CIM

THE PERFECT CIM (CONFIDENTIAL INFORMATION MEMORANDUM)

By Ryan Kuhn. A Harvard MBA, Ryan founded M&A advisor Kuhn Capital 35 years ago. Since then, the firm’s principals have initiated hundreds of high-IP mid-market M&A transactions together worth more than $3 billion.

Introduction

Before investment banks (aka IBs, M&A advisors, or just “bankers”) take their sellside client to market, they spend about three months preparing a Confidential Information Memorandum, or “CIM” that describes the opportunity to potential buyers.1For what else investment bankers do in those three months, see my How Do Investment Bankers Sell a Company? and Which to Use – Investment Banker or Business Broker?)

Why does pulling together a CIM take three months, why is it worth spending that much time on it, and what does the perfect CIM look like?

What Is a CIM in M&A?

CIMs are the first detailed portrait of a company for sale that a prospective buyer sees.

What CIMS Are For

As they say, you only get one shot at a first impression. To this end, the ideal CIM has a number of purposes. Among them are:

  • To describe the company and its circumstances concisely yet comprehensively.
  • To answer the key questions that most buyers will have, cutting back on tiresome, duplicative back-and-forth Q&A.
  • To provide data subsequently boiled down into a two-page anonymized teaser that introduces the target to buyers and who — if they’re interested and qualified – the banker invites to sign a non-disclosure agreement (NDA) as a condition of obtaining a CIM.
  • To — by its appearance — signal a professional approach to the M&A process.
  • To present the seller in an attractive but fair light.
  • To create an atmosphere of openness, one conducive to trust.
  • To assure confidentially by dint of the fact that it’s only distributed to buyers that the banker has vetted and that have signed an NDA.
  • To push banker and seller through a methodical internal due diligence checklist to catch issues that can either be resolved before going to market or must be disclosed to buyers.

What’s in a CIM

Subjects Covered

To accomplish these purposes, the perfect CIM covers the following topics about the target company:

TOPICS COVERED IN A CIM
1) History2) Products/Services3) Market
4) Marketing/Sales5) Customers6) Employees & Organization
7) Operations8) Industry & Competition9) Intellectual property
10) Corporate, Tax & Legal Matters11) Growth Sources12) Financial Performance
13) Projected Financial Performance14) Appendices

Subjects Not Covered

Bankers don’t usually include in CIMs details about the M&A process like the due date for letters of intent (LOIs), contact info for deal personnel, highly sensitive information (like employee personal data, supplier and client identities, etc.) M&A team due diligence task assignments, project “rules of the road” and valuation arguments.

To get more specific about what is in an M&A CIM, see below a Table of Contents we recently wrote:

SAMPLE CIM TABLE OF CONTENTS
Chapter Sections
I. SummaryBackground
Transaction Objective & Acquisition Rationale
Market
Clients
Competition
Sales & Marketing
Operations
Know-How/Intellectual Property
Organization
Financial Performance
II. History & BackgroundTimeline of Key Events
Business Model
Job Types
Corporate Structure
III. MarketMarket Size
Growth
Characteristics
Key Trends
IV. ClientsIntroduction
Exhibits:
Sales Value per Client Steadily Rising
Client Size Growing
Gross Margins Widening
Strong Client Loyalty
Clients Diversified Across Industries
Low Client Concentration
Summary
V. CompetitionTypes of Competitors
Bases of Competition
Frequent Competitors
VI. Sales & MarketingTarget Markets
Sales Channels
Pricing
Promotion & Advertising
VII. OperationsOverview
Facilities
Production Processes
VIII. Intellectual PropertyCertifications
Proprietary Data & Processes
Other IP
Technology
Proprietary Software
IX. OrganizationOrg Chart
Admin, QC & Engineering
Marketing/Sales
Project Management
Key Manager’s Biographies
Workforce Characteristics
Benefits
X. Financial PerformanceHistorical Trends
Compared to Industry Peers
Key Metrics Overview
Pro Forma
AppendicesDetailed Financial Statements
Sample Marketing Materials
Trade Articles & PR
Certifications

Length

For mid-market companies, we typically compile M&A CIMs about 60 pages long, though more recently we’ve been using lively graphics in place of words whenever possible.

On the other hand, we’ve published CIMs over 100 pages long for companies with multiple operating divisions.

The Table of Contents Explained

Summary

The CIM’s first section, the Summary (or “Executive Summary” for the title-conscious) provides a snapshot of the business, highlighting key points designed to capture the interest of potential buyers:

1) Company Overview

A brief introduction to the business, including its history, mission, and vision.

2) Market Opportunity

An outline of the market size, growth potential, and competitive landscape.

3) Financial Highlights

Summary of key financial metrics such as revenue, profitability, and growth trends.

4) Investment Thesis

Explanation of why the business is a good investment opportunity, including its unique selling points and strategic advantages. The banker may modify this and other sections to better fit the perceived strategy of the CIM recipient.

5) Transaction Objective and Acquisition Rationale

Why the owners are considering a sale, the ideal acquirer and transaction structure.

6) About the Business

This section delves deep into company operations with examinations of its products, services and business model.

