The Confidential Information Memorandum or CIM will probably the most important document you will be putting together for your business. It will be the culminating document that will hopefully give you the fruits of all the hard work you have put into your business since inception.
I have written this from the perspective of a small to mid sized business. Although, bigger M&A deals also have similar documents that are prepared by investment bankers for big dollars!
What is a CIM?
The CIM is a document that will be sent to potential buyer of your business after they have screened your company by reading a “teaser” executive summary and after they have signed an NDA with you and / or your broker. Potential buyers will make decisions on whether they will continue to pursue a purchase of your company or reject and move on after reading the CIM.
A CIM is not a legal document and does not bind any party. It is a marketing document which will showcase your company to prospective buyers. In a lot of cases, brokers, bankers (if hired), sellers have a tendency to dress up their business more than needed to project a stronger company than it really is. I will explain why this is not only a bad idea, it is a dangerous idea, contrary to what a lot of folks will say, especially for a small business. Meanwhile, a well drafted CIM will get you the strategic buyers as opposed to only financial buyers who will pay you the premiums over and above the standard multiples.
What needs to be on a CIM?
A typical CIM has 4 broad sections — key highlights, the detailed narrative of your business, growth opportunities and the financial performance. I will break these down below. Please note there could be additional sections, sub-sections and topics that might be applicable for your business (regulatory and compliance related, real estate assets and depreciation, environmental considerations, political implications etc).
Section 1 should be a summary of your company.
Most buyers will read the summary and jump straight into the financial details which are typically at the end of the CIM. So it is really important to have a strong value proposition of your business in the summary. Think about this.
If I were to buy a similar company what would excite me in a 1-pager?
These are the sections in the summary. It should be about 1–2 pages.
Executive summary: overview of the company — the elevator pitch of your company — industry, operations, markets and positioning, key employees and future.
Financial summary: historical revenue, EBITDA, EBIT (3–5 years), SDCF, cash flow summary, balance sheet summary (total assets, liabilities, equity)
Legal structure of the business: when founded, where registered, type of company, ownership summary.
Key investment highlights: why should buyers pay a premium for your business (above and beyond the industry multiples based only on SDCF or normalized EBITDA or revenue etc.)
Section 2 is the detailed description of your business
Most buyers will get to this only after they have assessed that the key highlights and financials match their expectations and interest. This is the section where you will get into the meat and potatoes of your business. These are the topics in this section.
Industry analysis: focus on highlighting the opportunities of your industry. The content should be geared towards providing a competitive landscape of your industry. Here, do not focus on specific markets your business operates in or plans to operate because a prospective buyer may, and most likely, try to expand into different markets. The goal should be to showcase that there is healthy competition, more growth potential than competing industries (example pizzeria as opposed to deli OR IT services as opposed to web development OR veterinary clinic as opposed to pet grooming, leaving room for diversification is such is the growth potential). I would highly suggest you purchase industry statistics that showcase steady growth, protection from macro movements and reports that discuss how to handle inherent as well as perceived risks.
Company analysis: this is where you will present your organization. Think about this — if an inspector / auditor were to come in blind and go through your business so that you can get a “certificate of excellence” how would you present your company? Start writing it out in plain English. Then you can organize the content around these topics —
- history, key milestones
- legal structure
- business model with assumptions
- mission, vision and strategy with assumptions
- business segments, strategic units, product lines, services and offerings
- customer segmentation and customer details (refrain from providing information that is not in your marketing / website), retention rate of customers, revenue splits
- references, associations, networks
- operations — activity map, production / development, team organization, organizational map, suppliers and procurement, R&D, delivery and logistics, quality assurance and measurements, all business systems, technology and process documents, marketing, sales, support and customer service, employees and key personnel, executive team and management, locations, real estate details, fixed assets, regulatory and compliance items. You will also add sub sections discussing the value of each area of your operations, any USP for the buyer (e.g. patent, copyright, IP), risks and how to mitigate, transfer or plan for the risk. The primary focus is to showcase the operations of the business today and how it evolved since inception.
Section 3 is where you will discuss growth opportunities
Think about you buying this business and growing it exponentially with unlimited capital, resources and nothing to worry about. If you were set free to grow your business today what would you do? Do not worry about what a potential buyer may think on why you have not done all these.
New segments and markets: discuss how it will be easy to expand to certain markets. Do a risk assessment of venturing into such markets. Provide opportunity numbers with references to reports, articles and statistics.
Marketing improvements: what additional marketing can benefit your company, what are the costs and returns? How should such marketing be done?
Sales process improvements: how should sales be improved to close more deals, increase the acquisition rate, reduce acquisition costs, have better transition of sales to operations, penetrate deeper into current customer base, segments, better organization and teams, better systems and processes.
New product lines and services: discuss how the business can create additional product lines and services by complementing a few things in your current operations, doing joint ventures and partnerships, leveraging certain suppliers and distribution channels, marketing and selling internal processes and systems.
Risks assessment: this is extremely crucial. Spell out the skeletons but explain how they are very well accounted for and managed or how they can be easily mitigate or transferred (e.g. buy insurance, outsourced). The best thing to do is to do a proper risk assessment and present the highlights. Every buyer knows there are weaknesses in every business. Check out point # 6 from a previous article I wrote about how to do such a risk assessment.
Opportunity map: strategic rationale on pursuing new opportunities, business model analysis with assumptions, case studies from other companies, industries, segments, identification of pilot opportunities, operational changes needed, approximation of costs and resources, suppliers and procurement details and finally, expected returns with payback periods.
