What is an offering memorandum (also known as a confidential information memorandum, or CIM)? Why is it important? If you create a powerful CIM, you’ll jump ahead in your pursuit of the best price for your business.
What Is a CIM?
A CIM is a document that explains all the intricate details of your business and industry. You want it to pique buyers’ interest and leave them wanting to know more about what makes your business attractive.
It includes management biographies, risk, objectives, terms of investment, operational explanation of the business, and comprehensive financial statements.
To create a powerful CIM, supply your mergers & acquisitions (M&A) advisor with all the necessary information. (You can find a guide on this in our blog, “How Do I Build My Business to Suit the Buyer’s Criteria?”) Your advisor will also need copies of financial records and tax returns.
The CIM is usually a 10- to 50-page professional document used to introduce an acquisition or investment opportunity to strategic buyers. It’s important in transaction processes because it’s the first document that prospective buyers look at before proceeding with a deal. In short, the CIM is a marketing document; its primary purpose is to entice potential buyers to make a deal.
What Makes an Effective CIM?
In a word: brevity. There isn’t a maximum (or minimum) page limit, but should be concise and state the facts, the good, bad, and ugly. Potential buyers are busy, and too much information can overwhelm them and make them lose interest.
The document should include relevant graphics to give potential buyers better insight into the products and/or services provided by the company. Ideally, the name of your company shouldn’t be disclosed in the initial document.
Here are some key ingredients for an effective, powerful CIM:
- Company and customers overview
- Management team biographies
- Marketing plan
- Company products or services
- Financial information
- Investment highlights section
- The deal
Company and Customers Overview
You’ll need to explain where your company operates (geographical regions) as well as the competitive landscape. Who are your top three competitors? What’s their market share? What’s yours? You can build credibility for your company if you include major customer names.
Remember, if you want your CIM to be “blind,” don’t copy verbiage from your company website. However, we understand that if you operate in a niche market or a very small region, it may be nearly impossible to hide your identity.
Management Team (and Board of Directors)
You want potential buyers to be impressed with your team’s experience and ability to work with them for a seamless transition. If you have a farsighted team, include their vision for the company’s future growth, upcoming opportunities in the market, strategy for achieving future projections, and details on market competitors. It also includes how the current management team plans to capitalize on strengths, deal with weaknesses, and manage operations scalability.
Investment Highlights Section
This should include at least three points outlining the USPs (unique selling points) of your company, your products, and this investment opportunity. What makes your company’s products or services different from those of competitors? Do you have exclusive patents and trademarks or proprietary technology? Do you have leading-edge production capabilities or an experienced management team who can faultlessly lead you through the sales transition?
For example, noting that you’ve developed strong vendor partnerships or alliances and lead the market are valuable USPs.
Company Products or Services
Include a list of the main products or services offered and the revenue generated from each one. If possible, list the current market share for each.
This section should highlight key historical financial metrics: revenue, profit margin, EBITDA (earnings before interest, taxes, depreciation, and amortization), etc.
How far back do you need to go? Include at least two years of data (preferably three or four) and projections.
Describe what deal you’re offering. What kind of deal do you want? Full sale, partial sale, strategic partnership, or a combination?
Your CIM should also be carefully edited and proofread. Think about it: would you give your money to a company that produced unprofessional-looking documents that are riddled with errors?
Analyze every sentence to make sure your document is free of errors or omissions. This document is your first (and sometimes only) chance to convince an investor. Craft a flawless document that will impress potential buyers with your professionalism.
The objective of your CIM is to attract interest and eventually execute a deal with a buyer. It’s used to attract external investors and helps the investor understand the investment in broad detail. In short, it’s a tool to help them assess whether they might be interested in buying your particular business.
Sending the CIM and Next Steps
There are 5 different types of buyers, so the CIM’s could be sent to who is the most qualified and the best fit. When someone indicates interest in your business, they sign a non-disclosure agreement (NDA) to create a confidential relationship between the parties and protect private information or trade secrets. After the NDA is signed, your company’s identity is disclosed and more detailed information is provided to the potential buyer.
There are two different school of thoughts here. If you are growing your business and need an injection of capital, you can either borrow capital or obtain it from investors. In this case you will need a pitch deck and not a CIM to showcase your business and why you need the capital. This will allow you to present how it is beneficial. If you are selling a majority or all of your business then you need a CIM to show buyers.
Potential buyers need key information on the company’s future growth strategy, upcoming opportunities in the market, the plan for achieving future projections, and details on competition in the marketplace. The document also details how the current management team plans on dealing with weaknesses, operations scalability, and more.