  A) Products and Services

Description of the company’s offerings, including their features, benefits, and target markets.

  B) Business Modelbusiness model

Explanation of how the company generates revenue, including its revenue streams and pricing strategy.

  C) Operational Structure

Review of the company’s org chart: descriptions of department functions, department manager titles, headcounts, reporting relationships, etc,

  D) Locations and Facilities

Details on offices and plants, infrastructure, age, uses, leases, etc.

  E) Market/Client Analysis

Thorough market and client analysis are necessary to demonstrate the company’s understanding of its industry and competitive environment.

7) Industry Overview

Detailed analysis of the industry, including current trends, growth drivers, and regulatory environment.

8) Competitive Landscapecompetition

Identification of major competitors, their market positions, and competitive strategies.

9) Target Market

Description of the company’s clients and target customers, including demographics, preferences, and buying behavior. This section is where the seller can showcase its intimate knowledge of who it serves by slicing and dicing data on them multiple ways. Example: revenue/margin over time by:

  • Location
  • Client Size
  • SIC/NAICS
  • Product/Service
  • Year Client Acquired (“Class Year”)
  • Etc.

10) Market Positioning

How the company differentiates itself from competitors.

11) Management Team

Detailed profiles of key executives including their backgrounds, experience, and roles within the company.

12) Org Chart with Brief Job Descriptions

Overview of the company’s HR structure by department, headcount and function.

13) Advisors and Board Members

Information about any external advisors or board members who contribute to the company’s technical, tactical or strategic directions.

14) Financial Information

A detailed look at the company’s financial performance and projections.

  A) Historical Financials

Presentation of past performance, including income statements, balance sheets, and cash flow statements.

  B) Financial Projections

Forecasts of future performance, including revenue, expenses, and profitability projections. These projections should interface seamlessly with the last period of actual performance. In addition, the financial model must clearly explain its drivers and assumptions.

  C) Key Metrics

Analysis of important financial ratios and metrics, such as net working capital (NWC), EBITDA, gross margin, and ROE, ROE, ROA, etc. Also valuable is a comparison of these indices with industry-wide performance.

  D) Capital Structure & Equity Ownership

Overview of the company’s equity account (along with who owns what in the “cap table”) and long-term debt. For descriptions of financial and other terms specific to sellside transactions, see my Founder’s Guide to M&A and Fund-Raising Terms.

15) Growth Strategy

While financial projections are informative, buyers need to put flesh on the bones with descriptions of how the company plans to grow (or keep growing):

  A) Expansion Plans

New product launches and markets.

Overview of the company’s marketing strategy, tactics and novel approaches to growth.

  B) R&D

Information about ongoing and planned R&D activities and their expected impact on the business.

  C) Strategic Partnershipspartnership

Description of any existing or potential strategic partnerships and alliances.

16) Appendices

The appendices provide supplementary information that supports the content of the CIM’s preceding sections.

  • Detailed Financial Statements
  • Important Legal Documents (employee contracts, NDAs, licenses including those for IP, etc.
  • Independent Market Research that supports the CIM’s market analysis.
  • Sample Marketing Materials
  • Any Other Relevant Information that helps buyers make informed decisions.

Avoid These Common CIM Pitfalls

1) Hockey Stick Projections

While it’s important to present a positive outlook, unrealistic projections raise red flags and suspicions that the seller’s value expectations may also be unreasonable. Ensure financial projections are realistic and based on sound assumptions.

2) Lack of Detail

A fuzzy CIM may leave potential buyers with more questions than answers. Provide concrete data that addresses all critical aspects of the business.

3) Ignoring Risks

Failing to disclose material risks can severely damage trust and credibility. Be transparent and explain how such risks can or will be managed.

4) Inconsistent Information

Ensure consistency throughout. Conflicting information creates confusion and doubts, and implies sloppy due diligence.

5) Uninspiring, Incomplete Summary

As the first section that readers see, the summary ought to be crisply compelling.

Conclusion

Put yourself in the buyer’s shoes. What you want to know is everything relevant to the target’s past and future, operations, value and strategic fit.

And no more.

At the end of the day, the seller is responsible for the quality of what buyers see and learn. Many larger investment banks traditionally assign their most junior staff to CIM writing and financial analyses, leaving senior managers to handle negotiations and rainmaking.

Therefore, caveat emptor: confirm that experienced bankers are actively involved in your CIM’s composition and that the end product is accurate and persuasive.

In sum, there may be no better measure of an investment bank’s quality and customer service than its CIMs.

And nothing dispels the impression of professionalism quicker than finding misspellings, sloppy grammar and wrong or missing critical data in it. A badly written CIM can blow up deals. (For other ways that sellers do that, see our Top 5 Ways Business Owners Kill M&A Deals.)

Instead, a presentation of the facts with clean formatting, liberal use of impactful graphics and concise expression sets the stage for productive negotiations.


© 2024 Kuhn Capital, Inc. All Rights Reserved

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Ryan Kuhn

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07/03/24

Ryan Kuhn is the founder of Kuhn Capital (bio). This article is not the product of AI. AI is a product of this article.