How to Write an Information Memorandum Part II

At Hyman Capital we help companies of all shapes, sizes, sectors, and in many different geographies. Companies come to us who are start-ups pre-revenue, to early stage, or indeed established businesses looking to grow. In fund raising we are often asked: 

“What materials do we need to prepare for the investor?” 

In this series of blogs, I am attempting to describe the contents of the documentation required to engage and interest investors.

In Part 1 of this series, I covered the description of the market that the company wanting the funding operates in. Please read Part 1 here.

In Part 2 I am going to cover the history of the company and the description of the goods and services it is offering into the market. 

The company History

The history of the company may be very short if it is a start-up business, however the creation story and why the company came into existence should still be explained. For an ongoing business, the key or critical moments in the company’s history should be described and key aspects explained. The brief history of the company should include:

Foundation: how the company was created (Partnership, Limited, etc.) its legal entity and country of registration. Year of first registration and year of first trading. The birthing story of the company may come here or later in the description of the products or services. A key point here is why the company was created, for what purpose. If the company was a Management buyout then this can be described here.

Acquisitions: if the company has made any acquisitions during its history these will need to be described, including such details as logic for purchase, price paid and the contribution this acquisition has made to the top line sales and profitability at EBITDA level. Any legacy overhang from the merger, such as agreements with the purchased CEO and key staff will need to be described and presented in the data room and in the IM, no matter the significance. Completeness and transparency being the watch words.

Divestments: if the company has sold any businesses or parts of its operations this should be described in detail, including the logic for the sale, price achieved, and how the top line sales and profit was affected. Any legacy agreements with the sold business, such as commitment to continue to purchase any products or services from it, should also be described. 

IP licencing: does the company use any IP from a 3rd party or sell its own IP to another business. Again, this will need to be described in some detail, giving details of the IP provision, any geographical constraints on the licence, or industry verticals identified as the focus and the costs or revenues involved. The period of any licencing is likely to be of interest and the terms. If the company is buying in the IP, how is the IP owner rewarded and what is the cost of the use of the IP. How do these coast scale with activity and is it likely the licence holder or licensee will become a competitor in the future? Is the IP future proof, how is the IP being maintained and updated with better knowledge and experience through use?

Operational milestones: the key historical operational milestones of the business should be described. These will include launch of a new product or service, launch into a new market or territory, recruitment of significant staff members, launch of an online offering. A good description of what led up to the key milestone and the management decisions that supported it would be great to describe.

Highlights and stumbling blocks: any awards or certification of the business should be mentioned. Stumbling blocks and mistakes, assuming these will be evident in the data room, will need to be described and how these were overcome.

Major projects: any major internal change projects that have been undertaken should be described, such as introduction of new IT system, financial systems any reorganisations, or launch of new department.

Major investments: any investments that the business has made. This would include any major plant or machinery, IP or licence that has been purchased.

New technologies, products, or services: any new technology products or services launched by the business or anticipated in the near future. Some of this may appear in the business plan but if the new technology or approach is directly linked to the investment then this will need to be presented clearly.

Legal and management structure, including: Subsidiaries and groups, branches and ownership structure. This section should describe the current legal structure of the business probably with a schematic if there are multiple entities and different structure for countries of operation. This should also highlight if the management structure is different. Ownership structure is a key piece of information for investors, to understand the current owners and the expected share of the business that is available to buy – although this last point is always a negotiation.

List of any legal, HR or insurance disputes past and anticipated: Not a showstopper, however if there are things that have happened or are ongoing then it worth mentioning these early. Detail can be in the data room, however, worth mentioning here if there are any outstanding disputes, or anticipated cases.

Business model: this section should describe in some detail the value chain or value add activities of the business that is being invested in. The section needs to describe any bought in technology or IP including the licenced use of IP. Obviously for licence use the terms of the licence, such as any geographical boundaries and the term of the agreement should be shared. Useful in this section is a description and explanation of the supply chain and note any key or critical suppliers and partners.

Corporate vision and strategy: by this stage of the document with the market described in the first section it’s a good time to share the vision or ambition of the business. What is the reason for the business’s very existence and what does it aim to achieve? This section needs to describe the aspirations and expectations of the business over the period of the investment. With investor money typically looking at a 3-4 year return the vision should cover the period of between 3 and 7 years. This gives the investor a view of how the business is expected to grow and develop during the investment term. 

