Volume 9, Issue 24, November 21, 2022
There's the expression, "You never get a second chance to make a first impression." For many healthcare business owners thinking about selling their company, the first impression they may personally make on prospective buyers will come from a confidential information memorandum (CIM). And if that CIM doesn't represent the business in a professional, positive, and transparent manner, the owner may not get a chance to receive a fair offer.
What exactly is a CIM? It's the document used to market your business to potential buyers. It may go by other names, including a pitch deck, investor deck, the "book," or confidential information presentation (CIP). The document is typically called a CIM when used in the sale of a mature business and a pitch deck for startups.
While the name is interchangeable, the content is not. A CIM is the initial source of data and information a buyer uses to evaluate the candidacy of an investment target relative to its investment thesis. Broadly speaking, the CIM explains what the business does and the type of transaction the owners are seeking.
Most business owners do not create a CIM until they are prepared to actively market their business for a sale. However, if an unsolicited buyer takes interest in your company, immediate signals are sent if you do not have a CIM, let alone one that's current: You're unprepared for a sale, and the buyer is in a good position to negotiate a value deal. At least those are the signals buyers receive, regardless of whether they're true. Simply responding to interested buyers with an annually updated CIM signals a posture toward prospective buyers that you are not interested in a low-ball offer.
On the other hand, if you intend to execute a coordinated, professional M+A process to sell your business, a CIM is required. You will be marketing your business to dozens — if not hundreds — of potential buyers, many of whom analyze numerous potential acquisitions each week. Without the data about your healthcare business consolidated in a professional manner, buyers are much less likely to invest the time into understanding your company's raw data.
Moreover, organizing and presenting the data allows you to structure the narrative in ways that emphasize your company's strengths while providing explanation on potential weaknesses. You can tell your story in ways that benefit you as opposed to allowing a buyer to "discover" the hair — the operational, legal, financial, or other aspects of the business that have had errors, inefficiencies, or other liabilities — and speculating on any other skeletons.
This article taking a closer look at the importance and development of a CIM is written for two audiences: 1) sellers who are hiring a professional M+A advisor, like VERTESS, to help them proceed with a sale and develop a supporting CIM or to double check that their current advisor included the relevant, key points in the CIM and 2) owners who endeavor to manage the sale of their business without a professional M+A advisor (not advisable) and therefore need tips and best practices to create an impactful CIM.
Let's take a look at a few general CIM best practices before we discuss key components in a well-rounded CIM.
First, do not use a Word document to create your CIM. Nobody wants to open up a CIM and be greeted by a wall of text — even a wall that has an occasional chart or image dropped in. Buyers review hundreds of CIMs, so the last thing you want to do is have a CIM that makes a negative first impression (remember what I said in the first paragraph). Make your CIM simple, nice to look at, and easy to review and digest. Include graphics, charts, and pictures and present them in an attractive layout. This is best achieved using software like PowerPoint.
Second, don't exaggerate or attempt to mislead a reader. An investor competent enough to buy your company is also competent enough to learn the truth about your company. Be as honest as possible in the CIM. That's what buyers are expecting.
Third, and this goes back to the purpose of the CIM: Keep it concise. This means around 40 pages, although fewer is fine if that's what's required to effectively tell your story.
After sending a CIM to potential buyers, you will find many will respond with additional questions deriving from their specific investment thesis. You can't try to get ahead of every question as questions change between differing theses. An industry specialist can help you create a CIM with specific data points that all investors in your vertical will want to understand. Investors will begin analyzing the data, using it in their own models; ask questions relating to their own thesis; and, if they feel like there could be an interesting opportunity, they will set up a "coffee meeting." This meeting gets final questions out of the way. When using an M+A advisor, the coffee meeting isn't something you should need to do as the seller.
From here, the buyer should have the preponderance of data needed to meet with you, the seller; identify chemistry and synergy; dig deeper into the data; visit your operations; and eventually, if all goes well, submit a letter of intent (LOI).
Below we identify some of the core components of a good CIM. There may be reasons to exclude, modify, or expand on this list. Each business is different, and your M+A advisor should know what is most important to include in your CIM, assuming your advisor is a specialist in your industry.
