In Previous Deal Notes® 107 and 121, we described what the Confidential Information Memorandum (“CIM”) is, its importance, and what it should include — balancing disclosures and optimistic storytelling of the business is critical. This Deal Note® addresses an additional crucial component of the CIM, which sellers of middle-market A&D business ask us about less often: what does not belong in a CIM?

The answer starts with understanding what a CIM becomes after it is sent. Every figure, claim, and projection in the document turns into a line item on a potential buyer’s due diligence checklist. Buyers do not read a CIM and accept the statements presented as fact; they read it and set out to diligence it. Therefore, we advise our clients that a CIM is not a marketing brochure filled with hyperbole; it is a set of statements the seller will spend substantial time and effort defending prior to the completion of a transaction.

With that in mind, below is a small sample of items that we typically advise not to include in a CIM.

Calculations that will not survive diligence. For example, we strongly advise against including EBITDA addbacks that your Quality of Earnings provider (or accountant) has not accepted. While the temporary increase to EBITDA presented may make the business seem more profitable and demand a higher initial bid, this is not something that would survive buyer due diligence (which would result in you most likely seeing a decrease in the purchase price based on a multiple of the amount of the addback you included).

Claims that read like guarantees. Grandiose and unfounded statements such as “we have no threatened or actual litigation” or “we are in full compliance with.…” can easily become representations and warranties in your Purchase Agreement and pose substantial risk to you post-closing. If one of those proves wrong, it is no longer a marketing overstatement; it is a misrepresentation with post-closing financial consequences.

The best CIMs are not the most verbose or the most beautiful. They are the ones where, months later, during buyer due diligence, nothing is found by the buyer that contradicts any of the statements made in the CIM. Buyers pay premiums for confidence (Deal Note® 131), and confidence is built by a CIM that withstands buyer due diligence.

Have a great day,

Joseph Lakaj
Analyst