As well as the vision the strategy that will be applied to deliver or execute against that vision should be described here. This should have sufficient information to be credible without going into operational detail. This is the first opportunity to link some of the outcomes required to deliver the vision to how the investment would be used. So, the core strategic requirements delivered by the investment can be described here.

Value proposition: an investor will be keenly interested in the customer value proposition. They will be looking out for key points of differentiation, the unique selling points, and any innovation in the supply chain both inbound and outbound. Packaging and other innovations around meeting customer requirements.

Objectives: the objectives the business should be described here covering both qualitative and quantitative objectives. There is an opportunity to discuss why these are the right objectives and their feasibility. How the business will meet the objectives and why they are difficult for other organisations to meet would be good to share. Demonstrating barriers to entry for others is helpful for investors to understand. How the objectives will be measured and reported to management attention and wider circulation completes this section.

Continuous increase in flexibility: for consumer markets particularly the ability to offer tailored solutions for customers is increasingly a differentiator. That flexibility is becoming more important in business-to-business transaction as well. The innovation can be in terms of packaging, pack size and having bite sized ways of helping customers to pay for larger transactions. Flexibility around product adaptability should also be covered here.

Cost efficiency: some commentary on how the business will ensure that it remains cost efficient during the investment period. For companies with significant growth there will be changes to the organisation, processes, and level of automation that the business uses to operate both its direct activities and manage its overhead functions. Some services that our currently outsourced may change provider, and services that are delivered by a single consultant may be brought inhouse or again outsourced formally to a known provider. These expected changes should be mentioned along with the impact on the service quality and price. Typical areas of outsourcing for SMEs include: IT, HR, Finance, operational software (cloud services), marketing and PR. Other areas which could be considered include: Sales calls, website and social media, events, corporate entertaining, employee flexible benefits, office management, retail management among others.

Market Focus: the company will continue to focus on high margin and attractive market segments to sell its goods and services. How is the company going to achieve this? This should be answered by way of getting market insights, links to the regulator, anticipation of any legislation likely to effect the company, health and safety and environmental legislation likely to affect the company’s operations. 

The goods and Services

The description of the goods and services: there should be a reasonably detailed description of the goods and services that the company is introducing or currently selling into this market. This section should also describe the opportunity to build on the projected future of the market and speak about the innovation that the new products or services are bringing. Core areas to cover in this section is how the innovations or key points of difference are sustainable in the long term.

Relative market attractiveness: the description of the company’s products or service needs to be objectively described in the current and developing market as described above. References to market papers and respected journals should be made to provide objectivity. A key point for investors will be how the competitive advantages offered by the company’s products or services are sustainable and difficult for competitors to replicate. The comparative competitor analysis will sit in this section. This gives an opportunity for the investor to see how the current companies’ product compare to competitor products, how the company expects to develop the product and explore how the competitors may react.

Product or service positioning: a description of the product or services market position, is that a premium product or basic product competing on price? Dependent upon the nature of the market and segmentation the expectations of that segment should be described. Any suitable analysis of the market and segment referencing acknowledged publications in the sector should be included here. The company’s product should be compared to the market leader in the sector and the and its relative strength and weaknesses.

The product should be described in a way that shows the respective customer benefit and key differentiating factors that the customer will consider in making their purchasing decision. 

Relevant certifications & qualifications: any relevant certification and endorsement from any industry bodies should be highlighted and described. External endorsement can be important in certain markets, particularly for a new product or one entering a competitive or regulated segment.

Relevant key financials: for each of the main products there should be a breakdown of the financials, ie the cost of materials, cost of assembly, cost of testing and packaging along with any cost of sales channel. Profit by product should be shown.

With multiple product the revenue split should be shared based on achieved and projected sales volumes. If new products will be developed using the investment monies, then the expected time taken, cost, fabrication, and sale price along with projected sales volumes should be shared. The ramp up of the sale should be reflected in a pragmatic and achievable plan to complete any new product or service. The product profitability per product or produce group and gross margins should be shown here. Geographic split of sales is also a point of interest, particularly if the product is being sold in different countries in different currencies as this will highlight any exposure to currency risk. Channel revenue and profitability will also need to be shown if relevant to show how the different channels are used and expected costs.

