What is a Confidential Information Memorandum?
A Confidential Information Memorandum (CIM) is one of the first documents a buyer receives during the M&A process. It is a descriptive resume of the company curated by the M&A Advisor on the seller’s side. The quality of the marketing document can significantly impact the value of business and the success of the business sale. There is a direct correlation between the quality of the CIM and the ability to find the right buyers for the business. During an M&A process, it is very crucial to know what buyers and lenders will be looking for and then create excellent marketing materials that tell the story in a compelling way.
The purpose of CIM
- Represents the attractive features/ investment highlights of the business
- Explains the business operations, making the company known/ attractive to buyers (and lenders) hence enticing buyers to increase their bids
- Shows the company’s growth potential and future prospects
- Mitigates frustrating follow-up queries from buyers and free-up seller’s / advisor’s time
Key Elements in an Effective CIM
Every CIM has multiple components that describe in detail the operations of the Company as well as why any interested party should invest in that Company. These sections and the length of the CIM are highly subjective and vary with every such opportunity. However, below are the four most important sections that must be included in any effective CIM:
- Company Overview
An in-depth explanation of the company’s operations and business model. Provides details on background, historical timeline, ownership, products & solutions, operational stats, management, geographic presence, etc.
- Industry Analysis
Comprehensive info on the industry within which the company operates. Highlights specific tailwinds that will propel its growth in coming years. Includes data on market size and forecast, key drivers, addressable total market, competition analysis, growth opportunities, etc.
- Investment Highlights
Explains how the company differentiates itself from the competition. Provides details on the unique selling proposition (USP) of the products & services, the strategy employed by the company, future roadmap, reason/background on the investment ask, etc.
- Financial Results
One of the most important sections in the CIM — provides an analysis of how the company has performed over the years and the management expectations for financial results in an estimated period. Includes details on key sections of the three-statement analysis and its notes, segmentation, etc.
Points to Remember
- 5 Do’s to know when creating a CIM
- Convey the Facts – A CIM is not a binding contract but omitting or not disclosing any key fact may lead to investors losing confidence in the entire process and the deal might get abandoned midway. It is trackable from pre-transaction through to closing and hence should be conservatively prepared instead of excessive embellishments that could come across as biased.
- Calculate the Returns – CIMs should contain sufficient information to enable buyers to benchmark their required return. CIMs should include both the pre- and post-deal capital structure and financials, allowing any potential buyer to conduct its own valuation analysis.
- Capture Credibility – Awards & accolades are one of the most important ways to demonstrate the credibility of the target company. These help organizations to increase the customer’s confidence in the products & solutions provided. These accolades also help in increasing the trust of potential investors not only in the company’s offerings but also in estimated financial targets.
- Compelling the Audience – A little creative flare in the CIMs, especially in the key sections, goes a long with the buyers, lenders, and investors. Representing the data in charts and graphs helps anchor the idea and provide analysis for the reader. It also makes it easier to compare results over time and demonstrate the growth with expanding curve lines.
- Communicate the Story – A disjointed narrative does not garner the necessary interest from buyers and surely confuses the reader. The aim is to present the information in an organized way so that each subsection adds to the next. If a robust storyline of value creation can be communicated through a CIM, it can help prequalify the potential buyer.
- 5 Don’ts to know when creating a CIM
- Disturbed Flow / Experimental Format: The buyers go through hundreds of CIMS in a day, and having a disjointed story or a format that is not standard makes it easier for buyers to move on to the next opportunity. Always ensure that the story has a flow with every section and subsection.
- Disclosing Confidential Data: The banker needs to be careful of the information being shared at the initial stage and be cognizant of the buyers who will have access to this information. The advisor needs to protect the client and redact certain information from strategic buyers (competitors) even if confidentiality agreements are signed.
- Explaining Valuation Calculations: A CIM should not contain any details on the valuation or how was it reached. This will shift the focus of the investors to the rationale behind driving the valuation instead of learning more about the business, growth potential, customers, and management.
- Abundant Use of Jargon: An easily comprehensible CIM will attract more traffic and conversations with the buyers than a CIM filled with jargon. Heavy usage of jargon will only make the CIM more difficult to understand for non-industry buyers. They should be thus used if its either standard practice or their meaning/usefulness is mentioned as a note
- Too Long / Too Short: A CIM is generally 30+ pages long with an in-depth analysis of the sections. A poorly written CIM will either be only 5-15 pages long or will contain a lot of filler information that adds absolutely no value or is simply rushed and makes incorrect statements and data. Thus, the analysis should be detailed, and the information populated should add some value or provide the buyer with some insight into the business.
Conclusion
Millions of dollars are at stake when a deal process starts and CIM is a valuable tool for creating a positive perception of the company. It is extremely important to draft a CIM which is informative, comprehensive, articulate, and convincing. A well-constructed CIM could ensure a high probability of closing and set the tone for how much value buyers place on the business.
Evalueserve has extensive experience working with large, mid-market investment and boutique advisory firms providing deal execution support for live deal mandates across various sectors. Most mid-market and boutique advisory firms have leaner deal teams and require support for deal preparation and deal marketing phases. Our trained pool of analysts has created multiple CIMs for various live engagements. Evalueserve analysts work as an extended team for clients, freeing up bankers’ bandwidth, helping them with data-intensive tasks, and prepping up for deal closure. For more information, please visit: https://www.evalueserve.com/solutions/deal-execution-support/
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