Overview. The first page of the CIM with meaningful content — usually the overview — gets a fair amount of attention and then most buyers will scroll to the financial section found later in the CIM. If buyers like both pages, they'll go back and read the rest of the document.
In your overview, summarize the offering in a way any reader (buyer) can understand. Define your audience, which is often demographics of end users, the business types you sell to, or possibly a job function (i.e., your customers). Show how you solve a problem(s) and explain it in a way that's easy to follow.
The final element to include in your overview is your "secret sauce" — your unique approach to solving the problem with your target audience.
Some quick tips for writing the overview:
History. When you reflect on the history of your business, you'll probably think about the experience of opening the company, your first customer, the first time you hired and fired someone, your first insurance reimbursement check, a customer experience that went wrong, or a major accolade. Investors want to know about the background of your company, but they are really looking to understand your history through the lens of growth. Help buyers visualize the way your footprint expanded, customers grew, patients diversified, contracts were secured, and staff increased. Include the challenges you faced along the way and how you overcame or navigated them.
Remember: A buyer is acquiring your business so they don't need to face all the challenges you did. If they wanted to face those challenges, they would start their own company. Let buyers know how much work it took to grow the company to its current state, even if those growth pains are in your distant memory.
After reading the history, buyers should come away with two sentiments: 1) I'm glad I don't have to go through all that effort, and 2) The skill, effort, and luck involved to advance the business to its current state are difficult to reproduce, so it's less risky to buy than build.
Team. Include an organization ("org") chart and explain why your team is qualified to execute your operations better than competitors. Work history, networks, and skills are key points to highlight, as is your history together as a team. This may include how you knew each other before working together.
Resume highlights or short bios are expected. Limit these to leadership. While the organization chart may show all the positions (ideally grouped by division or function), investors are most interested in and likely looking to acquire your leadership team and want to know they're of pedigree.
Market. In many healthcare verticals, this is known or assumed, but buyers want to know how big the opportunity is associated with your company. Yes, they may plan to expand your business. But the core market is a starting point, and they want to know that you know it.
Beyond the market, also provide a clear picture of your audience. Who are they, and how many are in your market? How do you reach/communicate with them? What are your referral sources?
You may decide to share the "total addressable market" (TAM), which includes every potential member of your audience seeking services or products from your business, or you may decide to refine it to your "total serviceable market" (TSM), which are the customers you are actually able to reach.
Business model. How do you make money? Who pays you, how much, when, and from where? I've seen sellers drop the business model canvass into a pitch, but that may signal inexperience. You should be able to synthesize your business model into a succinct, visual, and possibly creative way where everyone can understand the model.
For example, with substance use disorder (SUD) providers, I model the American Society of Addiction Medicine (ASAM) continuum in a visual, then overlay the company's position in the continuum and add relevant data. See an example below. It's a simple visual to depict a client's business model, and even an investor not experienced in the space will understand exactly what the client does, how they're paid, how patients move around the continuum, and some outcome measurements.
Competition. Not all CIMs include information on competition, but I personally like to discuss it. In the SUD/mental health spaces, it's helpful to see the density of providers in a geography since that helps buyers understand in-network reimbursement rates better.
When discussing your competition in the CIM, you do not need to know and identify every competitor, but you should have command over the competitors in proximity to your operations. Communicate how they're trying to address the problems you're trying to address and how your solution is similar, different, or whether that matters.
If you have a competitive advantage, share it. If your service is similar to your competitors, leave this section out. It may be unnecessary and spur questions you don't want to discuss.
Growth. Buyers deploy capital to generate a return on their investment. How might they generate a higher return on capital with your asset versus another? While you might not receive the "credit" in valuation for future revenues associated with growth (the buyer will need to do the work to achieve that growth, so they're not going to pay for it ahead of time and be accountable to execute it), you'll see increased interest from buyers if you can show demonstratable pathways to that growth.
