What is an Information Memorandum, and why do I need one ?.

When I first start working with new clients, that are looking to raise capital or sell their business, this is almost always the first major obstacle we have to get past.

The Blog entry has been created to assist company owners in understanding what is involved in preparing an Information Memorandum (IM), during the process of selling a company or raising new capital for the company.

It deals with these 4 questions:

  1. What is an IM ?
  2. Why prepare an IM ?
  3. How should a company go about preparing an IM ?
  4. How is an IM likely to be used by investors ?

What is an IM ?.

An IM is a document provided by a company to prospective investors after the investors have reviewed a brief Investment Summary, or “teaser”, and signed a Confidentiality Agreement.

Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company.  In Australia this was the major criticism of Prospectus’ in the old days …. They were pejoratively called “The Glossy Bit in front of the Application Form”.

In most Westminster-based legal systems – notably Australia, US, UK, New Zealand, Canada and at least 20 other Countries, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company.  NOTE to Company Owners …. You’re personally liable if you sell a business whilst withholding information that would have affected an investor’s ability to come to a different conclusion about your business.

However, IM’s are most often targeted at “Sophisticated Investors” who are not protected by the layers of regulation and red-tape that are applied to “Retail Investors”; therefore the law’s position on sophisticated investors is that they had the skills, knowledge, money and track-record to know better and if they lose their money then they understood the risks that could result ion that and still chose to invest.

A company and its advisor(s) must strike a balance when preparing an IM.  The document ABSOLUTELY is a marketing document, in the sense that it should motivate investors to want to invest in the company – but it needs to avoid hype, exaggeration, or omission, and provide a complete disclosure of ALL material facts.  Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may also create legal liability for the Directors of the company.

Why prepare an IM ?.

In general, an IM allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company.

It’s also worth stating the obvious here – Investors EXPECT an IM, if you don’t have one you almost certainly will not get anybody interested let alone get their $$$’s.

An IM also helps to ensure that all investors receive the same information.  This is particularly crucial when a seller is running a competitive process.  The more information that finds its way into the IM, the less need there is for investors to pose written questions, saving time for both buyer and seller.

From an investor’s point of view, a good IM demonstrates the professionalism and motivation to sell of the sellers, as well as the quality of the management—all important factors when deciding whether to invest in, or buy, a company.

How should a company go about preparing an IM ?.

Preparing an IM requires a high level of internal organisation.

The CEO or business owner should lead a small team of experts in the main areas (e.g. sales/marketing, legal and finance) that will need to be covered in the IM.

Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy.

When MSC prepares an IM, we generally aim to provide investors with details of clients, market position, operations, finance, risks …etc – information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company.

As a sanity-check, the Seller(s) and their advisors need to ask themselves what information they would require if they were buying the company – using a company they know little/nothing about as their reference point.

Given the IM is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provides investor with an opportunity to renegotiate their offer – typically downwards !!!!.

How is the IM likely to be used by investors ?.

An IM is the most efficient way of providing a large volume of information about a company to investors.

Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers (e.g. investment committees, boards, advisors) that may never appear on site.  The IM is by far the best way to do this.

Conclusion.

In conclusion, a high-quality IM is critical when selling a company, it is in some ways the equivalent of a CV for candidates looking to get that next great job/role.

And importantly, you don’t get a second chance to make a good first impression.

If you’d like to know more about this topic – feel free to contact me.  I’m also interested in any comments, or experiences you’ve had either involving a good IM or a bad IM.

Advertisements

18 Responses to What is an Information Memorandum, and why do I need one ?.

  1. Nice post,
    I learned a lot of information from this post. Thanks for the effort you took to expand upon this topic so thoroughly.
    I look forward to future posts.

  2. WA Ali says:

    splendid information, it helped me in understanding the real motive for an IM to a company.

  3. Abhishek says:

    thanks for sharing great information.
    could u pls share some IM Format

  4. alka says:

    it was really a very helpful information. has cleared nearly all my doubts on this matter

  5. sridevi says:

    Thank you. Its really helpful to understand what IM is.

  6. kapil says:

    it was helpful for me.
    thanks

  7. This is very helpful to me and my company. Thanks

  8. Andre says:

    Many thanks for explaining this key-document in the process of selling/seeking investments.

    Do you have a template on how an IM could look like?

    Thanks in advance!

    • investoritis says:

      Hi – Yes I do, but the exact nature of an IM will depend on the business industry, the solutions the business offers, the amount of funds sought and the level of perceived risk that needs to be addressed. This is why there’s an artform to creating IM’s rather than just having a boilerplate template that gets reused every time.

  9. ravi says:

    Hello, thanks for this beautiful format, which helps new generation enterpreuners to do business plan with their insight

  10. Thank you , great piece of info , really useful

  11. Shanon says:

    This is really interesting, You’re a very skilled blogger. I have joined your feed and look forward to seeking more of your wonderful post. Also, I’ve shared
    your website in my social networks!

  12. Olaoluwa Peters says:

    This is so kind of you.

    You have just shared a life changing knowledge and experience. God will Bless you in return.

    Please, keep it up

  13. Sameer Oza says:

    Hi,
    I am a marketing student & have a presentstion to do on prospectus.Could you please help me by providing detailed information on the below topics.
    1.what is prospectus
    2.What constitute an offer to the public
    3.Legal requirements of prospectus – content, misstatement
    4.Registration of prospectus
    5.Statement in liue of prospectus
    6.Self prospectus
    7.Red herring prospectus..
    Would be really great if i get the info in two or three days as i have the presentation on this coming Monday.Thanks in advance for your help.

  14. Adrian Thomas says:

    Interested to develop an IM for a highly mining project at the moment. Please contact me. Via email.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: