The Purpose of a Confidential Information Memorandum
Every M&A sale process needs to lead with a written Confidential Information Memorandum (CIM). Want to attract investors for a partial sale? Want to negotiate an outright sale with strategic or financial buyers? An effectively written CIM is vital for a successful sale. Why?
Establish common ground.
Because using a relevant and effective CIM, or “book” is the only way to tell prospective buyers how to view your company and its amazing opportunities for growth. How do you write a CIM? Moreover think: who should write your CIM?
How to write an effective Confidential Information Memorandum
When on the buy-side I expect an effective CIM. In other words, you should demand one as a seller.
M&A advisers recommend that an effectively written CIM follows a step-by-step process to present:
- Executive summary — a snapshot of your business
- Company description — describes what you do and for whom you do it
- Market analysis – research on your industry, market and competitors
- Organization and management — your business and management structure
- Service or product — the products or services you’re offering
- Marketing and sales — how you market your business and your sales strategy
- Historical financial statements — your past 3 years and trailing twelve months of financials
- MD&A — Management Discussion & Analysis
- Financial projections — what you believe the next 3 to 5 years will look like (and an OKR cascade is great here)
- Appendix — an optional section that includes key personnel resumes, intellectual property, permits, etc.
However, getting started may be difficult to do. Visit our blog and our M&A forum to learn more about writing an effective Confidential Information Memorandum. In addition you’ll learn expert tips and examples to present your company in its best light.
The Purpose of a Confidential Information Memorandum
Think of your CIM as a recipe for buyers to follow when valuing your company. Because you don’t ever have an asking price in any sell-side effort, you need to provide signs. Indications that will lead buyers to an appropriate value range.
Buyers determine your business valuation. Sellers do not.
First, you have to know what the objective of your Confidential Information Memorandum is because it needs to achieve your key results. There are many reasons to be accurate. Above all, it builds confidence in valuation while reducing the likelihood of deal-breaking surprises.
Buyers watch out for things that seem to make sense on the surface, yet make no sense when dismantled and analyzed. Confidentiality is critical when opening your books. However, good information drives progress.
This is the purpose of due diligence. To verify information expectations.
Not only do you need to know what information must be present in your CIM, but you also have to highlight critical, interesting and game changing information effectively. Most importantly, you have to get credit for it, otherwise you’ll never find the best buyer. Or reach maximum business valuation.
This is the purpose of your Confidential Information Memorandum: to generate real interest and the perception of significant business value from multiple buyers. For example, you want to get prospective buyers really excited about the possibility of acquiring your company. Otherwise they could end up competing with you. Who wants that?
Relevance and Viability
Therefore, I offer one piece of advice for every prospective seller. Be absolutely certain your Confidential Information Memorandum is written, stylized and illustrated to the highest standard, but keep it readable. Prospective buyers demand it.
Buyers want facts, not fluff. Above all, give them reliable information.
They don’t want an ambiguous, unattainable “pro forma” business you hope they believe could be a reality somehow. But rather, convey a viable growth opportunity. Acquisitive organizations want to understand what foundation your business is built on today. And how you grew and evolved it in recent years. Who is on the team that contributes to its success? Why sell now?
It may take buyers longer to grasp what you’re telling them in the CIM if they can’t understand your motivation to sell. And that increases the chance of them passing.
It’s very important to take transfer-ability into account when writing your CIM. Why? If your presentation of relevance and viability in your industry is unclear, it might be hard to get buy-in. Your book is your company’s biography and road map to the future. Buyers need to be able to see themselves in control going forward. They also need to establish a viable integration plan.
Here’s what your CIM might look like:ALIGNMT-CIM-Circuit-092016
How do you know you’ve achieved this? At the very least start with a well organized Confidential Information Memorandum template that sets the company up for success. Remember, a poorly written Confidential Information Memorandum may ruin the opportunity to sell.
One of the keys to an effectively written CIM is the style used to narrate the relationship between your operations and your financial performance. Present the historical financial statements and describe how your team reached your objectives. After that, explain your future objectives and key results (OKRs) that benchmark further success.
Related: The Business Valuation Spectrum
This is the foundation of how buyers approach business valuation. Get credit for the value you’ve built and you’re on your way to a deal.
The Value of Synergies
You won’t know who the buyer is until late in the game. Therefore, consider the pool carefully.
The point is to tell buyers what your view of the future looks like with fully realized synergies created by a deal, with your business under their leadership. Demonstrate all of the unique value you and your team have carefully built to establish your business as a real player in your industry. Convey your market position and strategy differentiation today, and how it will serve you tomorrow.
Ask buyers to see your business the way you see it – achieve a shared vision that your business plus theirs creates real synergistic value. Agree that the combined whole is indeed greater than the sum of the parts. And they will tell you what that vision is worth.
This is how to maximize the value of your business in an M&A sale. Buyers that share your vision will present premium valuations, while everyone else won’t. They will gravitate to the low end of the spectrum. After all, isn’t book value the value? It’s that simple.