Case studies that highlight a recent initiative and discuss how that initiative and its success can be reproduced is one effective way to demonstrate growth opportunities. In SUD, this may be a new level of care in an existing geography or starting an intensive outpatient program (IOP) to see if there's demand in a new geography before launching a residential treatment center (RTC). In mental health, a case study might speak to marketing to new populations, telehealth, psychedelics, or transcranial magnetic stimulation (TMS). Including data points that give a clear picture to the path toward growth can also be effective at demonstrating growth potential.
There are areas of low-hanging fruit for growth in most businesses. Even if they seem obvious, explain them. There are also growth initiatives you may have considered but chose not to pursue due to the effort, capital requirements, lack of manpower, lack of expertise, or simply because you were approaching a sale. Put numbers and timelines to these initiatives and offer the buyer a blueprint to a higher return on capital.
You're the expert. Help show it in the CIM. Buyers want to know what you might do to grow first before considering their own plans.
Financial overview. Historical and projected financials are key elements to a CIM. Explain volatility and defend the proforma. Buyers will scrutinize any years where revenue and expense variance were substantial, so it helps to set the narrative for those likely questions in the CIM.
It's best that proformas provide a realistic outlook for the current scope and scale of the business if it is mature or a defensible and conservative outlook for growth initiatives for a newer business or startup. Sellers tend to have a bright outlook for future performance, but buyers know that storms can quickly appear in even the bluest of skies. In other words, your proforma should point "up and to the right" (it would be uncommon for an owner to believe plans will result in declining revenues) but avoid signaling inexperience by including assumptions that paint an unrealistic or overly optimistic growth trajectory.
Make sure the data you've peppered throughout your CIM clearly ties to and is reflected accurately in the proforma. We call this "tick and tie," where advisory teams put a "tick" mark next to every data point in a CIM and "tie" them out to all the other data to ensure everything checks out. If you don't tick and tie your CIM, there's a good chance a buyer will. If they do, expect them to catch any errors, which will damage your credibility.
Metrics. Not all businesses operate off metrics, which is a travesty. I'll write a future article on how to develop metrics for your company and why that matters in an M+A transaction. If you do have metrics, the key is to compare yours to industry norms. Common metrics in healthcare businesses include prior authorization vs. claims collected, census, inventory turnover, and rounding, so you should be able to identify the benchmarks (an M+A advisor will help with this as well). If you have substantial variance from the benchmarks, you must address the reason(s) why. It's better to have an upfront explanation than to let buyers discover these variances and develop their own narrative for why your business is underperforming.
Developing an informative and effective CIM takes time, expertise, comfort with software, and other skills. An experienced M+A advisor will have these skills or a team supporting them with such talents. An advisor will know how to present your company's most important data and what data to omit. An advisor will also know how to pepper the CIM with data points allowing buyside analysts to prepare their own models so they can analyze your business operating in their portfolio or model.
Completing a CIM is possible without an expert advisor, but not without risks. For most business owners, the work required to create a proper CIM is usually difficult to effectively execute while operating and leading the company and do so in a way that creates a limited auction for the company.
Since the CIM is essentially the first true experience and interaction (and impression) a buyer will have with you and your company, it's likely in your best interests to hire an M+A advisor and task them with taking the lead on the CIM. This will better help ensure the final document communicates what buyers want to see, positions your business correctly under current market conditions and buyer interests, and gives buyers a starting point for the "coffee meetings."
After working in M+A advisory and corporate financial consulting, David co-founded Spero Recovery, a provider of drug and alcohol recovery services with over 100 beds in its continuum of residential, outpatient, and sober living care. As its CFO he led the company to significant revenue and margin growth while ensuring it adhered to the strictest principles of integrity and client care. After selling Spero he remained in leadership with the buyer as its CFO and quickly realized accretion and integration. Of the myriad lessons not learned while earning his MBA with Distinction in Finance from a Tier 1 university, the most profound was the importance of investing in his staff and clients. He learned that the numbers on a spreadsheet represent humans, families, and dreams, which was a radically different paradigm from investment banking.
At VERTESS David is a Managing Director providing M+A and consulting services to the Behavioral Health, Substance Use Disorder treatment, and other verticals, where he brings a foundation of financial expertise with the value-add of humanness and care for the business owners he is honored to represent.