Behind the Confidential Information Memorandum (CIM): Process, Importance, and Best Practices
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If you’re a software CEO looking to sell your business or raise capital, it’s crucial to understand the importance of a confidential information memorandum, or CIM, a critical step in the preparation phase for any liquidity event.
The CIM tells the story of your business: where it came from, what it is today, and what potential it has for the future. It highlights your company’s strengths and opportunities and makes the case, quantitatively and qualitatively, for why the business is an exciting opportunity. Investors and strategic acquirers alike use it to evaluate opportunities and assess their level of interest. In short, the CIM is an essential marketing document that helps position your company and establishes the key themes and opportunities for the business that will guide the rest of the process.
Of course, every business is unique, and the CIM should reflect that. CIM structures vary by sector, product category, and financial profile, among other variables. They are also time-consuming to produce, and properly positioning a business is difficult, especially if you’ve never previously done it. It’s not uncommon, for example, for sellers to think that they can simply repurpose the messaging they use for their customers, not realizing that they need to position themselves specifically for a buyer audience. That’s why having a trusted M&A advisor to guide you through the process is vital for ensuring your company is best positioned to be best received by the buyer community, ultimately leading to a strong outcome.
To help software CEOs understand a proper CIM structure and purpose, this guide addresses the following questions:
What is a confidential information memorandum (CIM)?
Why is a CIM important for selling your software company?
What are the benefits of creating an engaging CIM?
What are the best practices for developing a CIM?
What should be included in a CIM?
Who receives the CIM, and how will they use it?
Follow along as we dissect exactly what software companies should know about preparing and using a CIM.
What is Included in a Confidential Information Memorandum (CIM)?
Sometimes referred to as an Offering Memorandum (OM) or Information Memorandum (IM), a CIM is created at the beginning of a sell-side M&A process for prospective buyers, containing pertinent information about products, market, customer base (redacted), financials, organization, and growth potential.
In other words, the CIM tells the story of your software company in a way that prospective buyers will relate to. It should provide both a compelling story and comprehensive data, using narrative tactics and qualitative information backed up by quantitative metrics. A CIM can be anywhere from 30 to over 100 slides, depending on the depth and breadth of information included. The time it takes to complete this document depends on the scope of the CIM and the level of detail included.
Some M&A advisors will ask the seller to prepare their own CIM. Others will craft short, relatively superficial CIMs on their clients’ behalf. At SEG, however, we recognize that while you’re the expert on your business, we’re the experts at positioning your business to the buyer community. We work closely with each client to learn the nuances of their business, positioning, segmenting, testing, and defending every detail. Together, we create an in-depth, comprehensive CIM that paints a detailed and accurate picture of your company and helps maximize the potential outcome.
Our CIMs typically take 4–8 weeks to write, as we also include a buyer’s list, financial customer packages, and the like. This timeline strikes some sellers as excessive, but it takes time to do it right—to position your company well, establish a strong narrative, gather data that supports it, and prepare for questions to come from the buyer community. This comprehensive approach often ends up saving time in the long run because it helps ensure that we are completely prepared to go to market. By giving prospective buyers and investors what they need upfront, we can avoid unnecessary requests for information that can slow the process down later.
At SEG, we speak the language of the buyer. Nowhere is this more important than in the CIM — the first touch point many buyers have with your company and the guiding document throughout an M&A process. Learn more about how SEG can help you write a successful CIM here.
“I was really impressed with how SEG helped us analyze our business, understand our business, capture all the data across our business, and help us put the story together in the CIM. They discovered things about the business that I didn’t even know. They discovered strengths about my customer retention that I wasn’t even fully aware of, and they knew how to put the story together the right way.” – John Hinckley, CEO of Modern Message
What a Confidential Information Memorandum is Not
Before we dive too deep into CIM best practices, it’s also important to consider what a CIM is not. Here’s a quick list for reference.
Remember, a CIM is NOT:
A legally binding agreement
A document with direct valuation feedback
First, a CIM is not a legally binding contract. Rather, the CIM serves as a marketing document with the intent of persuading potential investors to take a closer look at your company. Unlike an LOI or IOI, a CIM does not indicate intent by either party.
It goes without saying that this doesn’t mean the CIM should contain untrue or misleading information just for the sake of looking more attractive to investors. Trust us: it’s easier to explain rough spots now than wait for them to come up during due diligence later on.
Similarly, a CIM should not include any information about valuation. Valuations come into play at a point when buyers are comfortable providing feedback based on what they understand about the business. A CIM is more about educating the buyers and piquing interest than setting a price.
