What is a Confidential Information Memorandum (CIM)?
A Confidential Information Memorandum (CIM) is a document used in mergers and acquisitions to convey important information about a business that’s for sale including its operations, financial statements, management team, and other data to a prospective buyer.
This guide will break down all the various sections that are included in most CIMs and provide a downloadable template that can be edited to create your own CIM.
Who prepares the Offering Memorandum?
When any company goes through a sale process, it hires an investment banker or M&A advisory firm. The first step of the banker is to understand the company and gather as much information as possible from top management to come up with a profile the company.
The banker prepares the CIM and uses it as a marketing document, which is intended to make the company look attractive as the objective is “not just to sell, but to sell for maximum value.” The reason an investment banker tries to sell a company at the maximum value is because they represent the best interest of their client (the seller), and that their commission is based on the sale price.
Contents of a Confidential Information Memorandum
An example table of contents for an offering memorandum:
- Executive Summary
- Investment Thesis
- Overview of the Market
- Overview of the Target Company
- Products and Services
- Revenue Profile
- Employee Profile
- Customer Profile
- Financials – Historical and Projections
- Management Structure
Below a detailed analysis of each section…
#1 Executive Summary
This is a 1-2 page summary of the entire memorandum. It contains at least the following:
- Key Business Products and Service Offerings of the Company
- Financial Overview – Revenue, EBITDA Margins, Cash Flow, profitability
- The Nature of the Transaction
- Investment Rationale
#2 Investment Thesis
This section of the CIM contains the investment rationale in detail, i.e. why would the “target company” be a great fit for the acquirer. Typically, it may include the following (as hypothetical examples):
- The company acts as a platform for market entry and growth
- The kind of partnerships it has with leading players, providing best-in-class services and the opportunity to build on them for the acquirer
- Upside opportunity from process optimization, cross-selling, cost optimization, automation, etc.
- Blue chip clients and longstanding relationship with them
- Strong Order Book
- Experience of the management and strong capabilities in business expansion
- Strong position locally with an international foothold
- Potential for synergies
#3 Overview of the Market
It is imperative for the acquirer to know the market size and current market trends. It is the duty of the banker to give an overview of the market and make the company’s case stronger. The investment banker prepares the market overview from credible data sources, such as World Bank, Gartner, IDC, Forrester, Bloomberg, Reuters, etc. Credible sources provide reliability to the data points and help the acquirer to better understand the market and formulate the right strategy.
The overview of the market contains elements like:
- Market size
- Top players in various business segments
- The trend of various product lines
- Growth trends in the market and the driving factors behind them
- Mapping of the competitors with the “target’s ranking”
Sample slide of the market overview:
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#4 Overview of the Company
It contains basic details of the company such as:
- Year of establishment
- Company description
- Business segments and its capabilities
- Revenue, EBITDA and net income
- Employee details
- Customers, clients and users
- Place of headquarters with different office locations
- Recent news about the company
#5 Products and Services
This section contains a detailed analysis of the products and services offered by the company in its day to day business operations.
For the product categories, the company will include a list of the products it offers under various segments, the differentiating factors of the products, the target segment of each product, etc.
From a service perspective, it shows the company’s various service offerings, the capability of the company, the end-to-end process of the services it offers, revenue models such as Fixed Price projects or those based on Time and Material, etc.
Example of Service Capability:
#6 Revenue Profile
It shows the revenue profile of the company from different aspects, which is very important for the acquirer. It shows the revenue mix according to Geo, Product, Business Segments, etc. By showing the information in this manner, buyers can see where the major revenue comes from and if it is aligned with their business strategy.
An example of a Typical Revenue Profile:
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#7 Employee Profile
Segregation of the employees is shown so that buyer has a fair idea of existing personnel mix and can plan changes that will help them achieve cost optimization, or whatever strategy they plan to execute.
An employee profile can be shown in several ways, including by Function, Qualifications, Geography, Pyramid, etc.
It’s important to have full profiles on all the key employees.
#8 Customer Profile
For any acquirer, it would be important to know what kind of customers the company would be serving in future. Some of the popular questions the acquiring company would be interested in includes: Will the customers be large enterprise customers or too many small customers, years of relationship with the customers, revenue contribution from Top 5 or 10 customers, etc.
Representative Set of Customers:
#9 Financials – Historical & Projections
This is perhaps the most important section from a valuation perspective, as it gives a detailed analysis of the profit and loss account. It contains actual financial information from previous years, as well as financial projections by the management of the target company. The assumptions of such projections are also written so that the buyer understands the rationale for such projections.
Since the target company is preparing the projections, it will try to show the company in a very positive position and make it attractive in order to achieve a higher valuation.
Example of a Target Company’s Profit and Loss Account:
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#10 Management Structure
A brief profile about key personnel of the company, highlighting their role(s) in the company, years of experience, previous work experience, etc.
This section is extremely important, and also one of the most matter-of-fact sections. It typically includes each person’s photograph, name, title, and a multi-paragraph description of what they do, their background and their claim to fame.
An organizational chart may also be useful in this section to illustrate the hierarchy and reporting structure.
What a Confidential Information Memorandum is Not
As discussed above, a typical CIM will include all of the above information.
But what is also important is to know what it is not about. CIM is NOT:
- It’s NOT a Pitch Book. A Pitch Book contains the credentials of the banker (rather than Target) and is used by bankers as marketing material to solicit business.
- It is NOT a legally binding contract between the buyer and seller.
- It doesn’t contain any specific information on the exact valuation. The investment bankers don’t set the sale price at the CIM stage. Instead, they look for potential buyers to place bids and try to achieve the maximum valuation for the company.
CIM Case Study
In 2011, Google bought Motorola. So what was the kind of information Google received that it decided to purchase Motorola for a whopping $12.5 billion. These things, that are not known in the public domain but are very important for any company to know, contained in a document called a Confidential Information Memorandum (CIM).
In any M&A deal, once the buyer and seller enter into transaction mode, they sign a Non-Disclosure Agreement (NDA), which restricts either party from using confidential information they are supposed to receive through CIM. The information contained in the document is confidential as it gives a detailed insider financial analysis of the company, hence the document is called Confidential Information Memorandum (CIM) or Offering Memorandum or Information Memorandum (IM).
Confidential Information Memorandum Template
Here is a template you can download to get a basic idea of how an offering memorandum or confidential information memorandum is laid out.
This template is only for educational purposes only and should not be used or relied upon in any way for any other use.
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This has been a guide to how to write a confidential information memorandum (CIM). The downloadable MS Word Template would be a good illustration of the types of information included in an offering memorandum.
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