An Information Memorandum, or IM, is one of the first detailed documents you are likely to receive when considering buying a business.
It should give you a structured overview of the company, including its financial performance, customers, management team, operations, market position and potential for future growth.
However, an IM is prepared as part of the sale process. It is designed to help you understand the opportunity, not to replace your own investigation.
The aim when reviewing an IM is therefore not simply to read what is presented.
You should use it to identify:
The following checklist covers the main areas to assess when reviewing an Information Memorandum for a business you may want to buy.
One of the first questions to consider is why the owner is selling.
Common reasons include:
A genuine retirement sale can be very different from a business being sold because performance is deteriorating.
Consider whether the reason given makes sense when compared with the rest of the information in the IM.
For example, if the seller says they are retiring but the business has also experienced a sudden fall in revenue, you should understand what caused that decline.
The reason for sale is not automatically a red flag, but it should form part of your overall assessment.
Understand who currently owns and manages the business.
Look for:
One of the most important things to establish is how dependent the business is on the current owner.
If the owner personally manages all major customer relationships, sales activity, technical decisions and key employees, replacing them may be more difficult than the IM initially suggests.
Customers are one of the most important areas to review.
Consider:
A business generating a significant percentage of turnover from one customer carries more concentration risk than one with a broad customer base.
Do not assume repeat customers automatically mean recurring revenue.
Try to establish what actually causes customers to return.
If the company relies on long-term agreements, understand the nature of those contracts.
Questions to consider include:
A business may appear to have highly predictable revenue, but the underlying contractual arrangements may tell a more complicated story.
Supplier concentration can create similar risks to customer concentration.
Assess:
If the company depends heavily on one specialist supplier, consider what would happen if that relationship ended or prices increased significantly.
Look beyond the latest turnover figure.
Review several years of performance where available and ask:
Where there has been rapid growth, understand what drove it.
For example, was growth caused by:
The source of the growth matters just as much as the headline percentage.
EBITDA is commonly used when valuing businesses, so this section of the IM deserves particular attention.
Look at:
Do not assess EBITDA in isolation.
If revenue has grown significantly but EBITDA margins have fallen, understand why.
Likewise, if profitability suddenly improves shortly before the sale process, investigate what caused the change.
Adjusted EBITDA often includes add-backs for costs the seller believes will not continue after completion.
Some adjustments may be entirely reasonable.
Examples could include:
However, you should assess every adjustment critically.
Ask:
A £100,000 add-back can have a significant impact on valuation if the business is being valued using a multiple of EBITDA.
The balance sheet can reveal information that is not obvious from the profit and loss account.
Look at:
Pay particular attention to unusually high figures.
For example:
These issues may later affect the final transaction structure or purchase price.
Working capital is particularly important because the business needs sufficient cash and short-term assets to continue trading after completion.
Look at:
A profitable business can still experience cash pressure if customers pay slowly or large amounts of stock must be held.
Consider how much working capital you will need after buying the business.
Many Information Memorandums will not provide a fixed asking price.
However, there may be an indication of valuation expectations or the seller may provide guidance later in the process.
If a price is provided, consider how it compares with:
Do not assume the seller's valuation is automatically the correct valuation.
Your eventual offer should reflect your own assessment of the business.
A strong management team can significantly reduce acquisition risk.
Consider:
The less dependent the company is on the departing seller, the easier the transition may be.
Look at the wider workforce as well as senior management.
Useful information includes:
Consider whether the company has enough capability to support future growth.
Also look for key roles that may currently be missing.
For example, a company may have grown successfully without a dedicated sales or marketing function, creating both a weakness and a potential growth opportunity.
Understand what premises the business operates from.
Establish whether the property is:
If leased, review:
If property is owned separately by the seller, understand what arrangements will apply after the acquisition.
For asset-heavy businesses, understand the condition and future cost of machinery and equipment.
Consider:
A business may generate strong EBITDA but require significant capital expenditure every year to maintain operations.
That affects the cash ultimately available to you as the buyer.
Identify any important intellectual property owned or used by the company.
This might include:
Consider whether:
Intellectual property can be a major source of value, particularly in technology, manufacturing and specialist service businesses.
The IM should explain why customers choose the business rather than its competitors.
Possible differentiators include:
Be wary of broad claims such as:
unless there is evidence behind them.
Consider the wider environment in which the business operates.
Look at:
Try to separate objective market information from promotional language.
A strong business can still operate in a difficult market.
Equally, a growing market does not automatically mean the individual company will grow.
Most Information Memorandums will highlight opportunities for future growth.
These might include:
Ask how realistic each opportunity actually is.
Consider:
Most importantly, distinguish between growth already being delivered by the business and growth you would need to create yourself after acquisition.
You should be cautious about paying today's purchase price for value that only exists if you successfully deliver tomorrow's growth plan.
Understand how the business currently generates new customers.
Look at:
A company that relies almost entirely on the owner for sales may require significant changes after acquisition.
Conversely, weak marketing can sometimes represent a genuine opportunity if the underlying business is strong.
Where relevant, understand how much revenue comes through digital channels.
Consider:
Also consider whether there is realistic scope to increase digital revenue after the acquisition.
Good management information can tell you a lot about how professionally the business is run.
Ask:
A business relying entirely on annual accounts prepared months after the year-end may give management less visibility over performance than one producing detailed monthly reports.
Consider how dependent operations are on individuals rather than documented systems.
Look for processes covering:
Well-developed systems can make ownership transition easier.
Businesses where knowledge exists mainly inside the owner's head can carry greater transition risk.
The location needs to work commercially, but it may also need to work for you personally.
Consider:
This is particularly important if you intend to become actively involved in running the company.
A long trading history can demonstrate resilience, but age alone does not make a business attractive.
Consider:
An established business with outdated systems can require significant investment.
An Information Memorandum is not supposed to contain everything.
Sensitive information is often held back until the buyer has progressed further.
However, missing information can help you identify the questions you need to ask next.
Pay particular attention if the IM provides little information about:
A lack of detail does not necessarily mean there is a problem.
It does mean you should investigate further.
Potential warning signs can include:
A red flag does not automatically mean you should walk away.
It means the issue needs to be understood before you progress.
One of the most important principles when reviewing an Information Memorandum is that you are still at an early stage of the acquisition process.
The IM helps you understand the opportunity.
Due diligence helps you verify it.
Statements about:
will need to be supported by underlying evidence later.
Do not make a final investment decision based entirely on the IM.
Once you have reviewed the IM, prepare a structured list of questions.
Group them into areas such as:
Prioritise the points that could materially change whether you want to proceed.
The next stage will often be an introductory call or meeting with the seller and their advisers.
Use that meeting to understand:
Useful questions may include:
The answers can be just as valuable as the information contained in the IM itself.
Before deciding whether to progress a business acquisition, make sure you understand:
You will not necessarily have complete answers at this stage.
The objective is to understand the business well enough to decide whether it deserves further investigation.
A good Information Memorandum should help move you from initial interest to a more informed view of the opportunity.
It should not convince you to buy the business on its own.
Your job as the buyer is to understand the commercial story, identify the assumptions behind it and decide what needs to be verified before committing further time and capital.
If the business still looks attractive after you have challenged the information presented, the next stages may include management meetings, valuation work, funding discussions, an indicative offer, Heads of Terms and ultimately due diligence.
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