The Confidential Information Memorandum, or CIM, is widely used as a marketing tool when raising debt or equity capital, selling healthy or distressed businesses or refinancing existing debt.
A CIM is like the big brother to a one-page investor summary, or the more commonly used term, teaser. Colloquially, a CIM is also often referred to as a book for the simple fact that it can be voluminous, detailed, dense and descriptive.
Well-prepared CIMs used in successful transactions tend to share some key characteristics. By establishing the purpose of a CIM and identifying best practices for creating one, you can better introduce an opportunity.
Identifying if a CIM is necessary
The truth is that CIMs are not necessary for every transaction.
CIMs tend to be most valuable in larger, more complex transactions with multiple, sophisticated stakeholders (private equity or venture capital funds, investment bankers or senior lenders, for example).
In the case of the sale of a single-store corner bakery to a competing family business in the same neighborhood, it may be sufficient to first only circulate a teaser and then, once the buyer signs an NDA, facilitate the financial due diligence by providing financial reports and other financial information (bank statements, tax returns and payroll records, for example).
Aside from potentially being less cost-effective, a full-blown CIM is just not as efficient to a local, competing family-owned bakery buyer as it is to a sophisticated financial investor like a private equity fund that may need to review and understand 5, 10 or 50 other opportunities.
It, therefore, goes without saying that, in this latter case, the need to present a value proposition neatly and concisely is paramount.
Creating a successful CIM
Some leaders may argue that no one buys a company off the CIM alone. Though this statement holds truth, like everything that is gray—transactions included—it’s all about identifying the winning formula. A CIM alone might not get you to the finish line, but a poorly prepared CIM can leave you stuck in the blocks a long time after the starting pistol sounds.
A CIM may not enable you to close the deal within an hour of sending it to your list of buyers, lenders or investors, but you might stand a better chance if it bears some of the hallmarks of the “5 Cs”:
- Compel the audience
- Convey the facts
- Communicate the story
- Calculate the returns
- Capture credibility
The CIM is not meant to close the deal for you—it is meant to provide enough salient details to entice key interested parties to engage in the transaction process.
- Compel the audience
Nobody likes a novel that takes 250 pages to get to the first car chase or before the protagonist is introduced. In a similar vein, the best CIMs are those injected with creative flare and staying power, especially in the sections that are key to a buyer, lender or investor.
To compel a buyer, lender or investor and capture their attention, alternative ways of presenting data can be explored, such as a pie chart vs. a bar chart, a table vs. a list and color-coding vs. black and white. It is advisable to avoid lines and lines of text, which can cause the reader’s attention to drift.
Although much effort was likely spent gathering data for the CIM, that doesn’t mean everyone will read it all. A compelling CIM presents key messages from a detailed dataset clearly and concisely with brief takeaway commentary.
If the additional detail adds value, it needn’t be wasted and can be referenced in the Appendix. The detail-oriented buyers, lenders or investors will likely devour that while at the same time keeping the others engaged.
- Convey the facts
Most good quality CIMs are trackable from pre-transaction through to closing. This means that there were no big surprises between the story that the CIM put forward and what was discovered in diligence.
Of course, matters can arise that aren’t disclosed in the CIM, such as granular details of pending litigation, detailed organizational charts or specifics of intellectual property, for example.
Although the CIM is not a binding contract, if it omits key facts which a potential buyer discovers during diligence, it stands to waste a lot of the buyer’s, lender’s, investor’s and deal team’s time. Once discovered, the potential buyer, lender or investor may lose confidence and abandon further diligence.
Similarly, key facts should be key facts. In most cases, management is very knowledgeable about the business and market. However, including excessive embellishments from management or other experts’ opinions can appear biased. Too many management assertions may put off potential buyers, lenders or investors.
Stick to the facts and ensure they can be supported by reliable data.
- Communicate the story
A disjointed story and a CIM that doesn’t enable the potential buyer, lender or investor to “connect the dots” is a sure way to confuse the audience.
As they say, “the past is the past” and, in the words of Terry Pratchett:
“You do not know where you come from, then you don’t know where you are, and if you don’t know where you are, then you don’t know where you’re going. And if you don’t know where you’re going, you’re probably going wrong.”
This may be true of a company trying to sell—especially if it has a history of distress.
Buyers, lenders or investors will likely want to understand not only the key events that impacted the business, but more importantly, how the incumbent management team reacted to and dealt with them.
For example, consider the purchase of a 500,000 square foot warehouse. Was it purchased because of a market hunch, resulting in wasted space, drain on cash and business disruption? Or was it a carefully researched growth opportunity made to minimize risk with a lease vs. buy analysis undertaken before pulling the trigger?
Telling the story also helps the potential buyers, lenders or investors determine the stage of the business. Early-stage distress? Emerging from a well-executed turnaround plan? Maturing and in need of new ownership and fresh capital? Prime for a bolt-on by a larger strategic?
