorandum tips.

This is a high level overview of the M&A sale process:

Table of Contents

Every business strives to maximize it enterprise value in the eyes of acquirers when running a sell-side M&A process. The problem is there is no such thing as an asking price. It’s just not done in the middle market. How do you establish business valuation in the M&A sale process? Write an effective book.

Because your CIM plays such a significant role in the sale process as measured by business valuation, follow these Confidential Information Memorandum tips to get it done right.

1. Three things you need to know

  1. What you’re saying
  2. Who you’re saying it to
  3. Why it matters

Meet your audience’s expectations. But who is the audience for a CIM? Executive? Junior staffer? Technical people? Most likely it’s going to be an analytical type with business and economics in mind. They will summarize the salient points for the decision maker, should the criteria satisfy their appetite.

What is their criteria? What are they looking for? Buyers are scouting for superior strategic business opportunities and are focused on the future. They are looking for unique value and competitive advantages that will generate revenue and profits well into the future. Write your book with this perspective in mind.

2. Three things you need to do

  1. Get the attention of the reader
  2. Keep their attention
  3. Earn their trust

In my view the spectrum of communication spans from (1) fact, to (2) impact and (3) takeaway. In this case a fact is usually a number, a ratio, a trend or other measure of success that we can all agree to. By impact I mean how does it affect your business right now; can you refer to other facts here? And by takeaway I mean what is your opinion on future direction? This will be different for everyone.

The more compelling your account of fact and impact, the more you will be able to influence takeaway. Takeaway has a lot to do with the soft side of business valuation; takeaway is opinion; it’s risk tolerance.

3. Understand Valuation

Buyers know everything they need to know about valuation. It’s a complicated equation that involves financial statement analysis, researching comparable companies and transactions, potential synergies and upside growth potential with a new driver behind the wheel (i.e. the buyer). The thing is, valuation is different for every business out there on any given day. Internal and external factors change all the time. So does business valuation. The goal is to maximize your business valuation when it matters: in a transaction.

The entire point of your Confidential Information Memorandum is to maximize valuation. If you stick to the topics that matter, tying them together while telling a meaningful story that builds credibility, you will succeed. Keep your metrics and narrative on the following topics:

Confidential Information Memorandum Tips: Approach & Elements of Value

The seller’s job is to fill in the picture with relevant, accurate facts and a great takeaway that encourages buyers to recognize value where it might not be obvious. Keep reading for more Confidential Information Memorandum tips to maximize business valuation when selling.

Enterprise value, enterprise valuation, or business valuation is an economic measure reflecting the market value of a business, including its assets and liabilities. The enterprise value calculation considers the market value of a company’s equity or assets plus its debt and cash. The thing is everyone will value these elements differently.

Enterprise value is subjective, determined by the individuals perspective on quality, future growth potential and alternatives. It describes how and why people imitate other people’s actions when they’re not sure what kind of behavior is appropriate in specific situations. As a result, people rationally observe actions of others in a group and make a decision based on it.

4. Get Everyone On the Same Page

Assume nothing is obvious. Take nothing for granted. One of the most important Confidential Information Memorandum tips is the fact that this book is your only opportunity to tell the story of your business exactly how you want prospective buyers to see it. Remember, though, that the facts will be verified in due diligence so be realistic.

Here is a Confidential Information Memorandum Questionnaire to help you get started organizing specifics.

The trick to business valuation buy-in is gathering diverse perspectives and getting everyone on the same page. This includes stakeholders representing different goals across the organization and people at all levels—from those who interact with customers to executives setting the strategic agenda.

Want to know how buyers approach acquisitions? Take a look at how we run the buy-side mergers and acquisitions process

Another way to think of the purpose of your CIM: establish common ground. Keep the reader reading. Get them interested in the whole story, including:

  • Product / Market fit
  • Organization / Market fit
  • Finance / Market fit

Synergies may also be a significant factor in your valuation. They will vary from buyer to buyer and will be largely subjective. There are the usual suspects like eliminating duplicative positions in HR, accounting and operations that the buyer can eliminate. But there may be ways the buyer can leverage a product, service, specialty or department to augment their own sales, profits or economies of scale or scope. If you don’t present everything, they likely won’t find it on their own. They also won’t likely pay you for it.

It’s also important to highlight any unique asset classes that need to be specifically addressed. For example, a client of mine was approached by a prospective buyer who proposed to acquire 100% of the company stock from its shareholders on a cash-free, debt-free structure. The problem with this is that the seller had just invested in new capital equipment that increased production capacity more than 50%, and used long-term debt to finance the investment. In addition, the company owned its real estate but wasn’t included in the Term Sheet.

