The Importance of the Information Memorandum in a Sales Process
An Information Memorandum is one of the most important documents in the business sales process. It doubles up as the key marketing document used to generate interest in the business from prospective buyers and the key financial document used by them to value the business as a basis for submitting a non-binding indicative offer.
The Key Marketing Document
The buyer of a business is likely to be another business who is motivated to acquire it because it fits with their own corporate strategy. To market the business effectively to them, it is therefore important that the Information Memorandum clearly demonstrates all the strategic reasons why they might want to acquire it.
The sections of an Information Memorandum typically comprise:
The Executive Summary
Industry Overview
Business Overview
Management and Employees; and
Financials
The Executive Summary succinctly captures what the business does, the underpinnings of its success, the opportunities that will positively impact its future, the reason its owners wish to sell, its historic and forecast sales and profitability and a concluding list of Investment Highlights that presents all the key reasons that would make the business attractive to a buyer. If positioned correctly, then the strategic fit to potential acquirers of the business should be immediately apparent to the reader. This is important given it is typically time poor CEO’s or CFO who review the document. They are therefore unlikely to continue reading it if there is no interest once they’ve finished the Executive Summary.
The remaining sections of the Information Memorandum support the Executive Summary by containing all the details required to fully understand the business in the context of the industry in which it operates. Areas covered in these sections include:
There is a high likelihood that a CEO or CFO who has read the full document has seen a potential strategic fit with their company and will now be turning their mind towards valuing the business as a basis for submitting a non-binding indicative offer.
The Key Financial Document
Businesses are commonly valued by applying a multiple to a “normalised” measure of their earnings. It is therefore critical that:
the above sections of the Information Memorandum draw out all the aspects that add to the perceived quality of the business in the eyes of a buyer to maximise the multiple chosen; and
the Financials section accurately adjusts the business’ earnings so the multiple is applied against an accurate “normalised” measure of profitability being sold.
Examples of characteristics that enhance quality and valuation multiple include the business having:
market leadership in a high growth industry with high barriers to entry
sustainable competitive advantage, for example from exclusive distribution agreements, government licences, prime locations, firmly entrenched brands, switching costs, economies of scale etc
high customer diversification
recurring revenue streams
ease of scalability
talented leadership in the key roles that drive the business
a track record of successfully delivering strong sales and earnings growth
strong forecast sales and earnings growth supported by a clearly articulated strategy
The Morgan Shaw article “Why Having Accurate Financials is so Critical to Selling Your Business” (discusses the importance of preparing accurate financials and includes examples of adjustments that should be made to reported profit to generate a normalised measure of earnings for inclusion in the Information Memorandum.
The Information Memorandum is therefore key to the valuation and should be thoroughly reviewed for accuracy by the seller before being distributed to potential buyers. Notwithstanding it is also the key marketing document, embellishment should be avoided as mistakes uncovered down the track would tarnish the credibility of the seller and cause otherwise interested buyers to get cold feet.
Darren Shacknofsky, Head of Transaction Services, 4 September 2020