Mergers and acquisitions (M&As) are some of the most important transactions you can conduct as a business owner, and they can also be some of the most complicated. Of course, not all mergers and acquisitions are complicated, but when they are, it’s important to make sure you have all the information you need and that you’re providing all the information the other business needs to know as well. That’s where a CIM, or a confidential information memorandum, also just called a book, comes in.
A successful CIM is detailed but also offers the necessary information as clearly as possible. CIMs are also motivating, tell your business’s story, and should be designed to keep a potential buyer interested. Here’s how CIMs are used, what information should be included, and when creating a CIM is a good idea versus using other, potentially simpler, documents.
What do confidential information memorandums do?
There are a few key things that any CIM should do to be an effective tool for M&As. The 5 Cs of CIMs are:
- Compel your audience
- Convey the facts
- Communicate your story
- Calculate returns
- Capture credibility
Or, put another way, they should be interesting, offer the key reasons for a merger or acquisition, provide the key facts about your business and financials, explain why you’re credible, and provide your brand’s story and potential value.
If you think that sounds like a lot of work, you’re not wrong. CIMs can be large documents, and it’s important to make sure you aren’t just opening a firehose of information and hoping that the other party is ready for it. Instead, a good CIM offers information as needed in highly digestible formats while also telling two stories.
The first is the story of your business, how it got to where it is (in as positive a light as possible), and its value. The second story is the value of your business as part of a merger or acquisition, as the case may be, and what your business can bring to the table for the other company.
What are the advantages of having a CIM in M&A transactions?
Not every business needs a CIM. Smaller or more localized businesses might not need one, both because they don’t have as much information to convey as larger corporations and because potential buyers are more likely to be familiar with the business as is.
However, there are some key advantages to having a CIM if you’re running a larger business or have complicated financials.
- Having a CIM can give you a better understanding of your business and what you’re bringing to the table.
- CIMs save time communicating information and help minimize back-and-forth questions.
- You’ll feel better prepared for negotiations after preparing a CIM and will remember more specific information about your business.
- Having a CIM shows that you’re serious and could be a valuable partner.
- A CIM provides a clear statement of the value of your business.
Some businesses are only going to be interested in a merger or acquisition with a business that offers a good CIM, though the information in the CIM may not be the most important component here.
One of the most important advantages of having a CIM for M&A negotiations is that it proves that you’re serious and can also show how potentially valuable your business is in terms of the knowledge and skill you employ.
A business’s employees and skill set are every bit as much of an asset as the brand name or physical assets. By providing a high-quality CIM, you’re demonstrating skill, attention to detail, and how serious you are. You can also use a CIM to prove you understand the potential buyer and what value you bring them specifically, based on what kind of pitch you make and what version of your brand story you sell.
When do you need a CIM instead of a teaser profile?
Teasers are much shorter than CIMs, often 5–10 pages long, and provide key information without going into as much detail as a CIM.
A lot of the time, a teaser is all smaller businesses need, especially if you’re shopping for potential buyers without wanting to disclose what business you represent.
However, using a teaser doesn’t necessarily mean that you don’t need a CIM. Instead, think of your teaser as a pre-CIM for a larger or more complicated business. It’s only a replacement if you don’t need a CIM, either because you don’t have a lot of complicated information to provide or because the potential buyer is already familiar with the business you’re selling.
Teasers are a good opener that allows you to gather interested buyers without disclosing your business identity. CIMs are more important later in the process. Think of a CIM as the document that lands a sale, while your teaser is the flyer that gets interested buyers in the door.
What should I include in a CIM?
Creating a CIM can be complicated and takes a lot of time. That means that you want to be sure your CIM is as complete and informative as possible so you don’t have to go back and get more information and spend more time on business research and reports later on.
An incomplete CIM can also be a big red flag for potential buyers and can ruin good opportunities. Worse, you might not even know why a potential deal fell through since the other business might not communicate that your CIM was incomplete or poorly put together.
Creating a complete and informative confidential information memorandum is critical. Here’s how you do it and what information should be included.
