M&A Vocabulary – Experts explain: Information Memorandum

published on 10 March 2022 | reading time approx. 3 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

What is an Information Memorandum

In M&A processes, the Information Memorandum (in short: info memo or IM) serves to provide potential buyers with essential information about the company for sale (target) in a well-prepared form. It enables the sell-side to comprehensively present the target and to explain why the purchase of the target is particularly attractive to the prospective buyer (equity story). Thus, the info memo constitutes the foundation that gives potential buyers – at an early stage of the M&A process – the possibility to thoroughly work their way into the business model of the target and enables them to decide whether they want to participate in the further process.

Who prepares the memo

Normally, the shareholders of the target company engage an M&A advisor who comprehensively assists them in conducting the entire M&A process. The M&A advisor coordinates and is responsible for the preparation of the info memo with the involvement of and in close consultation with the client. Usually, it takes about several weeks to prepare an IM. In this period, the M&A advisor requests plenty of information and asks numerous questions during workshops on the equity story, strategy and business plan. In doing so, he brings to the table his expertise and experience regarding the expectations and requirements of potential buyers. In the final step, the info memo is approved by the client.

Placement in the M&A process

In a typical, structured M&A process, an anonymous is sent to potential buyers in order to determine their basic interest in the acquisition of the target – in particular as regards the business model and the financial profile. After a non-disclosure agreement (NDA) is signed, the prospective buyers are provided with the info memo, in order to enable them to make an indicative offer for the acquisition of the target.

The requirements regarding the structure and the content of the indicative offer are set out in a process letter and made available to the potential buyers together with the info memo.

Subsequent process steps and the provision of further information in an M&A process are not further discussed in this article.

Typical structure of an info memo

Every info memo is as unique as the company to be described and pitched therein; accordingly, in the preparation process, every info memo is tailored individually to the features of the respective target. In most cases, however, the preparation is based on usual and established structures that have proven to meet the expectations and needs of the addressees. Below, you can find an illustration of such structure.

In the introduction of the info memo, the main issues of the subsequent chapters are summarised as part of an executive summary (here named “at a glance”). Then, the background (e.g. succession for reasons of age) and scope (e.g. which companies, contemplated sale of any company real estate) of the intended company transaction are set out.

The “Key investment highlights” include a concise compilation of the attributes of the target that make it attractive and unique.

The next chapters describe in detail the business model and the main points regarding products and services, customers and sales / route to market, the value chain, the organisation as well as the management and the team. Usually, the clear names of customers are not mentioned in the info memo – in particular not in connection with revenue figures. In terms of granularity and transparency, however, the presentation must enable the potentiak buyer to carry out first essential analyses and to identify opportunities and possible risks (e.g. customer concentration, dependence on few suppliers).

A separate chapter is dedicated to the positioning of the target in the relevant market, the differentiation from main competitors and the expected development of the overall market.

The chapter on strategy and business plan is of central importance, since, here, the direction of the future development of the target is presented. Working out a detailed forecast for the current financial year and a reliable business plan for the following two to three years, often jointly with the M&A advisor, is a very important task when preparing an M&A process and the info memo.

The “Financials” chapter presents detailed financial information on the historical, current and expected future financial development of the target.

When preparing this chapter, the focus is on working out the sustainable operating profitability of the target company, i.e. the adjustment for one-off or extraordinary effects that are not attributable to the actual business. These adjustments are of essential importance for the determination of the company value by the prospective buy-side and for the argumentation of the sell-side as regards the pursued price. Here, in addition to the support from an experienced M&A advisor, the involvement of experts as part of vendor due diligence may prove to be an added value.

Summary

The info memo is the central document in an M&A process. It is fundamental for exciting interest on the part of potential buyers and serves as an anchor point in terms of valuation for the further course of the process.

Accordingly, the info memo should be thoroughly prepared. An experienced M&A advisor knows the market standards and the typcial questions and requirements of potential buyers and can provide a significant value-add for the clients.