Overall a technology or development road map of the product or service should be described. This will discuss how management anticipate the market will develop and therefore how the product will evolve overtime to meet and exceed the expectations of the market segment.

There should be a description of the support that the customer expects for the product or service and how that support is delivered, showing costs and expected number of times the product is expected to require that support.

This section should also outline any targets for each product of product family along with the support services required. Overall, the summery will need to cover the lifecycle cost of servicing the customer and show that this can be achieved profitably. Major customers and any licencing or resellers will be covered by this overarching area.

Product life cycle: this will describe the typical lifecycle of the product. This will show how often the product or service will need to be updated and enhanced to keep pace with the market and customer expectations. It may also be helpful to show the customer lifecycle for the product which shows how often the customer will need to repeat purchase the item or service.

Product matrix: if multiple products or product families are being offered then it’s often helpful to show a matrix of the offer showing how the different products address alternative market segments. Typically, such a matrix will include: price, performance, quality market positioning of the offerings.

IP or patent protection: investors prefer to invest in companies which have some level of protection for their IP. This can be a mixed blessing for a company as it can be expensive to gain a patent particularly internationally and can inadvertently introduce competition or alternatives. If IP protection has been sort with patents or other methods these will need to be mentioned and the details shared in the data room.

R&D spend: if R&D is critical to the ongoing success of the business then the funding of this activity will need to be described in some detail along with how research projects will be selected and prioritised. At exit, the investor will want to be confident that the business has grown and become more valuable during the investment period rather than simply exhausted its current technology and know-how. 

Marketing and sales: marketing and sales is critical to any business without top line sale there is no bottom-line profit. How the company will demonstrate the market, engage the market, and deliver sales is imperative to the success of the business. How the sales and marketing function will start, evolve, and sustain the predicted sales into the business will need to be described in some detail along with any anticipated challenges along the way. The sales forecast should also take a very pragmatic view of the sales function in order to provide confidence to the investor that the sales required are achievable.

Operations: after sales have been won then the business operations need to be described. Often this can be done by examining:

• People – how the business attracts and retains the right people to deliver the business plan,
• Process – what processes will those people following, is this a regulated business, is there key know how in the process, how will knowledge be retained in the business rather than in employees’ heads?
• Systems – what systems are proposed to be used to support the process, this could be an IT system, or it could be a systematic process using specialist knowledge or design.
• Tools – what tools will be needed which are not necessarily directly in the product but are critical to its success, these can be software, such as configuration control or jigs fixtures and fittings. how these will scale and evolve to deliver the products or service into the market to deliver the sales volume projected.

Cost control and innovation: how the production process or service delivery will evolve to realise further cost advantages with scale. This can include outsourcing or indeed insourcing of a service currently outsourced which can be better run internally once the business meets a certain size and scale.

IT and Technology: business support IT and how that will scale with the business. Clerly this may include CRM systems, website social media, email marketing and customer engagement.

Procurement & supply chain: how suppler diversification and risk to both suppliers and supply chain will be manged as the business scales.

HR and resourcing: both for the overhead function and directly how will labour and talent be attracted to the business and sustained in the growth phase, are suitably qualified and experienced people available in the local area. How will the recruitment requirement be executed, with it be an internal team or outsourced recruitment team? 

Plant machinery equipment and facilities: what will the company require now and as it scales in order to grow and deliver the products and services required. How will these be paid for and any risks offset.

Overview of customer base: if the business has existing customers, then it's good to include a list of Customers and References. If there are different customer groups or demographics these should be described along with the current total number of customers, customer retention rate, the description of target customers and groups along with the revenue split of top 10 customers or top quartile. It would be helpful, if appropriate, to discuss any customer concentrations, dependencies, and the average contract duration & life span.

Platforms & networks: if applicable there should be a description of any employed platforms and networks used by the business to find customers, employees or suppliers. 

Conclusion

In part II of this blog, I have attempted to describe two areas of the IM, these being the history of the company and the description of the goods and services sold.

I have described a very broad range of areas that could be described in the IM and it would be unusual if all these areas described were needed. Far more likely that several or many of the topics simply are not relevant to describing the company. The nature and activities of the business itself will determine the focus of the IM. If complex production processes are needed by the business these will need to be described, but not relevant for a simple service business.

In Part III of the blog, I will be outlining the areas covering the description of the management team and source and use of funds.