Generating a Narrative for the CIM: Finding the Story to Connect with Your Buyers

This article covers the importance of crafting a compelling narrative for the CIM, or confidential information memorandum, as used in M&A deals.

CIM or Confidential Information Memorandum | Firmex

If you went into finance to leave English Lit behind, there’s some bad news for you. You might need to brush up on your storytelling skills.

Stories have been shown to help us connect with people and move them to action. It’s even been shown that when you move beyond factual arguments and get people emotionally involved in a story, they’ll drop their guard and accept your arguments less critically.

Good storytelling can even help you close deals faster and with higher valuations. And the confidential information memorandum (CIM) is a good place to start.

As part of the sell-side M&A process, you’ll have to write a CIM for the company being sold. In what can be a book of 100 or more pages of financial statements, charts, graphs and discussion, you’ll have to describe in detail the company, its market, and its competitive environment.

The CIM is both an informational document and a marketing document. While providing factual information, it should also present the company in its best light for the buyer and help support the valuation for the company.

From the executive summary to the investment thesis and financial statements, it’s important that the CIM ties it all together with a coherent, consistent narrative, which will shape the way a potential buyer views the data. They will already be building their own narrative around the target company, so take control and set the narrative you want them to buy into—right from the start.

The Marketing Piece: Know Your Buyers

It may seem counterintuitive, but to generate a narrative about the company being sold, start by learning about the potential buyers. If you’re familiar with sales or marketing, you know that for persuasion to be effective, you need to start by understanding your customer.

The company you’re selling may have a strong story, but it won’t mean anything if you can’t demonstrate to potential buyers how they would benefit from that story. For instance, the narrative that appeals to a strategic buyer looking to integrate the company into their own operations will be different than one for a financial buyer—such as a private equity firm—looking for a high financial return in a short period of time.

A strategic buyer will still be interested in financials, but might also be interested in accessing a new market, gaining synergies, or taking control of the supply chain. Your narrative needs to focus on how the merger or acquisition could benefit the buyer in one of these areas, based on the merits of the company being sold and the needs of the buyer.

A financial buyer is more likely to be interested in a story that supports strong, predictable, free cash flow or exceptional growth—and will likely be more concerned about the business cycle and performance of the overall industry because these factors can affect growth regardless of the strength of the company.

The Valuation Piece: Know Your company

Narrative can be important for valuation, argues Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, in his book Narrative and Numbers: The Value of Stories in Business. It may, for instance, influence estimates of variables such as future market size and cash flows. For example, a networking effect or winner-takes-all narrative could lead to a larger estimate of future market share.

With the needs of potential buyers in mind, examine the data you’ve compiled on the company, its market and its competitive landscape, and look for narratives that can drive valuation—such as sustainable competitive advantage, revenues protected by factors such as high switching costs or a “better mousetrap.”

Don’t forget the less sensational narratives. A strong financial record over several years in a stable market tells a story as does a company benefiting from macro factors such as the expected interest rate environment.

Work with the management of the target company. They know their company better than anyone. They may already have a corporate narrative—but don’t assume it’s the right one for your purposes. It may have been developed for internal or marketing reasons and its audience may be employees or customers. Or it may have been created to tell a startup story and now the company is more mature.

Putting It Together: The CIM

To be persuasive, the story should be simple, credible and authentic. Try to stick to one main narrative and avoid telling side stories. Don’t be afraid to show weaknesses; they will likely come up in due diligence and, by showing them up front, you could increase the trust that potential buyers have in the story. The most effective stories are specific and, wherever possible, they show rather than tell.

Everything in the CIM should support the narrative. Don’t assume people will connect the dots. Highlight how the narrative might affect the value of the firm and benefit the buyer. If there’s a sustainable competitive advantage, show its effect on such things as market share and margins. If you’re telling a growth story about a company that’s benefitting from its industry, then give more weight to that section.

A good narrative can take some time to develop, but the effort is worth it. Your CIM will work harder for you.

Douglas Warren

Doug Warren, MA, CFA, writes for the financial industry, drawing on experience he gained working as an institutional portfolio manager, bond salesman, credit analyst and financial advisor.