There are four questions that company owners must know the answers to, before drafting an information memorandum as part of the process of selling a company.

First and foremost, what is an information memorandum (IM)? An IM is a document provided by a company to prospective investors after the investors have reviewed a brief information summary, or "teaser", and signed a confidentiality agreement.

Some business owners and financial advisors look at it as a marketing document which provides a selective overview of the attractive features of a company. In some countries, mostly Anglo-Saxon jurisdictions, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company. Other jurisdictions may not regulate such documents as closely.

A company and its financial advisor must strike a balance when preparing an IM. The document should be a marketing document, in the sense that it should motivate investors to want to invest in the company - but it should be devoid of hype, exaggeration, or omission, and provide a complete disclosure of facts. Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may create legal liability for the company preparing the IM and its advisors.

In general, an information memorandum allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company. The alternative is simply to respond to investors’ questions, but this typically does not allow the company to provide a comprehensive overview, and makes it difficult to present the information in the best light.

An IM also helps to ensure that all investors receive the same information. This is particularly crucial when a seller is running a competitive process. The more information that the IM has, the less need there is for investors to pose written questions, saving time for both buyer and seller.

From an investor’s point of view, a good information memorandum demonstrates the professionalism and motivation to sell of the sellers, as well as the quality of the management – all important factors when deciding whether to bid for a company.

Preparing an IM requires a high level of internal organisation. The chief executive or business owner should lead a small team of experts in the main areas, such as sales and marketing, legal and finance, that will need to be covered in the IM. Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy.

When preparing an IM, we generally aim to offer investors details of clients, market position, operations, finance and risks, among others – information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company.

A good method is for the sellers and advisors to ask themselves what information they would require if they were buying the company. Given that the information memorandum is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provide an investor an opportunity to renegotiate their offer.

An IM is the most efficient way of providing a large volume of information about a company to investors. Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers, such as investment committees or boards, that may never appear on site. The information memorandum is by far the best way to do this.

In conclusion, a high-quality IM is critical when selling a company. In the same way as a CV may go through many drafts in order to present the candidate in the best possible light, so too, an investment of time in producing a quality information memorandum pays off. You do not get a second chance to make a first impression. 

*Les Nemethy is the CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions