Thursday, 18 October 2012
What Does a CIM Include and How Do You Position It?
C.I.M. stands for Confidential Information Memorandum and it is the main overview document provided in the private company divestiture or private placement financing process. A CIM is made available subsequent to signing an NDA and presents detailed company information as a basis for an indicative value discussion.
The CIM is typically prepared by the adviser and ranges from 40 to 100 pages. CIMs describe the nature of the business (i.e. products/services, strategy, differentiation, revenue model, etc.), its history, ownership, legal structure, suppliers, customers, competitors, market opportunities, management, growth prospects, and high level financial information such as historical revenues, EBITDA and a balance sheet. Customers, key suppliers and key management do not have to be identified by name. It is still important to protect competitive intelligence at this point as there will be only one successful buyer and the company should not be put in a position where its competitors have access to sensitive information about the company.
The reader of a CIM will be looking to better understand the value proposition of the company and to identify attributes that drive sustainable value. Some examples of questions to be addressed include:
- Has the seller transferred his/her relationships and know-how to ongoing management?
- Are the revenues of a recurring nature or project based?
- What are the key sustainable differentiators of the product or business model?
- Is the customer base diversified / is the business reliant on key suppliers?
A CIM must not over-promise or leave less than flattering facts out because it forms the basis of an expression of interest that may turn in to an LOI and, ultimately a purchase and sale agreement. Due diligence verification throughout this process will uncover all of the facts.
CIMs are different for early stage financings versus divestitures. In the former case, it is more like a business plan outlining intentions and how to achieve them whereas for a divestiture it is more of a description of the business and the market the company competes in. In the case of raising capital you need a detailed and logical use of funds explanation and this use of funds needs to generate a positive incremental return on investment. In the case of a divestiture it is not so black and white because, in my view you would only include a forecast if you expect it to be substantially different from past trends. If you have a strong historical growth record and you expect this to continue then it may be best to just provide an estimate to the end of the current fiscal year. This is because you don’t know what the buyer may be thinking and he/she may actually envision a future that includes leveraging its assets to construct a forecast that is much higher than what you would have prepared.
Should a CIM be written for the best buyer/investor? What I mean by this is, if there is a well capitalized large company acquiring businesses in your space, should the CIM be written to appeal directly to this potential buyer? My view is yes and no. Yes in that, you should exploit every angle to best position the company and no in the sense that you would do 90% of that anyway as you write the CIM to highlight sustainable value drivers. A CIM undoubtedly raises further questions, and this is a good thing because it allows advisors to engage potential buyers on the opportunity, add color, clarify any misunderstandings and strengthen the main selling points specific to that potential buyer. In short, create a two-way exchange of information and gain a better understanding of a buyer’s strategy which can be leveraged during negotiations.
In the end, a CIM is a marketing document and should present the business in its best light. There is an art to writing a good CIM. A good CIM provides all of the basic information plus it paints a rich picture of opportunities.
Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.