The problem is you don’t know who prospective buyers will be before you start the process. It’s also unlikely they will share your vision on their own. And it might never happen. Therefore it’s very important to write an effective Confidential Information Memorandum. Here are the topics to cover
The CIM Table of Contents
In order to hit the key notes and open the dialog with prospective buyers follow this structure:
- Executive Summary
- Business Overview
- Summary Financial Data
- The Opportunity
- Business Strategy
- Transaction Objectives
- Company Highlights
- Competitive Advantages
- Market Opportunity
- Industry Perspective
- Industry Trends
- Market Analysis
- Competitive Environment
- Economic Outlook
- The Company
- Objective & Key Results Review
- Product/Service Overview
- Markets & Customers
- Channels of Distribution
- Supply Chain Management
- Historical Financial Analysis
- Organization Chart
- Key Employee Bios
- Human Capital Growth Outlook
- Financial Review & Outlook
- Management Discussion & Analysis (Historical)
- Key Performance Indicator Analysis (Historical)
- Objective & Key Results Outlook
- Projected Financial Statements
- Balance Sheets
- Income Statements
- Cash Flow Statements
- Key Performance Indicator Analysis (Projected)
Remember, you only get one shot at a first impression so do it well with an effectively written CIM.
The Role of Financial Projections
Financial statements play a significant role in synergies and business valuation. Therefore you must pay close attention to getting the presentation of historical and projected financials done right.
Normalizing historical financial statements is expected. The type of financials you start with helps build credibility. For example, audited financials are better than reviewed, which are better than compiled. Internal financials could impose a number of contingencies and add significant time to due diligence.
Related: How to Normalize Financial Statements
Normalizing your historical financial statements (or recasting) is an important exercise. It will help reconnect you with business fundamentals. It may even uncover productivity enhancements. But this is a topic for another discussion.
Instead let’s touch on the role of financial projections in your CIM. Financial projections can make or break your business valuation. They will either be considered as reliable, or dismissed entirely. How they are presented will determine their contribution.
The key financial projection components
- Historical Analysis
- Unit Economics
- Price Sensitivity
- Cost of Goods Sold
- Fixed v. Variable Expenses
- Margins & KPIs
Insights to your expectations of the future, and how you plan on profiting from them are key. Furthermore, how you plan to mitigate risks and avoid mistakes are useful to buyers.
You base the next fiscal year on your most recent trailing twelve months (“TTM”). For example, use March 2018 through February 2019 as your most recent TTM. Based on the four period historic trend establish your revenue goal for fiscal 2019. Next, establish what COGS and operating expenses should amount to for the same period. What’s left? EBITDA, EBIT and Net Income. There, we’re done with the projected Income Statements for the current year.
Do this for the next 2 to 4 years. Then move on to the Balance Sheets.
Projecting Balance Sheets is a bit more complicated. The number one reason is shareholder distributions. Similar to the Income Statements, using KPIs to determine healthy Balance Sheet line items is the best practice. From short term assets to long term liabilities, estimate what your capital requirements will be to fund growth.
Finish the projected Balance Sheets and move to the Cash Flow Statements. This is easy. Cash Flow Statements are no more than an analysis of the Income Statements and Balance Sheets. Get the calculations right and your done.
Valuation is more art than science.
Related: What is my Business Worth?
Reliable financial projections supported by OKRs and KPIs build credibility. If you’ve thought about selling your business you need to understand valuation. More importantly, you need to understand valuation from the buyer’s perspective. Selling a business is unlike selling any other asset. A business’ value differs from day to day, from buyer to buyer.
Valuation is more art than science.
Your CIM should provide the reader all of the variables in the valuation equation the way you see them:
- Top line business driver(s)
- Business improvement developments
- Consistent financial statements
- Management Discussion & Analysis
- Your major competitors
- Your competitive advantages
- Relevant financial projections support
The M&A Sale Process
Having an effective Confidential Information Memorandum is only one step in running a successful M&A sale process.
In this paragraph, I’m going to discuss a few reasons why a well organized M&A sale process is vital to achieving your objective. First, the only way to attract multiple viable buyers to make competitive offers is by accurately presenting a realistic future for your business. Second, they have to believe your financial projections. There are, however, some buyers who will disagree. Third, and most important, they need to see a viable integration plan. Moreover, when buyers have confidence in all three of these elements, their interest, and your business valuation increase. In conclusion, writing an effective CIM is vital to establishing viable M&A transaction expectations.
We work really hard from the start to close deals. Similarly you should too.
Keep in mind:
There are many reasons to leverage OCRs regularly. Above all, it keeps business healthy.
Here you have access to a template. In addition, you can get a financial model template.
I’ll start by reminding you how important an effective CIM is. After that, I’ll tell you about the value of a well researched buyers list.
One word: Process.
In conclusion, an effective CIM is only one important aspect of the M&A process.