A memorandum is a written message that may be used in a business office. The plural form of the Latin noun memorandum so derived is properly memoranda, but if the word is deemed to have become a word of the English language, the plural memorandums, abbreviated to memos, may be used. In law, a memorandum is a record of the terms of a transaction or contract, such as a policy memo, memorandum of understanding, memorandum of agreement, or memorandum of association. Other memorandum formats include briefing notes, reports, letters, or binders. They may be considered grey literature. In business, a memo is typically used by firms for internal communication, while letters are typically for external communication. Memorandum formatting may vary by office or institution. If the intended recipient is a cabinet minister or a senior executive, the format might be rigidly defined and limited to one or two pages. If the recipient is a colleague, the formatting requirements are more flexible.
What is an Information Memorandum?
An Information Memorandum (IM) is a package of documents created by business owners for prospective buyers. The primary mandate of an Information Memorandum is to motivate potential investment into your business. Although this package is designed to draw the interest of prospective buyers, it dually serves the purpose of transparency. Owners should avoid exaggeration i.e. by not disclosing false information, and aspire to disclose any information that will materially affect the value of the company. Information Memorandums tend to be very exhaustive as they should include items relating to the financial standing, assets and liabilities, business description, market position, clients, strategies and promotion methods, markets served, etc. of the company. An Information Memorandum is the most effective way of providing a large volume of information about a company to investors. In order to increase the effectiveness of the document, business owners should include as much information as possible to reduce future correspondence on the same topic. An IM is a document provided by a company to prospective investors after the investors have reviewed a brief Investment Summary, or teaser, and signed a Confidentiality Agreement. Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company. In Australia this was the major criticism of Prospectus’ in the old days. They were pejoratively called The Glossy Bit in front of the Application Form.
In most Westminster-based legal systems – notably Australia, US, UK, New Zealand, Canada and at least 20 other Countries, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company. NOTE to Company Owners. You’re personally liable if you sell a business whilst withholding information that would have affected an investor’s ability to come to a different conclusion about your business. However, IM’s are most often targeted at Sophisticated Investors who are not protected by the layers of regulation and red-tape that are applied to Retail Investors; therefore, the law’s position on sophisticated investors is that they had the skills, knowledge, money and track-record to know better and if they lose their money then they understood the risks that could result in that and still chose to invest. A company and its advisor(s) must strike a balance when preparing an IM. The document absolutely is a marketing document, in the sense that it should motivate investors to want to invest in the company – but it needs to avoid hype, exaggeration, or omission, and provide a complete disclosure of ALL material facts. Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may also create legal liability for the Directors of the company.
Why prepare an IM?
In general, an IM allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company.
Confidential Information Memorandum (CIM)
What does Confidential Information Memorandum (CIM) mean?
A confidential information memorandum (CIM) is a document drafted by an M&A advisory firm or investment banker used in a sell-side engagement to market a business to prospective buyers.
A CIM, also referred to as the “book” will typically include the following:
• A detailed description of the business and its operations;
• A summary of the industry and opportunities within the market;
• Financial information including analysis of historical results and future projections; and
• A summary of the auction process including the proposed structure of the deal and timing for receipts of expressions of interest or letters of intent.
The CIM is one of the most important documents prepared in the sales process, because it provides a prospective buyer with the information to generate an initial offer. Typically, the book will not include a purchase price for the business, but will provide the prospective buyer sufficient information to appropriately value the acquisition. It is extremely important for the CIM to clearly articulate all of the company’s attributes in order to fetch a premium valuation.
Areas that should be described in detail include:
• Customer diversification;
• Barriers to entry from competitors;
• Ability and plan to achieve future projections;
• Future growth opportunities;
• Strength of management team;
• Scalability of operations; and
• Opportunities in the external market place.
A seller should review the confidential information memorandum thoroughly before it is distributed to potential financial or strategic buyers. M&A advisers and investment bankers are professionals that understand the sales process, but no one knows the business better than the seller. It is crucial that all valuable attributes of the business are highlighted in the CIM to get the best terms and highest possible price. An IM also helps to ensure that all investors receive the same information. This is particularly crucial when a seller is running a competitive process. The more information that finds its way into the IM, the less need there is for investors to pose written questions, saving time for both buyer and seller. From an investor’s point of view, a good IM demonstrates the professionalism and motivation to sell of the sellers, as well as the quality of the management—all important factors when deciding whether to invest in, or buy, a company.
How should a company go about preparing an IM?
