What Is a Confidential Information Memorandum?

A confidential information memorandum (CIM) is a marketing tool sellers use to attract the greatest number of prospective buyers and the highest sale price for a business.

It includes an in-depth description of the business with historical and projected financial information. Still, it stops short of providing many of the details a potential buyer will ultimately want to determine if the business is a good fit.

The idea behind a CIM is to show the small business in its best light without giving away too much information to anyone who might not be a serious buyer. Only after a potential buyer has reviewed the CIM and expressed interest do the buyer and seller meet for the first time.

A CIM might also be referred to as:

• an offering memorandum (OM)
• an offering
• a selling memorandum
• selling memo
• confidential description book
• a pitch book
• a private placement memorandum

What Information Is Included in a CIM?

A confidential information memorandum can be anywhere from 50 pages to as much as 150 pages long. It typically includes the following:

• an executive summary
• an overview of the company
• a discussion of the industry and market where the business operates
• a description of the products and services the company offers
• a profile of the customers the business serves
• the company's operational and technological capabilities
• historical financial information including revenue, net income, and EBITDA
• financial projections
• a description of the company's assets, including equipment, inventory, and intellectual property
• profiles of the management team and key employees
• a discussion of the outlook for growth

What Information Isn’t Included in a CIM?

Remember that releasing company information to buyers in stages is the cornerstone of protecting the confidentiality of the sales process and making sure sensitive information doesn’t fall into the wrong hands. Many of your business’s most sensitive documents should not be shared until you’ve received a letter of intent (LOI) from a buyer, the buyer has signed a non-disclosure agreement (NDA), and due diligence is underway. Some of the documents and information to leave out of a CIM include:

• tax returns
• customer lists
• trade secrets
• detailed financial statements, such as P&L statements
• certain contracts

It’s also important to note that it’s common practice in the to omit a business valuation or sale price from the CIM. Business brokers and M&A advisors hope to drive up the sale price by generating a lot of competition among buyers. Your situation might be different, and there might be occasions when including a business valuation in the CIM makes sense.

What Are the Advantages of Using a CIM to Sell Your Business?

Although the basic job of a CIM is to assist potential buyers, it can also have significant benefits for you, the seller. Here are a few of the ways a CIM can help sellers:

Helps achieve maximum value. If you’ve ever received a quote and gasped at the price, you know how important it can be to set the stage for an asking price. While a CIM doesn’t usually include a business valuation or sale price, it does establish the rationale behind the price of the target company by laying out all the ways in which the business can benefit a potential buyer.

Saves time. A CIM answers the buyers’ questions when they’re interested in acquiring a company. Without it, sellers have to spend many hours answering the same questions from numerous prospective buyers.

Identifies serious buyers. Just as it takes considerable time for sellers to prepare a CIM, reading one is also time consuming. The buyers willing to sift through all that information will likely have serious interest in buying your company.

Prepares sellers for the sales process. Before crafting a CIM, you’ll have to think through some of the more difficult questions buyers ask. The process of preparing a CIM allows you to formulate responses to questions such as, “Why are you selling the business?,” and “Why should a buyer want to acquire your business,” and offer the most compelling rationales and persuasive arguments to move a deal forward.

Where a CIM Fits in the Sales Process

Before beginning the sales process, you’ll need to find potential buyers by casting a wide net. In the case of sell-side M&A practices, the wide net is called a teaser.

A teaser is a much shorter document than a CIM. It typically omits the company name, so sellers can keep their anonymity at this early stage. It contains a description of the company, basic financial information such as annual revenue and cash flow, and a short discussion of the company’s growth potential.

A teaser offers just enough information to allow business brokers, and M&A advisors to gauge whether the business fits their clients’ broadly defined investment criteria. Buyers are typically looking to acquire businesses of a certain size and type, and a teaser allows them to determine whether the business meets their basic requirements without spending a lot of time and effort.

After receiving the teaser, interested buyers will ask to review the CIM. But while a teaser can weed out legitimate buyers who are not interested in buying your particular business, it won’t eliminate someone who is just kicking tires or a competitor who wants to get a closer look at how your business operates.

In some cases, sellers request proof of identity (such as a driver’s license), and they might research a buyer’s background and finances before sending a CIM.

In all cases, sellers should require buyers to sign an NDA before sending a CIM.

It’s a good idea to create a non-disclosure agreement tailored to the information contained in the CIM and use another agreement that includes the additional information disclosed during the due diligence process.

Should You Write Your Own CIM?

While you can find templates for the confidential information memorandum online, writing a CIM is best left to business brokers or M&A advisors. Preparing a CIM takes a lot of work. More important, brokers and M&A advisors have the experience needed to create a CIM that accomplishes the two most important goals of the effort:

• Attracting the greatest number of prospective buyers
• Conveying the highest value proposition

When crafting a CIM, it’s not enough to know every detail of your business. You also need an understanding of the types of potential buyers for the business and the ability to position the business’s attributes in a way that addresses the needs of those buyers.

Strategic buyers will have a different focus for evaluating a target company than will a private equity firm or a financial buyer.

Not only will a business broker or M&A advisor have access to a large buyer pool, but these professionals also have the expertise to write the confidential information memorandum in such a way that it appeals to the most likely buyers for the target company.

Conveying Value

Business broker and M&A specialists can use their understanding of different types of buyers to convey the highest valuation for the company. In addition to financial modeling that puts the company’s best foot forward, they can highlight and focus on the company features most important to the buyer your company is most likely to attract.

For example, as a seller, you might be very proud of the strategy you deployed to get a leg up on the competition and gain market share. Your approach would greatly interest a strategic buyer, but if the most likely buyer for your company were a financial buyer, focusing on your company’s financial metrics would be more persuasive.

Likewise, a private equity firm would be more interested in a business with high growth potential, and an investment professional would be best able to convey the company’s value to that buyer type by using credible sources to support projections about the market and trends.

The selling memorandum is a powerful marketing tool, outlining all aspects of your business and creating a lasting impression on potential buyers. To attract prospective buyers, visit the BizQuest Broker Directory to find a professional to help you prepare a confidential information memorandum to help sell your business.