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 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 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.
Businesses are commonly valued by applying a multiple to a “normalised” measure of their earnings. It is therefore critical that:
Examples of characteristics that enhance quality and valuation multiple include the business having:
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
