Key takeaways
- A CIM is a sales document written by the seller's adviser, so read it for what it proves, what it asserts and what it leaves out.
- Rebuild the earnings yourself from the statements before you accept the normalised figure on the summary page.
- The best questions a CIM raises are about the future: who the customers are, who runs the place, and what happens when the owner leaves.
- Use the CIM to decide whether to make an offer, and due diligence to decide whether to close.
After you sign a non-disclosure agreement, the first substantial document you receive on a business for sale is the confidential information memorandum, usually called the CIM. It is written by the seller's broker or adviser to present the business well. That is its job, and a good one is still enormously useful. Your job is to read it as evidence rather than as a conclusion.
We prepare CIMs for sellers at BizSell.ca and we help buyers read them. This guide is the method we use on the buy side, section by section, with the questions each part should make you ask.
The summary and the asking price
Start at the end of the summary, with the asking price and the earnings figure it is based on. Note whether the figure is seller's discretionary earnings or EBITDA, because the two are not comparable and the multiple that looks reasonable on one is aggressive on the other. Note whether the price includes inventory, working capital, real estate or vehicles, and whether it is for shares or assets.
Then read the description of why the business is for sale. Retirement, health and relocation are common and legitimate. A vague reason, or a reason that does not match the owner's age and circumstances, is a question for the first meeting, not a reason to walk away.
The financial section
Most CIMs present three to five years of summarised results plus a normalisation schedule that bridges reported profit to the headline earnings figure. Do not accept the bridge. Rebuild it. Take the reported statements, list each add-back, and ask of every line whether a new owner would genuinely avoid that cost. An owner's salary is a valid add-back only to the extent it exceeds what you would pay a manager, or what you would pay yourself.
Look at the trend, not just the latest year. A business whose earnings jumped in the final year deserves a question about what changed and whether it will last. Look for the cash flow items that EBITDA ignores: capital spending, working capital growth, and loan repayments. A business that needs new trucks every few years earns less than its EBITDA suggests.
Customers, suppliers and people
The customer section tells you about concentration and durability. If the CIM says the top customers are long-standing but does not give their share of revenue, ask. If it gives percentages, ask how many of those relationships are contracted and how many rest on the owner personally. The supplier section tells you about dependence the other way, especially where a single supplier, franchisor or platform controls the terms.
The people section is where owner dependence hides. Read the organisation chart and the role descriptions and ask who signs quotes, who the customers call, who handles hiring and who could run the place for a month. A CIM that describes a strong team but shows the owner in every function is telling you two different stories.
- Share of revenue from the largest customer and the largest five
- Which customer and supplier relationships are under written agreement
- Tenure and compensation of key staff, and whether they know about the sale
- What the owner personally does each week that nobody else does
Operations, assets and the lease
The operations section should let you picture a normal week. Ask what systems run the business, what is documented, and what capacity exists without new investment. The asset list should include age and condition, so you can estimate what you will need to replace and when. The lease is often the most important single document for a location-dependent business: how long it runs, whether it can be assigned, what the renewal terms are and what the landlord can demand on assignment.
Growth opportunities, which every CIM includes, are worth reading as a list of things the seller did not do. Some are genuine, some are excuses. Ask why the owner has not pursued each one, and listen for answers that reveal a constraint you would inherit.
From the CIM to an offer
A CIM is enough to decide whether to make a conditional offer, not enough to decide whether to close. Your letter of intent should state the earnings figure you are relying on, the structure, the working capital you expect to receive, the transition you expect from the owner, and the diligence you will perform. Everything the CIM asserted becomes a diligence item. Everything it proved becomes a confirmation item.
If you want a second set of eyes on a CIM before you make an offer, a Business Acquisition session with Ali runs 60 minutes for $399, by video or phone, or in person in Vancouver. Call or text (604) 632-4959 or email ali@sedighi.ca.