Section 4 is the financial presentation of your company
This section needs to be well-presented from structure, simplicity, exhaustiveness and professional perspectives. If you are not 100% sure you can do this, it is better to get your accountant to prepare this. If you cannot discuss this with your accountant (due to confidentiality) you can hire consultants (make sure they sign an NDA). Typically these are the sections —
- basis of preparation (gaap, audited, reviewed), tools used (QuickBooks)
- relationship among business units, entities, related businesses, minorities interests
- one-off adjustments
- key assumptions in the financial preparations
- profit and loss statement — key assumptions for EBITDA / EBIT — minimize or better still, eliminate all add-backs to get to the SDCF or normalized EBITDA and if any, explain clearly why it should be allowed, comment on main line items (what went into COGS that drive margin, expense items), describe the main drivers of the revenue items, depreciation details and policy, key ratios as compared to competition and industry. It may be beneficial to provide additional sections by product lines, business units, segments, service offerings as appendix items if available and clean. Typically 3–5 years of history are expected. If the trend is not upward, explain why that is the case and how it can be overcome. Remember, most buyers will jump right to this section when they get the CIM.
- balance sheet — historical, comment on the main line items, accounts receivable details, average, collection policies, challenges and how they are managed, credits, liabilities, debt, loans, mortgages, intercompany liabilities, minorities details, investment details, changes in shareholder equities, working capital management
- cash flow statement — this is key, especially for small businesses. A lot of buyers will want to understand the free cash flows of the business. There are several ways to calculate free cash flows. It is important to present this in the simplest of ways. Buyers will also compare this to the tax returns. If the financials are on accrual basis and tax returns are on cash basis, explain clearly the discrepancies. Line items in the financials and the tax returns have to tally to the penny or else it will create red flags. If there are write-offs for tax purposes, you will have to explain them and provide details.
- financial projections — outline projections based on the strategic map you have laid out in section 3 — connect these 2 sections here. Typically 3–5 year projections are good. One thought is here is that if you are expecting a 5x multiple then you are telling a buyer that the payback period for their investment is about 5 years. So project accordingly. Discuss diversifications, risks, opportunities as it pertains to the numbers you have presented. It is better to be conservative than be aggressive. There is a school of thought that it is better to double the projections because prospective buyers will reduce all your projections by half or more. While this is true, it is better to be conservative and call it out — if you have the right strategies, list out the risks and opportunities with proof, results, references and statistics, a seasoned buyer will value it a lot more — it makes you a very strong and confident seller. It shows integrity as well as compassion for a buyer.
Why is it dangerous to over-dress your company
A lot of brokers, bankers, consultants and business owners have a tendency to over-dress their company so as to attract premium, strategic buyers and then working down from there on — basically trying hard to put lipstick on a pig. I am not saying your business is analogous to a pig by any means, but you get the drift. It is much better to project a conservative view of the business and focus on supporting that fact with numbers, results, reports, and industry statistics. This way you can work up from there. It is MUCH easier to work up on numbers than working down during interviews. Your confidence will get through to the buyers.
Selling anything, and especially selling your business, is a transference of feeling. If you are passionate, genuine and confident it will get across. The reverse is even more true.
…and remember…trying to put lipstick on a pig also annoys the pig!
What should not go into a CIM
A CIM is not a legal document and it should not contain any legal clause or statements that can give out a sense of binding a prospective buyer to anything at this early stage.
You will find a lot of articles that mention not to add a valuation section in the CIM. If you are trying to sell a small business and approach a broker, the brokerage will advertise your business (confidentially) with a purchase price. Just search online and you will see the examples. So prospective buyers will know what you are expecting for your business. However, I would advice that the CIM should not contain any details on how a valuation was reached. This will open up a lot of discussion early on which will simply waste a lot of time. Serious and experienced buyers will ask questions about growth potentials, customers, management, operations, risks and opportunities instead of negotiating how you reached a certain valuation at the early stages of the sale. They will focus on that during due diligence. So, in the CIM you should not have anything regarding valuations, calculations, multiples or goodwill. Larger companies have no valuation at all — brokers, bankers present the CIM and get buyers to bid on the company.
Who needs to create the CIM
This applies mainly small businesses. Larger companies will almost always hire a banker, industry consultant to help them prepare the sell-side packages. However, I have seen many small business owners buy a template and then fill in the sections over a weekend and then hand it to their broker who then creates the final CIM.
Let me ask you this. You have spent a lot of physical, emotional, and financial capital building your business. A lot of blood, sweat, tears, and sacrifices went into the DNA of your company. It is your pride and joy. Why would you hand off constructing the most important document of your business, since inception, to someone who does not know much about your company, let alone care that much about your company?
The CIM is not about being an author or a write or a journalist — it is about putting your heart and soul, putting your pride, on a 50-page document that will win the heart and soul of a buyer who appreciates your efforts, your business, your industry, your markets, your employees, your suppliers and you.
I can guarantee you that if you take a few weeks, you will come up with an excellent CIM, one that will make you really confident when you interview with prospective buyers. The process of documenting your business for sale is actually very rewarding and more importantly, during the process, you will think of many things that will help you to tweak, mitigate, plan and address your regular day to day operations as well.
In the end you can always work with your broker or a consultant or even a friend on the look and feel of the document.
A confidential information memorandum is the best document you will write for your business. It may seem daunting, but if you sit down and give yourself some time to think about all that you have done and could do for your company, you will see that it is not a difficult process at all. In fact it will be extremely rewarding personally. You can also find many articles online that writes about how to read a CIM or how to evaluate a CIM from a buyer’s perspective. I would suggest you read these — it will give you an excellent idea on what buyers would do when they lay hands on your CIM. A CIM is a first step towards selling your business, one that will make the all the difference in how the entire sale happens and even beyond through to transitions.
I am happy to discuss more and help — just reach out to me here. All the very best!