In this case the buyer hoped to significantly undervalue key assets and disregard operating liabilities (the collateralized debt) basing the business valuation on historical unadjusted EBITDA. This would leave the sellers with a materially undervalued enterprise value. In this case the balance sheet is a significant driver of enterprise value, which is why the buyer drew attention away from it.

Another problem with this acquisition proposal was the company did not want to run so much as a limited process, which would qualify, or disqualify, the offer by comparing it with others. Here is a look at your potential transaction options:

Confidential Information Memorandum Tips: Process Scope Impacts Value

Once your CIM is written you may as well run at least some degree of a process. Your M&A advisor won’t charge you anything more for this step. In fact it increases the chance of getting a premium deal done which means more money for you and a higher success fee for your advisor.

Related: What to Expect From Your M&A Advisor

It’s important to point out here that among other Confidential Information Memorandum tips is to emphasize your understanding of (1) deal structure, (2) asset classes and (3) liability treatment in M&A transactions. It also enables you to manage a process to generate competitive offers from multiple bona fide buyers.

Another tip to get everybody on the same page is to draw the readers’ attention to the synergies that could evolve as combined entities in (1) product, (2) organization and (3) finance. These are the three pillars every business stands on, so connect the dots and convey how they interact together to make your business unique, highlighting the intangible value you’ve built. Emphasize it’s transferability, meaning there’s no key person or other dependent variable that adds an element of risk under new ownership.

5. Clean Up Your Historical Financial Statements

The first function of your financial model is to present the most recent three historic years and the most current interim period (typically trailing twelve months (TTM) from the most recently closed month) with adjustments for discretionary and non-recurring (1) revenue, (2) costs, (3) expenses and (4) any other items like one-off asset sales. Do this for both your income statements and balance sheets.

This is done for two reasons:

  1. To establish profit maximizing historical trends, even if that wasn’t your actual strategy
  2. To establish a basis for strong financial projections

The most important Confidential Information Memorandum tips on this step regard getting credit for the historical adjustments. Pinpoint the precise dollar amount, add/subtract it from the specific line item and footnote the reason for the adjustment with as much narrative as needed.

Clarify what about the expense was discretionary. For example, first class flights, accommodations, meals and entertainment on standard sales travel, trade show attendance or other business meetings are legitimate adjustments when economy would have worked just as well. Be careful to only suggest knowingly discretionary expenses, etc., and truly non-recurring, unforeseeable events that had a negative impact to profits.

The entire point of presenting adjusted historical financial statements is to establish a basis for future profitability.

6. Support Your Financials With Industry Research

No business operates in a vacuum. Companies within industry verticals share similarities in unit economics, growth rates, profitability and other key performance indicators. It’s good practice to follow the most relevant metrics in your industry and present yours in your CIM. If you are outperforming your industry averages, it should help to maximize your value. If you lagging averages, you’ve got some goals to set and work to do.

Not all industries are simple, with every company outputting the same product or service, comparable as apples to apples. Many industries include diverse participants that play a single role in the greater supply chain. There are standard metrics for each position in the vertical. Know what role your business plays, what metrics measure your effectiveness and success and present them in your CIM.

The easiest place to start comparing companies and industry research is public companies within an industry. You can see a ton of relevant information, including:

  • Stock performance
  • Financial performance
  • Operating metrics
  • Valuation
  • News
  • Google trends

The more you know about your industry provides insights for you and potential buyers to help gauge your market position and how it affects your business valuation. It also will help you support growth objectives.

7. Present Viable Financial Projections

Preparing viable financial projections is difficult at best, even for internal eyes only. There are so many factors that impact actual financial results versus projected that you will never get them right. Getting close is great. Keep this in mind when preparing financial projections you will be sharing with prospective buyers. Just like your historical adjustments, you want to get credit for your financial projections. At least for the first year or two, because they can help you maximize value if your deal is based on the future.

Here’s a primer on how to prepare realistic financial projections.


8. Discuss Relevant Key Performance Indicators

This is its own topic too. Determining which key performance indicators are best for you is an ongoing process that you and your management team should be constantly developing.

Confidential Information Memorandum Tips: Which Analytics are Right for You?

9. Prepare Your Executive Summary Last

I know, it may sound counterintuitive but the first section of your CIM, the Executive Summary, comes last. By selecting the most impactful paragraphs from each of the relevant sections of the book, you can address the takeaway first, allowing the reader to pursue the facts and impacts in their respective contexts.

©2023 ALIGNMT LLC | Financial Management | Mergers & Acquisitions | Investor Relations


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