Preparing an IM requires a high level of internal organization. The CEO or business owner should lead a small team of experts in the main areas (e.g. sales/marketing, legal and finance) that will need to be covered in the IM. Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy. When MSC prepares an IM, we generally aim to provide investors with details of clients, market position, operations, finance, risks. etc. information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company. As a sanity-check, the Seller(s) and their advisors need to ask themselves what information they would require if they were buying the company – using a company they know little/nothing about as their reference point. Given the IM is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provides investor with an opportunity to renegotiate their offer – typically downwards!
How is the IM likely to be used by investors?
An IM is the most efficient way of providing a large volume of information about a company to investors. Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers (e.g. investment committees, boards, advisors) that may never appear on site. The IM is by far the best way to do this. Although the purpose of this document is to motivate investment, it should not be framed as a pitch book. Rather, it should simply be considered as an informational document on the company provided during the sale process. There is no standard template for IMs- Business owners should tailor their package to present their business in the most objective but optimal light. Regardless of the presentation of your IM, it should convey the same information to all investors in order to promote transparency throughout the selling process. This is even more imperative when the business owner has multiple interested investors.
What to include in an Information Memorandum?
An Information Memorandum is the most effective way of providing a large volume of information about a company to investors. In order to increase the effectiveness of the document, business owners should include as much information as possible to reduce future correspondence on the same topic. However, this can prove to be a daunting task as the list for possible headings can be exhaustive. When preparing the IM, it is beneficial to assume the role of the buyer. This will help you reflect on how to structure your IM, what to include, and how to present it. Instead of passively going through all the headings and filling out the section with information about your business, it may be best to tailor your package in a unique way that will assist buyers in understanding the finer working details of your business. Assuming the role of the buyer during the writing process allows for the package to maintain its objective integrity all the while fulfilling its function as a marketing document.
INFORMATION MEMORANDUM
An Information Memorandum (IM) is a package of documents created by business owners for prospective buyers. The primary mandate of an Information Memorandum is to motivate potential investment into your business. Although this package is designed to draw the interest of prospective buyers, it dually serves the purpose of transparency. Owners should avoid exaggeration, and aspire to disclose any information that will materially affect the value of the company. Information Memorandums tend to be very exhaustive as they should include items relating to the financial standing, assets and liabilities, business description, market position, clients, strategies and promotion methods, markets served, etc. of the company.
The importance of having a well-organized Information Memorandum?
An IM gives business owners the opportunity to clearly set out all relevant details pertaining to the company. It is imperative that the information is presented in an attractive, logical, and coherent way as it also reflects the companies’ professionalism, quality of management, and dedication to the sale. A high-quality IM is critical to ensure a smooth transaction for it promotes transparency and minimizes unnecessary correspondence. An information memorandum, sometimes also known as a sales memorandum, is a document produced prior to selling your business, and essentially functions as your opening pitch to any prospective buyers. The information memorandum is your chance to shout about the positive aspects of your business and state the reasons your business is an attractive investment prospect. It is the first major written description of the business your eventual buyer will have, so it’s well worth investing considerable time and effort into making sure the right message is conveyed. You must also ensure the document is an accurate representation and does not overstate, or understate, certain aspects of your business. The exact contents of the memorandum will vary from company to company; however, an effective one will typically contain, amongst other things, the following key pieces of information:
• A brief overview of the company’s history and how it got to its current position
• Details of how your company operates – what you sell, or what service do you operate? How do you buy raw materials? How do you produce the end result that you sell? How is your product bought and sold?
• A discussion on your company’s competitors, and what makes your company different
• Your reason(s) for selling the company
• Details of the premises you operate from. Are they owned, leased, or do you work from multiple locations?
• Details of any staff you employ and the details of their contracts
• Give an outline of your customer base. Include details of your typical customer and any key customers who are particularly important to the business.
• Illustrate the general financial health of the business by providing historic turnover and profit figures, details of the business’s assets, and any company debts or other liabilities.
• Give a projection for the business going forward, such as profit forecasts.
• Lay out your expectations regarding the selling price of the business, the terms of sale and desired time scales for completion.
The length and complexity of the information memorandum will largely depend on the size of your business and the amount you are likely to sell it for; a larger, more valuable company will often necessitate a longer and more detailed memorandum to be produced. At this stage you want to ensure you include enough information to present your business in the best possible light to maintain the interest of potential investors; however, you must also be careful not to divulge too much information which could be of use to your competitors. The distribution of this memorandum will typically be done following receipt of a signed non-disclosure agreement (NDA). This gives you legal protection against those in possession of the memorandum from distributing the information contained without your express prior permission.
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