A CIM should answer the question of “so what?”. A company that knows its business can generate a compelling storyline. A common trait of CIM commentary is that statements are made but not explained, which lets the mind of the buyer, lender or investor wander—and sometimes think the worst.
If a CIM makes statements such as “revenue increased 5% last year but declined 20% in the last twelve months” then it should not only say why but also explain the importance of this movement or trend for the potential new owner, especially if it is a distressed situation.
If a robust storyline of value creation can be communicated in a CIM, it can help prequalify the potential buyer, lender or investor for the opportunity, contributing to a more productive and streamlined sale process.
- Calculate the returns
To strive for an optimal price, CIMs do not usually include the target’s view of valuation. However, valuation is important to the buyer, lender or investor, and is often one of the most crucial factors in deciding to pursue an opportunity.
So while it may not always be wise to include a valuation analysis, successful CIMs provide the buyer, lender or investor with sufficient information to enable them to benchmark their required return. This helps prequalify the buyer, lender or investor because without a possible return within its mandated range, they are unlikely to proceed with the opportunity, and no time is wasted.
In practice, financials may be presented in the CIM that include the pre- and post-deal capital structure, adjusted EBITDA (including details of the adjustments) and sufficient description of items such as the target company’s operations, products and locations, so that the potential buyer can run its own valuation analysis.
This might be illustrated in a situation whereby a private equity group’s criterion is to invest equity against a maximum leverage of 5x EBITDA, and the post-deal capital structure and valuation suggest that the purchase price may require leverage of 9x EBITDA, or more equity. This could be a deal breaker, and knowing this early can help save everyone’s time.
However, if the CIM excels on the other 4 “Cs” and the buyer, lender or investor really likes the opportunity, it may compel the more flexible of potentially interested parties to find a way to make the deal work despite the financial situation.
- Capture credibility
Credible CIMs contain all the things discussed in the other “Cs.” However, there are several other ways to enhance a CIM’s credibility.
Awards and accolades are a fundamental way to demonstrate the credibility of a target. If the target business was recently awarded a “top industry player” award or recognized as best in class in its field, these should be included. Similarly, other third-party recognition can be powerful.
For many CIMs, building credibility is easier with non-financial content than it is with financial content.
It is monumentally important to build credibility around the financials of a target company because sophisticated potential buyers, lenders or investors will likely: a) only read the financials in detail; and b) be extremely knowledgeable about the industry, key events impacting supply and demand, risks and opportunities, or lack thereof. This is especially applicable to strategic buyers.
If the financials in a CIM do not reflect the story being told or are not developed using sound assumptions, then this can detract from the potential buyer, lender or investor’s appetite for the deal.
Optimism is fine, but realism is better. Management teams can be eternally optimistic, and so they should be—they are running a business with multiple challenges and daily hurdles to surmount, including motivating a dedicated team. Plus, they possess deep knowledge of the business and therefore are a valuable resource when building or preparing projections. However, it’s the advisor’s job to keep them honest and kick the tires on material assumptions that cannot be supported by run rates or contracts, for example.
Most potential buyers, lenders or investors will automatically discount management’s projections significantly. However, if robust, rational and reliable assumptions have been applied, discounting will be more difficult for them and the CIM is likely to be more engaging and credible. Of course, the potential returns must be realistic in the first place.
A specific piece of guidance on this is: no hockey sticks. Too often, a CIM contains five years of historical flat (or worse, declining) revenue and profit results, only to be followed by a “hockey stick” shaped revenue and profit curve with an accompanying note along the lines of “market growth because of ‘a’ which is going to produce ‘x’ in additional sales.” This is not credible.
A credible CIM includes evidence of relevant analysis around the financials—for example, historical growth run rates, marketing plans, ROIs, new business wins, new product development, key new hires, new contracts won or tangible pipeline opportunities.
Upon close inspection, there are always data points to support projected assumptions. If it adds value, consider including it as an Appendix.
The quality of a CIM can be enhanced if it uses compelling design features and builds credibility with the audience by developing a consistent story. This story should demonstrate the skills and experience of the management team, allowing them to successfully tackle historical and future challenges and opportunities, as well as communicate the uniqueness of the target’s products and market and achievable near-term goals.
A CIM with these characteristics, underpinned by realistic financial projections and backed by assumptions that can be supported, should help position you closer to the finish line every time.
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Restructuring and turnaround services within the United States are offered through BDO Consulting Group, LLC, a separate legal entity and affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm. Certain restructuring and turnaround services may not be available to attest clients of BDO USA under the rules and regulations of public accounting.
Nick Welch is a Director with BDO Consulting Group’s Business Restructuring and Turnaround Services practice and is based in Miami. He has 20 years of finance experience and for the last nine years has advised lenders and management teams on numerous restructuring and transaction situations. Nick’s industry experience spans retail, leisure and hospitality, healthcare, renewable energy and fintech in the U.S. and Europe.
Nick Welch, BFP FCA, FMAAT
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