Lastly, CIMs are not pitchbooks. A pitchbook is a shorter document designed to appeal to venture capital investors, who are typically looking for minority positions and are generally more risk-tolerant. Private equity companies, on the other hand, are looking for majority transactions and are more risk-averse. They require much more detailed information about the companies they are seeking to acquire than a pitchbook can provide.
Why is a CIM Important for Selling Your Software Company?
CIMs are an essential step for any software company serious about a merger or acquisition. A good CIM should engage readers with your story as well as accurately and clearly depict your business and growth opportunities.
Without these qualities, you risk wasting both your time and the buyer’s. After all, which would you find more appealing: a company that presents you with a lot of data or a company that presents a compelling narrative strongly supported by data?
Of course, data is essential, and CIMs call for a lot of it — far more than in a regular profit & loss statement, for example. We understand precisely what KPIs to include and, just as importantly, how to provide context for less-than-ideal metrics so that buyers and investors can see the full picture, not just a single data point.
Consider a SaaS company we recently helped sell. Two years before they began working with us, they worked with a well-established investment bank that put together a short, template-based CIM with no value implications or value drivers. When they were unable to get the deal they wanted, they turned to us. We worked with them to craft a more in-depth and thoughtful CIM that presented the company in a unique and intriguing way. In the end, they were able to exit at three times the amount they had been offered previously.
While the CIM wasn’t the only factor, of course, it helped the company stand out and reassured the buyers that they were making a well-informed decision.
The Seller's Benefits in Creating an Engaging CIM
As we mentioned before, a CIM is an opportunity to craft the narrative around your business to potential buyers.
An engaging CIM has multiple value-additive benefits for the seller, including:
Maximizing value: A well-argued CIM shows buyers you have a deep understanding of your business and the opportunities that lie ahead, positioning your company as a valuable investment.
Generating more interest (i.e., more competition): A detailed and well-positioned CIM creates more interest with buyers, which in turn creates more competition—and better valuation—during the M&A process.
Time: A comprehensive CIM gives buyers a clearer picture of the business. This creates an apples-to-apples view of the opportunity to ensure both buyers and sellers are effectively utilizing time as interest develops in the process.
De-risking: A CIM can serve to make important disclosures early rather than later when a buyer might be more spooked by surprises. By using the CIM to bring up potential problem areas early, you can explain any negatives clearly and concisely and take the opportunity to position your company around them.
Expert-Endorsed Best Practices for Developing a CIM
While writing and developing a CIM isn’t something the seller usually handles on their own, we’ve compiled a list of best practices for sellers to consider as they move forward in any M&A process.
Before building a CIM, it’s crucial to have a firm grasp on what value your business provides, where it has come from, where it is today, and where it can go. M&A is driven by the rearview mirror; before buyers and investors can get excited about the key opportunities propelling your company forward, you must first establish the fundamentals of your business within the CIM. This includes thorough details about whom your business serves, its current strengths and weaknesses, how it is positioned in the industry and against competitors, and near-term and accessible growth opportunities.
As part of the CIM creation process, we work with our clients to evaluate the strengths and weaknesses of every aspect of their business, including their industry, products, competition, and customers, and work with them to position around any weaknesses. Only after all this is laid out should you focus on the future, using a well-planned “growth ahead” portion to help maximize potential value for your business.
Here are some other tips to keep in mind:
Make it a story – Remember, a CIM is the first narrative you get to craft about your business. Don’t just jot down facts and figures. Take the opportunity to deliver a clear message about what makes your business compelling.
Make it defensible with data – Data is compelling. Use it to support your story, and don’t say anything that can’t be backed up with hard numbers. Forecasts should be based on both historical trends and industry norms. Don’t worry if you’re not familiar with industry norms; it’s our job to provide that and put your information in context. Above all, ensure that every metric you share is accurate. You don’t want any factual errors!
Keep each message valuable but concise – Remember, it takes hours to read through a CIM. Focus on what’s important and make every word count by providing value in the shortest terms possible. You’ll have plenty of time to dive into everything else throughout the remainder of the process.
Be transparent – A CIM is important in generating trust with potential buyers. Don’t risk coming across as disingenuous by leaving out the negatives. Be open and control your narrative by positioning around any weak points.
Key Elements to Incorporate in a CIM
What’s included in the CIM depends on the audience. The audience, or potential buyer, usually falls into one of two categories: strategic or financial, and you may use different positioning tactics for each. (Quick refresher: a strategic buyer typically purchases a company to fill a need. Financial buyers usually seek to build an investment portfolio with high-performing businesses.)
To appeal to the strategic buyer community, for example, a CIM should focus on targeted revenue growth, operational optimization (strategic sourcing, cost reduction in all functions), and reduction in financial cost and investment.
