4 Keys to the Perfect Confidential Investment Memorandum (CIM)
June 18, 2019
Sell-side advisors can sometimes overlook the basics when building a CIM or pitchbook. Here's our take on what matters most after working with hundreds of M&A professionals.
While each company conducting an M&A process is different, most CIMs follow a structure that is expected by professional buyers. For seasoned sell-side advisors like those that work with Captarget, we thought it would be worthwhile to review what really matters when creating a CIM based on our experience of what works.
Sure, there will be formatting or presentation differences for different advisors. But the fundamental coverage and information presented follows a consistent structure. By sticking to this structure and maintaining a simple, professional tone, you will create a CIM (or “pitchbook”) that assists your process instead of impeding it.
For help creating your next CIM, reach out to our 100% on-shore team via our M&A services page here.
1. The Typical Structure Buyers Expect to Find
Professional buyers have come to expect a certain layout and order to the contents of confidential investment memorandums. In our experience, it’s best to stick to what buyers expect.
Typically, the typical CIM structure consists of a minimum of 17 coverage areas, each explaining a different part of the opportunity, company or transaction.
These are as follows:
-Business overview or executive summary
-Strategic considerations specific to the technology, company position etc.
-Expansion and growth opportunities include market analysis
-Sales and customer information
-Products and/or services overview
-Ownership details, cap table details
-Management and employees
-Financial information summary
-Financial statements/Financial modeling
These selling documents always start with the presentation of an Executive Summary, which highlights the transaction at hand and summarizes the main selling points and high-level areas of interest needed to orient to the opportunity.
Strategic Consideration Coverage can vary on how the opportunity is being presented and to who. Strategic buyers may value the company being presented differently than a pure financial buyer, for example.
It is important early on in the presentation process to ensure that the possible buyer understands what drives value for the company, why it is unique and how it is positioned in the context of a competitive marketplace.
The Transactional Overview section is generally a technical summary of the desired transaction. However, it is important to note that most middle market M&A transactions are considered ‘negotiated transactions’ meaning they are not necessarily bought based on a price tag or set of ridged terms. That said, the transactional overview is good context to create some shape to a conversation about how a deal can get done, but unlike a public offering or larger deal, these are not typically make or break terms or structures.
From here, the typical CIM turns more to address the operations, structure and trajectory of the business.
The Products and Services section discusses what the business offers to its consumers, whether it's B2C or B2B. Markets and Customers speaks to the type of niche audience the company caters to and its success in doing so.
While these sections may seem basic and self-explanatory, they are integral to beginning to flesh out the “story” of the business in question. (We’ll talk more about the importance of story, below.)
Next, Operations and Human Resources add to the story about the internal workings of a company and Growth Opportunity outlines the potential successes the company can achieve in the future.
Financial Information is a must because it shows how profitable a business is along with how much debt it carries, which can be a hindrance.
The remainder of the CIM structure is typically dedicated to presentation of industry information and company financials. This allows for the detailed company information to be presented in the context of the broader market and ultimately should support claims about the trajectory of the business which should then be proven by any financial information presented. The presentation of financials varies greatly depending on the transaction type and may range from simple historical income statements, balance sheets and cash flow statements to more complicated pro forma business models.
2. A Focus on the Most Important Information (Including Financials)
It is only one of the many focus areas mentioned above, but the most important information included in a CIM is arguably the financials – the data that's going to drive the sale and/or investment.
Ask any professional buyer of businesses or investor what section of a CIM they frequent most and nearly all will say they read the executive summary and the financials. Only then do they decide to commit significant time to understand the more nuanced elements of the business ownership and operations.
For years, financials were presented as an Appendix to the story, or even as a supplementary document. Modern CIMs should present financial information as part of a story line, not as an afterthought. Attention should be paid to the presentation of financials while still being sure to include working sheets with all non-presentation specific supporting documentation.
Although financials are often included towards the end of a CIM, know note they the importance of this information is paramount. After all, most middle market M&A transactions are valued based on EBITDA, net income or something similar instead of growth potential, market conditions etc.
3. Tell a Story
The most important thing that a CIM does is tell a story. Period.
Whether it's a positive or negative story all depends on how well the investment advisor does their research and how well they extrapolate the information. The narrative is created through careful evaluation and consultation with management. Oftentimes, it's written and rewritten until the narrative is absolutely perfect and designed to have maximum impact.
Remember – CIMs are not just presentations of technical information. They are used to tell a story about an opportunity that the buyer didn’t know existed until that moment. Additionally, CIMs do not need to answer every question a buyer could have.
Quite the contrary, they should insight a buyer to ask more, well informed questions. Taking this approach can help ensure that your CIMs are not too technical and not too long.
4. An Honest Look at the Business
The most important thing that a company can do is offer an honest look at the business. Outlining areas of both strength and weakness let investors and buyers know where they need to put the work in, and whether it's doable. While we can all agree that CIMs are selling documents, taking an approach where weaknesses are hidden or the entire story is not told only creates distrust early on in an already technical and often difficult process.
Consider your audience as you tell your client’s story. What do they value most in an opportunity? How do they communicate? Use this to drive how you present the information without blurring the lines into ‘pitching’ too hard.
How Captarget Makes the Confidential Investment Memorandum (or CIM) Process Easy
Captarget makes the CIM process easy for business owners and M&A professionals looking to sell all or part of their (or their client’s) business by providing the expert staff, tooling and experience needed to present the opportunity in the context of industry best practices. It is our job to dig through and digest all the information, package it into a professional selling document and provide critical feedback along the way.
Having access to a team of analysts who have developed a significant volume of CIMs over nearly a decade makes the process better, faster, simpler and less expensive.
While working with our team, clients no longer have to wonder what or how to say what is needed to communicate with buyers and instead can focus on all the other necessary elements of a business sale.
Explore our services on our M&A Services page.