M&A Vocabulary – Understanding Experts: “Information Memorandum”

What is an Information Memorandum

The Information Memorandum (IM or Info Memo) serves in M&A processes to provide potential buyers with essential information about the company for sale (target company) in a prepared format. It offers the seller the opportunity to comprehensively present the target company and explain why acquiring the target company is particularly attractive for the potential buyer (equity story). Thus, the Info Memo forms the basis for enabling potential buyers to gain an in-depth understanding of the target company’s business model at an early stage of the M&A process and to decide whether they wish to participate in the further process.

Who prepares the Info Memo

Typically, the shareholders of the target company mandate an M&A advisor who comprehensively supports them throughout the entire M&A process. The M&A advisor coordinates and is responsible for preparing the Info Memo, involving and closely coordinating with the client. Preparation typically takes several weeks. During this period, the M&A advisor requests extensive information and asks numerous questions in workshops on equity story, strategy, and business plan. In doing so, they bring their expertise and experience regarding the expectations and requirements of potential buyers. Final approval of the Info Memo is given by the client.

Classification in the M&A process

In a typical structured M&A process, potential buyers are approached based on an anonymous brief profile (teaser) to first determine a fundamental interest in acquiring a target company – particularly with regard to its business model and financial profile. After signing a non-disclosure agreement (NDA), potential buyers are then provided with the Info Memo, which should enable them to submit an indicative offer for the acquisition of the target company.

The requirements regarding structure and content of the indicative offer are set out in a process letter and provided to potential buyers together with the Info Memo.

The subsequent process steps and further information disclosure in the M&A process are not discussed in detail in this article.

Typical structure of an Info Memo

Each Info Memo is as unique as the company it is meant to describe and market; accordingly, each Info Memo is individually tailored to the respective target company during the preparation process. However, creators typically follow established structures that have proven appropriate for the audience. Such a structure is illustrated below.

As an introduction to the Info Memo, the key points of the following chapters are summarized in an executive summary (referred to here as “at a glance”). Subsequently, the background (e.g., succession due to retirement) and scope (e.g., which companies, planned co-sale of any business properties) of the intended corporate transaction are outlined.

The key investment highlights are a concise compilation of the attractiveness and unique selling points of the target company.

In the following chapters, the business model as well as details on products and services, customers and sales structures, value creation, organization, and management and team are described in detail. Typically, no actual customer names are mentioned in the Info Memo – especially not in connection with revenue figures. However, the level of granularity and transparency must enable the potential buyer to conduct essential initial analyses and identify opportunities and potential risks (e.g., customer concentration, dependence on few suppliers).

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

The chapter on strategy and business plan is of central importance, as it outlines the direction for the future development of the target company. Developing a detailed forecast for the current fiscal year and a robust business plan for the following two to three years, often together with the M&A advisor, is an essential task in preparing for an M&A process and creating the Info Memo.

In the finance chapter, comprehensive financial information on the historical, current, and expected future financial development of the target company is presented

A focus in preparation here is on developing the sustainable operating profitability of the target company, i.e., adjusting for one-time or extraordinary effects not attributable to the actual business. These adjustments are of essential importance for the Business Valuation by potential buyers and the seller’s value argumentation. In addition to support from the experienced M&A advisor, involving specialists as part of a vendor due diligence can add value here.

Summary

The Info Memo is the central document in an M&A process. It is essential for generating interest among potential buyers and sets an anchor point for the Business Valuation throughout the further process.

Accordingly, the Info Memo should be prepared carefully. An experienced M&A advisor knows market standards as well as typical questions and expectations of potential buyers and can deliver great value to the client.

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