In a recent article, DealRoom provided an overview of the information memorandum, and its importance to the fundraising process.
Here, we go one step further and talk about how M&A information memorandums should be written, as well as providing a sample.
Just as with an investment memorandum, an M&A information memorandum.
Who prepares the M&A information memorandum?
Typically, larger firms will hire a third party (an investment bank or legal firm) specialized in M&A marketing materials to write their information memorandum.
However, this isn’t a prerequisite, and firms always have the option to write their own IM.
Business owners should be aware, however, that poorly executed information memorandums will reflect badly on the company, so the document needs to reach high standards whoever is tasked with writing it.
Characteristics of a good M&A information memorandum
From the buyer’s perspective a ‘good’ M&A information memorandum is one that describes a company that they feel compelled to acquire.
However, the information memorandum should possess several characteristics before this can happen:
- Well-written: The IM should be well-written. Sloppy or flowery language are the hallmarks of amateurish information memorandums and are an instant turn-off for investors. If the company’s managemetn cannot provide a well-written document, what are the chances that they can run a well functioning company?
- Well-presented: In the same vein as the previous bullet point, the presentation of the document is paramount. While the medium isn’t the message, it should still convery professionalism. A professional designer for an information memorandum does not cost much, but can add significant value to a document used to sell a business.
- Informative: The purpose of the M&A information memorandum is to sell the company, and that will only happen if the buyer receives relevant information. Remind yourself about the time you wrote essays and used paper writing service to help you gathering information from various sources and presenting it in a clear and concise manner. Similar to that work the M&A IM document should seek to tell them, in very clear terms, why acquiring the company makes sense at the price being proposed by the seller.
- Transparent: An information memorandum which is dishonest (and that means lack of transparency, not just outright lying), will not only force buyers to reject a transaction, but will also create a bad image of the company in industry circles. Ultimately, nobody – buyers, intermediaries, suppliers or clients – wants to deal with a bad faith actor.
- Realistic: Entrepreneurial enthusiasm can easily brim over into hubris. When writing an M&A IM, be sure to avoid the pitfall of exaggerating the company’s potential. When a memorandum states that a company is ready to become a billion-dollar enterprise, the first question buyers will ask is: “If that’s the case, why are you selling it?”
What should be included in an M&A investment memorandum?
As stated above, the aim of the M&A investment memorandum is to sell the business.
Hence, whatever you believe will incentivize buyers to make a bid for the company (staying with the boundaries of honesty and realism), should be included.
Most information memorandums will include 5-10 chapter headings, which include the following:
- Legal Disclaimer: M&A information memorandums should always have a legal disclaimer at the outset, which describes how the document attempts to be as honest as possible, and that the company cannot face litigation if any of the contents turn out to be erroneous.
- Executive Summary: If the reader is only casually interested in acquiring the business, there’s a good chance they’ll only read the executive summary, a 1-3 page summary of the rest of the document at the front. It should be concise enough to be ready quickly and still include all of the key points.
- Business Outline: This section answers in detail what the company does. It can include subsections on the company’s products, services, or intellectual property. The temptation here is to overdescribe the business and its offering. If it’s a straightforward offering, don’t complicate things: make everything easily understandable to the reader.
- Market/Industry Overview: The market is within the company’s direct reach – its direct competitors, local market, and its dynamics; the industry is the bigger picture – at a national and possibly international level. Concise overviews should be provided for both, along with their prospects for the coming 3-5 years.
- Management Overview: This section should only include the members of management that the buyer will acquire once the transaction closes. It can also include details of the owner-manager’s willingness to stay on for an extended period after the transaction closes. Brief resumes should be included for each.
- Business Model: How does the company transform investor funds into cash? This section makes it clear how the company functions and will continue to function after the transaction. This is sometimes referred to as ‘operational overview.’ It can also allude to the company strategy.
- Sales and Marketing: This section should allude to how effective the company’s sales and marketing efforts are. What is the conversion rate for buyers in the company’s sales funnel? The effectiveness of the company’s sales and marketing department indicates how increased investment in this area can generate higher revenues.
- Financial Overview: At a minimum, the financial statements – ideally audited by a well-known auditor – should include an income statement, cash flow statement, and balance sheet for the previous three years. Proforma financial statements are a value additive for potential buyers.
The one-page teaser
Before sending the M&A information memorandum to potential buyers, it is customary to send them a one-page teaser.
This document, usually sent by an intermediary, is a non-confidential summary of the M&A information memorandum. It should whet the buyer’s appetite for the transaction, without giving away sensitive information about the firm.
Those that respond with interest can be assessed on their suitability for a transaction and sent a confidentiality agreement before the M&A investment memorandum.
Almost every M&A sale process begins with the creation of an M&A information memorandum. Although companies do often sell with poorly-written documents, there is no reason for not writing a professionally written IM.
Whether the company management decides to write the documents, or hires a third party to do so, a professionally-written and well- presented information memorandum always reflects well on a company and its management.