Information Memorandum useful?

Is the Information Memorandum (IM) useful or overrated?

In this article I want to ask the question if the Information Memorandum is an useful or overrated document? This especially given the background that we see more and more business owners complain about high retainers. Business owners seem more reluctant to pay high daily fees or fixed amounts than 5 to 10 years ago. A retainer (a fixed, sometimes monthly, amount) is the compensation for the work done by an external advisor. A big piece of the work by an external advisor is to make a well written Information Memorandum.I am very interested to hear your thoughts and opinion on the, perceived, value of an Information Memorandum. Here are some of the questions I would like to ask:

  • Is an Information Memorandum always useful?
  • In which circumstances is an information Memorandum not required (or never)?
  • What if a seller doesn’t want to pay for making an IM?
  • What is the minimum required level of quality for an Information Memorandum?
  • Has the need for an Information Memorandum changed over time?
  • Is an IM needed if there is only a few buyers?
  • How large is the need for an IM if the buyers know the industry inside out?
Please leave your opinion on these questions about the usefulness of an Information Memorandum at the end of the document.

What is an Information Memorandum?

An Information Memorandum is a document that is used to give information to interested buyers during a business sale process. The Information Memorandum provides an overview of the company that is being offered for sale. Its main purpose is to provide information to potential buyers to allow them to get a better understanding of and opportunity to review the company. Based on the Information Memorandum buyers decide whether they want to progress with the business purchase.

Different names for an Information Memorandum

In practice we see many different names for an Information Memorandum. In the end it is a detailed document that describes the company and tries to answer most questions that will be asked by interested buyers. Possible names we come across in the market are:
  • Information Memorandum
  • Deal book
  • CIM (Confidential Information Memorandum)
  • Pitch book
  • Memorandum of sale
  • Company book
  • Confidential company paper
If you know of other names that are being used please leave them below as a comment.

What is described in an Information Memorandum?

An Information Memorandum is a document of between 10 and 200 pages (the size can differ significantly depending on who writes the document and the what the size is of the company for sale). All areas of the company should be described in detail. It should also be a kind of sales pitch that points to the synergies and opportunities for a qualified buyer. The information Memorandum can also describe the auction process including the proposed structure of the deal. Further, info can be given on the proposed timing and the required receipt of letters of intent or term sheets. These are the areas that are normally described in an Information Memorandum:

  • Company history
  • Reasons and background for the sale
  • Legal structure
  • Products and services the company provides
  • Operations (organizational structure) and premises
  • Type of clients and customer diversification
  • Sales and marketing section (sales figures by product line)
  • Detailed financials (last years accounts and normalized adjusted net profit)
  • People (key individuals, staff members and strength of management team)
  • The market and barriers to entry from competitors
  • Opportunities in the external market place
  • Future growth opportunities
  • Ability and plan to achieve future projections
  • Scalability of operations
In the Information Memorandum the advisor normally adds a disclaimer describing at least that a) the information has been prepared carefully but that the advisor can’t be held liable for expectations and outcomes which are based on the memorandum and, b) that the memorandum is not a prospectus and does not formulate an offer but is purely of an informative nature. A professional buyer will see a slick sales pitch directly and therefore drop out. Also, remember that a seller has an obligation to report material items or issues in a company. The objective of the memorandum of sale is to provide to the buyer all necessary information to form a good image of the company and to calculate an indicative value of the company.

How to prepare an Information Memorandum?

There should be an efficient and intensive cooperation between the people involved within the company for sale and the team of the external advisor. Selling a company is an important project and preparing an IM requires a high level of internal organisation at the company for sale. The best is for the business owner to appoint a small team or individuals in the main areas of the company (sales, operations, legal and finance) that provide the required information for the IM. If confidentiality is important, it can also be just a few people at corporate level (Business development, M&A, legal or the CFO). However, a seller needs to be aware that a business sale is a stressful and time consuming process for the people involved. Hence, adequate resources need to be assigned to the project. The final version of the IM should be reviewed by the owner and the members of the management team. After that the company for sale is ready to ‘go to market’.

Advantages of having an Information Memorandum (and disadvantages if you don’t have an Information Memorandum)

What happens if you don’t have an Information Memorandum when buyers ask for it? Will it make you look less professional? Are your changes lower to sell your company at a good value?The advantages for a seller can be numerous. The buyer wants to know in advance exactly what is being offered. For him or her the important questions must be answered immediately. He or she can then assess whether it makes sense to spend time on the acquisition. Further, an IM will eliminate similar questions from multiple buyers and hence save time. For the seller it will save on conversations with potential buyers that take time and therefore money. Lack of information always leads to questions, questions lead to more questions, and each question can rise mistrust. Ultimately, there is a lot of time and money spent without the desired result, the sale of the company.Having an IM prepared shows a clear commitment to buyers. Buyers know an Information Memorandum is normally costly and hence it proves to buyers that they are dealing with a committed seller. This is important as buyers can only spend their time on a few acquisition projects. Further, an Information Memorandum allows a seller to organize an auction which can be a way to increase the sales price of a company if there is a lot of interest. Without an Information Memorandum it will be more difficult for a seller to organize a structured process. A good sales memorandum will give a professional image of the seller.