CIMs are typically divided into eight specific sections. You can omit some of these sections, depending on your business and the potential buyers you’re courting, but you should always have a good reason for the omission. If you don’t, it’s better to include each section even if you aren’t providing much information there.
- Overview and highlights: Provide key information and a summary of the business and what information will be included in the CIM.
- Products and services: Cover all the products and services your business offers in detail.
- Market: Any potential buyer will want to know what markets you’ve already cultivated with your business. If you’ve been eyeing potential markets for expansion, you can also include that information here.
- Sales and marketing: Your sales data, existing marketing information, and how well you’ve cultivated brand awareness go here. Be honest, even if you haven’t done much marketing or don’t have a strong foothold. A wise buyer will recognize where there is potential to do better based on the information you provide.
- Management team: Profile your existing team, their skills and strengths, and what they have been in charge of. This is where you get an opportunity to argue for keeping your existing team through a merger or acquisition, so don’t skip it.
- Financial information and projections: Be detailed, and show performance over time and any projections you’ve done for your business in the future. This may be the most important part of your CIM. But the information you include should make the business look good.
- Risk factors (can skip in some cases): A wise business will always be interested in the risks they are taking on with a merger or acquisition. If there are serious risks, don’t undersell them. Most businesses will smell something fishy if the detailed risks seem unrealistic.
- Appendices
Remember, this isn’t a legally binding document or a contract. A good CIM is marketing your business to potential buyers. However, you aren’t pitching your business either. A CIM should outline how a buyer is going to get a good deal rather than doing the negotiation work.
Lastly, you’ll notice that your business valuation isn’t included in your CIM. Providing a valuation sets a price and a price range for potential bids. It’s better to present information about your business and see what potential buyers are willing to pay for it.
If CIMs are marketing, why do businesses trust them?
One of the most common questions from small business owners looking to sell their businesses is about the spin in a CIM. A good CIM is designed to present your business through rose-colored glasses, or in other words, to make it look as good as possible without outright lying.
The thing is, no business is going to make an offer to buy without doing its homework. Your CIM is more about getting the right businesses to the table and interested in doing the homework than it is about actually getting them to buy.
Optional additions to an effective CIM
While we’ve already outlined some of the most important parts of a CIM, some businesses may benefit from having a bit more information included in their CIMs.
Here are some additional sections you might want to consider, depending on what kind of business you’re selling and what businesses you’re trying to attract as potential buyers.
Investment thesis
This is where you really sell the business, and it can be customized to the specific buyer. Your investment thesis is all the core reasons why this business might want to merge with or acquire your business.
For example, if you think your business could be a good market entry for another company, offers process optimization or cross-selling opportunities, or attracts similar customers to their existing clients, you should include that here.
Synergies, a strong order history, or existing partner relationships can also be good details to include. Essentially anything that sweetens the pot for a specific potential buyer or type of buyer should go here.
Employee profile and management structure
Most of the time, a management team profile is sufficient, but in a smaller business or in an industry where employee skills are particularly important, you might want to include information about additional employees or the existing management structure and how it works. Basically, if you include this information, it’s because you want to show off the skills and expertise that already exist in your company and how your employees could be a specific asset to a buyer.
Customer profile
Most businesses are going to have a pretty good idea of your customer profile from the other information included in your CIM. However, if you’re attempting to sell to a company with a similar customer profile, highlighting the similarities by providing your customer profile can make it easier to land a deal. In this section, you’re looking for opportunities to say, “We have the same customer base. Consider how much value enhancement you get by adding our products and services to your company.”
Final thoughts
Not every business needs to have a CIM, but having one, especially a good CIM, can help you stand out from the pack as a small business. Think carefully about whether it’s worth the time and effort to put one together or hire a corporate lawyer to create one for you.
Remember, this is as much a sales pitch as an informational document. The most important things to include are what makes your business look good and specific ways your business is potentially appealing to a specific buyer. It’s probably better not to have a CIM than to have a bad one. But if you’re willing to put in the work, these documents are incredibly helpful when it’s time to sell your business.