Thursday 18 October 2012

What Does a CIM Include and How Do You Position It?

C.I.M. stands for Confidential Information Memorandum and it is the main overview document provided in the private company divestiture or private placement financing process.  A CIM is made available subsequent to signing an NDA and presents detailed company information as a basis for an indicative value discussion.
The CIM is typically prepared by the adviser and ranges from 40 to 100 pages.  CIMs describe the nature of the business (i.e. products/services, strategy, differentiation, revenue model, etc.), its history, ownership, legal structure, suppliers, customers, competitors, market opportunities, management, growth prospects, and high level financial information such as historical revenues, EBITDA and a balance sheet.  Customers, key suppliers and key management do not have to be identified by name.  It is still important to protect competitive intelligence at this point as there will be only one successful buyer and the company should not be put in a position where its competitors have access to sensitive information about the company.
The reader of a CIM will be looking to better understand the value proposition of the company and to identify attributes that drive sustainable value. Some examples of questions to be addressed include:
-       Has the seller transferred his/her relationships and know-how to ongoing management?
-       Are the revenues of a recurring nature or project based?
-       What are the key sustainable differentiators of the product or business model?
-       Is the customer base diversified / is the business reliant on key suppliers?

A CIM must not over-promise or leave less than flattering facts out because it forms the basis of an expression of interest that may turn in to an LOI and, ultimately a purchase and sale agreement.  Due diligence verification throughout this process will uncover all of the facts. 
CIMs are different for early stage financings versus divestitures.  In the former case, it is more like a business plan outlining intentions and how to achieve them whereas for a divestiture it is more of a description of the business and the market the company competes in.  In the case of raising capital you need a detailed and logical use of funds explanation and this use of funds needs to generate a positive incremental return on investment.  In the case of a divestiture it is not so black and white because, in my view you would only include a forecast if you expect it to be substantially different from past trends. If you have a strong historical growth record and you expect this to continue then it may be best to just provide an estimate to the end of the current fiscal year.  This is because you don’t know what the buyer may be thinking and he/she may actually envision a future that includes leveraging its assets to construct a forecast that is much higher than what you would have prepared.
Should a CIM be written for the best buyer/investor? What I mean by this is, if there is a well capitalized large company acquiring businesses in your space, should the CIM be written to appeal directly to this potential buyer?  My view is yes and no.  Yes in that, you should exploit every angle to best position the company and no in the sense that you would do 90% of that anyway as you write the CIM to highlight sustainable value drivers.  A CIM undoubtedly raises further questions, and this is a good thing because it allows advisors to engage potential buyers on the opportunity, add color, clarify any misunderstandings and strengthen the main selling points specific to that potential buyer.  In short, create a two-way exchange of information and gain a better understanding of a buyer’s strategy which can be leveraged during negotiations.
In the end, a CIM is a marketing document and should present the business in its best light.  There is an art to writing a good CIM.  A good CIM provides all of the basic information plus it paints a rich picture of opportunities.
Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.


Tuesday 9 October 2012

An Overview of NDAs

Non Disclosure Agreements (NDAs, also called CAs for Confidentiality Agreements) are contracts that stipulate that information received from a counterparty will only to be used for the purpose as defined in the NDA and that it will not be used as a basis for competitive tactics or shared freely with others.  NDAs are signed in cases of divestitures but also for joint ventures and other collaborative and strategic relationships.  The term of an NDA is typically 1 to 3 years and the appropriateness of the term depends very much on the rate of change in the company and the industry in which it operates. 
NDAs may include non solicitation and/or non circumvention clauses.  Non-solicitation clauses can apply to customers and/or employees.  Non circumvention clauses protect entrepreneurs with great ideas from well capitalized parties acting on the idea without acknowledging or compensating the entrepreneur.
Every NDA will include clauses that describe when the agreement does not apply; such as (i) if the information falls into the public domain, other than as a result of a disclosure in violation of the agreement; or (ii) if the information is already known to the recipient at the time of its disclosure; or (iii) if it is independently obtained or developed by the recipient.  The reasons for these are fairly self evident.  You can’t stop a person from acting on information that they already know or is publicly available (that everyone else can act on). 
NDAs may need to be adjusted for different jurisdictions and for certain counterparties.  For example, NDAs usually address what the recipient should do with the information once one party determines the process is over.  This may include returning or destroying the information; however, in certain jurisdictions companies will want to retain a copy of the information in case it is required to be disclosed pursuant to applicable law, regulation or legal process.  Private equity and venture capital groups typically add a clause to protect their ability to invest in, or operate companies in the same or related fields of business as that engaged in by the company.
Certain companies will not sign NDAs at all (at least not in the initial stages).   IBM will not review blind teasers (i.e. a summary without disclosing the company name) and requires all introductory information to be marked "non-confidential".  Microsoft’s policy is that NDAs are executed on the condition of aligned business group(s) willing to sponsor an engagement.  These companies see so many proposals and are in so many businesses that they have simply decided that it is not worth the expense of processing NDAs at an early stage.
So, do NDAs really protect you from counterparties using the provided information against you? And if someone contravenes an NDA, can you prove it?  Can you sue them.. yes, will it be worth it?  Rarely.  My view is you should always put an NDA in place before you share information but then use caution and share only select information that will not potentially harm your business.  Don’t view an NDA as a bullet proof vest.  Continue to be guarded particularly in the areas of new business partners, potential new customers and key employees.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.