Please provide your feedback and opinion on the usefulness of an Information Memorandum below.

  • Is an Information Memorandum always useful?
  • What if a seller doesn’t want to pay for making an IM?
  • Has the need for an Information Memorandum changed over time?
  • Is an Information Memorandum really required or can a business sale been done without it?
  • Is there a difference in the need for an IM between a relatively small SME and a large corporate?
  • What is the value added of an IM compared to very detailed company presentations and financial overviews?
  • What to do as an advisor when a business owner only wants to pay a very limited retainer?
  • Does the Information Memorandum need to differ between industry and size of business?

Leave your opinion on these questions about the usefulness of an Information Memorandum here below.


Comments

Giovanni Romeo, CFA | Tuesday 10 March 2015 | website:
I think the IM is always useful, at least to make understand the sale side advisor what is going to propose to the investors.

I think you should not advance with contacts with investors without having it already finalised.

Rgds,

Giovanni Romeo, CFA

Barkan Baybogan | Tuesday 10 March 2015 | website: www.bycapadvisors.com
A sales prospectus is always useful because of its' ability to gather up and present all the necessary and required info about the vendor. An IM is complimentary and the importance depends according to the degree of the assignment. Sale auctions obviously require preparation of more detailed IM. However, the cost of IM should determine accordingly the degree of effort for preparing an IM because preparation comprises a significant percentage of the advisory in the initial assignment.

Ward Vandecruys | Wednesday 11 March 2015 | website: www.vandecruys.be
An IM is a must. However the contents does not necessarily have to give a complete insight on the company for sale. I consider it as an introduction that should allow the potential buyer to decide on the opportunity offered and the suitability for him to continue the exchange of information and NOT as a base for the due diligence. IM is followed by specific question of that specific buyer. This method is more efficient than trying to put all possible information that all potential buyers may need in one document.

A seller never pays for the redaction of the IM but for my advice, guidance and expertise. Analyses and reporting (the IM) is only the concretization of these aspects. Added value by raising company value, cleaning-up what should not be included, straightening out what is known but not written, etc. If I do not bring more than I cost the case is not worthy to accept.

The form and contents of an IM changed since 1987. Contents was complete in these years and included stacks of paper, even the accounts of 10 years ago. Now it is a strategic document outlining strategic features of the business offered. Please read "business" and not company!

A deal can be done without an IM but the communication to the potential buyers will be very time consuming since it is you that will have to inform them about the strategic outlines of the business.

A large corporate has some more and bigger figures to communicate and possibly more businesses or markets. Communicating the strategy is the same effort for both.

You can hand detailled figures in any direction. The power of a good IM is the consensus of them all. A management dashboard.

As said my target is the commission, not the retainer fee ... although it is nice to have. So, I insist on a engagement/binding/responsibility of the seller. Never work without a retainer but willing to reduce it.

Over all industries the key information is the same: price, risk, roi, potential, proven track record, USP, .. The side information may however be differ by industry, not by size.

Brian Olsen | Tuesday 17 March 2015 | website: www.linkingeurope.com
I strongly believe in an Information Memorandum and associated teaser. The information can never stand alone but should give potential investors an in-depth overall knowledge of the company covering its idea, management, products, market, competitors, suppliers, outstanding issues and financials and probably several other issues pending the particular case.

This will form for the investor to establish the first overall impression and make a base for bids and conditions and for next steps forward. Basically said, this is the sales pitch for the company in a fierce competition from many kinds of companies.

Many owners do not believe in this (and thus reluctant to pay retainers as they do not understand this very important and comprehensive work). But they themselves has been successful by producing a superior product and/or services and been able to hire expert people to produce it and sell it to establish them on a market.

But often they fail to see that this is also needed for their company. They often think that the market knows their company (some competitors do of course but also not in detail) but many investor might not. But in my view paying a retainer for a fee shows and entails commitment and seriousness from both sides of the transaction and thus often results in success. Given the company is a fair opportunity for a fair price.

The above is written from the perspective for for small and medium sized companies.

TKO Miller | Tuesday 8 August 2017 | website: www.tkomiller.com
Thank you for the informative article! We've also written a blog post on how to construct a CIM that will set up a business sale for success. Read it here: https://www.tkomiller.com/blog/6-crucial-pieces-to-constructing-a-confidential-information-memorandum

Add comments

Email Name Website Message