What goes into an information memorandum

Once a buyer has signed a confidentiality agreement, the first detailed thing they usually read about your business is the information memorandum. It is the document that turns initial curiosity into a serious offer, or into a polite decline. A good one answers the questions a buyer will ask, presents the business honestly and saves weeks of back-and-forth. A poor one raises doubts that follow the deal all the way to settlement.

What an information memorandum is for

An information memorandum, often called an IM, is a structured description of the business prepared for potential buyers. It is not a contract and not a full due diligence pack. Its job is to give a qualified buyer enough understanding to decide whether to proceed and to make an informed initial offer.

It is usually released only after a buyer has signed a confidentiality or non-disclosure agreement, and often only after they have shown they have the means and intent to buy. Your lawyer should prepare or review the confidentiality agreement.

What it should contain

The exact structure varies, but most effective information memoranda cover the following.

Overview of the opportunity

A one- or two-page summary at the front: what the business does, where it operates, how long it has been running, headline financial performance, why it is for sale, and the key reasons it is attractive. Many buyers read only this section before deciding whether to read on.

History and ownership

How the business started, how it has grown, the current ownership and legal structure, and any significant changes along the way.

Products, services and customers

What the business sells, to whom and how. Useful detail includes:

the main products or service lines and their share of revenue;
the customer base by type, size or industry, without naming customers at this stage;
how much revenue is recurring, contracted or repeat;
how concentrated revenue is across the largest customers;
how customers are won: referrals, marketing, tenders, online.

Operations

How the business actually runs: premises, key equipment, systems and software, suppliers, seasonality and capacity. A buyer wants to picture day-to-day operations and spot anything that would need investment.

People

An organisation chart, the number of staff by role and employment type, the length of service of key people and the owner's current role. Be specific about what the owner does and how that work would be handed over. Individual salaries and personal details are generally held back until later in the process.

Premises and lease

The location, size and nature of the premises, and the key lease terms: the rent, the term remaining, any options and whether the lease can be assigned. A buyer's financier will often focus on this.

Financial information

Usually three years of historical results plus year-to-date figures, showing:

revenue, gross profit and expenses;
normalised earnings, with each adjustment listed and explained;
key ratios and trends;
a summary of assets included in the sale.

Our article on how much your business is worth explains normalisation and why buyers scrutinise every add-back.

Growth opportunities

Realistic opportunities a new owner could pursue, such as new markets, products, pricing or efficiencies. Keep these grounded. A buyer will discount ambitious claims and may question the rest of the document if this section reads as wishful.

The sale process

What is being sold (assets or shares), whether stock is included or extra, the timeline, how offers should be submitted and who to contact. Our article on asset sale vs share sale covers the structural choice.

What to leave out at this stage

Confidentiality agreements help, but they do not undo a disclosure. Information that could harm the business if it reached a competitor is usually held back until a buyer is further along. This often includes:

customer names and individual customer revenue;
supplier pricing and terms;
staff names and salaries;
detailed pricing models, recipes, processes or source code.

These can be released in stages during due diligence, once a buyer has signed a letter of offer or heads of agreement.

Accuracy is not optional

An information memorandum is a selling document, but it must be accurate. Under the Australian Consumer Law, a person must not engage in conduct in trade or commerce that is misleading or deceptive or likely to mislead or deceive. Statements in an IM can give rise to claims if they are false, overstated or leave out something that makes the overall picture misleading. Disclaimers help but do not necessarily protect a seller who has made misleading statements.

In practice:

Make sure every figure reconciles to the financial statements and tax records.
Support every add-back with evidence you could produce on request.
Label forecasts and opportunities clearly as estimates, and explain the assumptions.
Disclose known issues that a reasonable buyer would want to know, such as a major customer reducing orders or a lease nearing its end.
Have your lawyer review the document and its disclaimers before it goes out.

A buyer who finds something in due diligence that the IM glossed over will start to question everything else in it. Honest disclosure early protects both the price and the seller.

Presentation

Clear writing, consistent figures and a logical structure make a better impression than design. Use plain language, short sections and simple charts where they help. Photos of the premises, fit-out and equipment are worth including. Avoid jargon and superlatives. Make it easy for a busy buyer, and the buyer's accountant, to find what they need.

When to start

The IM draws on almost every part of the preparation work: clean accounts, documented processes, a reviewed lease and a clear understanding of the owner's role. If that work is done, the document largely writes itself. If it is not, the IM is where the gaps become visible. Our guide to preparing your business for sale sets out what to do first.

How we can help

Kainos prepares the financial sections of information memoranda, including normalised earnings and supporting schedules, and helps owners present the whole business clearly and accurately. We advise and represent sellers through the process, working alongside their lawyer on confidentiality agreements and disclaimers. To talk about preparing yours, contact us or read about our business sales and purchases service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.