Keep your end audience in mind when writing a CIM. You don’t have time to share everything, so what you choose to share needs to generate the necessary interest from the buyer community.
While every CIM should be unique, there are six elements that should always be included:
Industry and Competition Overview
Growth Ahead Opportunities
Ownership and Organization
Read on for more tips about each of these areas, along with breakdowns of key points of each.
Sometimes referred to as the Executive Summary, the business overview is a crucial component of the CIM, providing an overview of its market, value prop, and how it generates revenue.
When writing a CIM, consider including these elements as a business overview:
Company mission or vision
Founding story with supporting details
Information about the leadership team
Summary of product offerings and roadmap
Business model and pricing
Industry & Competition Overview
In order for the potential acquirer to make an informed decision, it’s important they know exactly how your company is positioned in your market, the size of your end market, and what market trends are currently impacting the company. This portion of a CIM is all about positioning your business within the broader scope of your industry.
Here are a few items to include in a market overview:
This topic includes vital information about your business’s product offering and technology. Buyers and investors will want to know about the core product offering and how it differs from others in the market.
This portion should include:
Product overview (key functionality, what the product does, whom it serves, etc.)
Product detail (detail on modules, different product offerings, core and supplemental products, etc.)
Key value prop
Integrations or APIs
UI/UX and mobile capabilities
High-level strategic product roadmap
Just as an acquirer wants to ensure your position in the market is solid, they also want to assess your customer base, which is the best support for healthy revenue, especially for subscription-based businesses. This aspect of a CIM demonstrates how your business serves your customers and what it is likely to look like in the future.
Typical items to include in your customer overview include:
Total customer base snapshot
ICP (ideal customer profile)
Thorough retention analysis
Customer segmentation analysis
Customer testimonials and reviews
Growth Ahead Opportunities
The CIM is an opportunity to demonstrate that purchasing your company would provide growth opportunities for the acquirer. Once buyers are comfortable with where your business is today based on the prior information, this element can get them excited about its future. You can demonstrate the company’s upward trajectory by showcasing the figures about your sales and marketing efforts.
Some information related to growth that is helpful to include here:
Sales and marketing opportunities
Embedded growth opportunities (whitespace, etc.)
Product expansion and monetization opportunities
Potential M&A segments and opportunities of focus, both near and long-term
Painting a portrait of your business as financially stable and scalable is one of the most important parts of a CIM. You’ll share actual financial information and projections and make your company appear as attractive as possible on paper.
Consider providing the following financial information in the financial overview:
Summary P&L statement
P&L revenue details
Thorough COGS (cost of goods sold) analysis
Thorough operating expenses analysis
EBITDA / adjusted profitability analysis
Ownership, Organization, and Technology Overview
Finally, it’s critical that software companies provide an overview of their ownership and organization when creating a CIM.
An overview of the organization should include the following:
Legal corporate structure and ownership
Headcount & compensation trends
Who Receives the CIM and How Does it Impact Their Decision?
Before a CIM is sent, prospective buyers and investors require a non-disclosure agreement (NDA). A CIM contains sensitive information about your business, so be sure not to share private information with other parties.
After a CIM is sent, the prospective buyer/investor will review it thoroughly. Most buyers will skim through a CIM to see if the financials and narrative make sense. Then, they’ll do a deeper read to ensure everything still looks good. Remember that a CIM is intended to be read, not presented, so it should be written to stand on its own. Also, bear in mind that a variety of people, including the CEO, CFO, CTO, and possibly the buyer’s investor committee, will be reading it, so it should speak to multiple personas.
If a potential buyer and investor are interested in learning more, they’ll typically follow up with questions and information requests. Having an advisor to help gauge how to respond to follow-ups and determine what information should be shared at this stage is crucial. If interest remains, additional milestones in the M&A process will follow, including IOIs (indications of interest), LOIs (letters of intent), due diligence, and ultimately going through with the deal.
Your Company’s CIM Roadmap to Optimize Your Exit
In short, the CIM not only tells a concise and compelling story — it gives the data to back it up.
A good CIM provides an accurate depiction of the business for buyers to evaluate, ensures efficient utilization of buyer and seller resources and time, and de-risks the deal prior to the later stages of the process. By following our best practices, you can ensure your CIM is digestible and pertinent while making the audience want more. Doing so helps maximize the potential outcome and ensures a high probability of closing.
Executing a successful CIM is best done with the help of a trusted M&A partner who’s been there before. At Software Equity Group, we have over 30 years of experience telling compelling stories that speak the language of potential PE investors and strategic buyers. If you’d like to learn more about how we can help your business, reach out.