Entrepreneurs and business owners spend years building their business — and often years before that dreaming of and planning for it. Every owner knows the journey it took, from the highs of launching the business or securing the first customer to the lows of meeting an early payroll liability or facing the uncertainties of the recent pandemic.
When it comes time to exit a business—an inevitable transition for every owner—the challenge of converting all those sweat, tears, and triumphs into a marketable format can be daunting. In addition to the company’s financial results, its investment thesis, operational excellence, and future upside are just a few of the many components that can support a strong level of interest from buyers.
One of the keys to selling any business is the “book” or Confidential Information Memorandum (CIM). The CIM is typically a slide presentation designed to tell the company’s story, its people, and its performance in a compelling way. A well-designed CIM will generate additional interest from potential buyers and, hopefully, lead to offers for the business.
Below are several factors that a transaction advisor should consider when developing a CIM:
The most obvious—and commonly referenced—aspect of a business’s marketability is an analysis of the recent financial results of the business, and in particular, the company’s EBITDA, or earnings before interest, taxes, depreciation, and amortization.
The financial results are prominently positioned in the CIM and showcase the seller’s performance after the underlying financial statements have been scrubbed to ensure that non-recurring transactions and expenses that may not be passed on to the buyer are “added back” to produce adjusted financials.
A CIM will include graphical depictions of these results, as well as profit margins, restated financial statements, and industry-specific metrics of the company’s performance.
Broadly speaking, the selling company’s appeal may be highlighted in an executive summary, an investment highlights section, or both.
In addition to purely outlining the financial performance of a business, buyers are often very interested in learning about the founding background, differentiated services, equipment or facilities, additional upside of the opportunity, and the desired transaction type or future plans of the sellers.
Importantly, a successful CIM will communicate this information concisely and in a way that reinforces the most valuable components of a company’s appeal—those which should be most interesting to ideal buyers. This can include images, graphical display of past performance, maps, or infographics of key performance indicators.
The business’s operational history and current activities that produce the company’s financial results can often be overlooked in a CIM or provided in a format that is unengaging and difficult to comprehend. In fact, the business summary can be the substance that supports buyers’ interest level and gives prospective buyers the confidence to move forward, believing that future performance will meet or exceed prior results.
Whether it be a timeline that outlines key stages in a company’s history or an assessment of other competitors in the market, the CIM should substantiate the claims in its investment highlights by showcasing impressive information about the seller’s customers, sales and marketing efforts, industry-specific information like safety records, and breakdowns of business line or CapEx spending. These and other customized slides can be differentiators that give potential buyers insight into synergies or resources of additional value.
A growing and profitable industry supports investment into businesses within that industry. Most buyers have investment criteria within which they must invest. As a result, most prospective buyers are very familiar with the expected performance of an industry. However, a strong CIM should further demonstrate the benefits to those potential buyers, and, for others who may be more industry-agnostic, a survey of the sector can bring additional competition into the sell-side process.
Many businesses are sold on the strength of their sellers, who are often entrepreneurs or founders with key insights, experience, or reputations within their regions or industries. For others, the lack of need for the owners’ involvement can be an equally compelling selling point. In preparing a winning CIM, it is important to provide pertinent information about the owners, whether they are key to the performance of the business—or not.
Similarly, the intangibles that contribute to a company’s success can be surprising in many cases or not well-understood. This can make the process of creating a customized book, or CIM, more of an art than a science. In some cases, those intangibles can be stated or listed. In others, the magic formula can be so impactful that its impact should be threaded throughout the presentation to highlight the importance or relevance to multiple value drivers.
As important as determining what to include in the CIM is identifying what not to include in the CIM. Owners have often poured far more into their businesses than can be communicated effectively or concisely, and there are invariably inputs that cannot be included in a meaningful way — or that contribute to the marketability of the business. As a third-party advisor, the investment banker tasked with delivering the CIM must strike the right balance between what is valuable as a first-order highlight and what should be omitted. These difficult decisions are critical for generating interest from targeted buyers.
The CIM, coupled with the corresponding Teaser, is intended to provide potential buyers with an enticing first impression to encourage those intrigued to investigate further. A successful CIM should be visually impressive and professional, customized to each seller’s uniqueness, and informative about the key value drivers that are important in the industry.
To learn more about the sell-side process or discuss what a CIM might include for your business or industry, reach out to one of our HORNE Capital team members. We can share insight and examples of a CIM that may give you additional confidence when planning for a successful exit for your business.
HORNE Capital is a FINRA-licensed, sell-side investment banking firm that offers financial advice on divestitures, mergers and acquisitions, and valuations for lower-to-middle-market companies. For more information or to discuss the opportunity to sell your business, visit www.hornecapital.com or email Neal Stephens at email@example.com.