Best practices for acquisition stage investment memo?

February 16, 2021

by a searcher from Aalto University - School of Business in Helsinki, Finland

We are looking at standardizing our searcher's acquisition stage investment memos, and wanted to get some of ideas from the community for best practices. In the Nordics, investment memos (or CIMs if you will) are treated more as marketing than legal documentation. The legal fine print will be in a separate term sheet or investor agreement.

At the moment, the draft outline has:
1. Executive Summary: What are the key reasons why we are acquiring?
2. Transaction: Expected returns, form of investment, sources and uses of capital, cap table post-acquisition
3. Industry: Industry assessment, key competitors
4. Company: Overview of the company, history, current owner, business model, financial performance
5. Management: New management team, board of directors
6. Value creation: Financial projections, growth opportunities, operating improvements, exit scenarios
7. Key risks: Risk, probability, severity, mitigation
8. Appendix: Audited financial statements, five year financial forecasts, SHA/IM term sheet, Searcher CV

Any suggestions on the outline, or more generally on what to include and what not on an investment memo?

(edit: fixed the broken layout)

Reply by a professional
from University of Colorado at Boulder in Colorado Springs, CO, USA

Good list. You probably have "Market Opportunity" inside of #3 (if not, I'd add) - the market as a whole is important. Harvard did a study that showed that picking the right industry was more important that picking the right target. I'm not easily seeing "Differentiators" - but that always comes up - and having a section that speaks to this CFS (critical factor of success) is helpful. If this is a Recurring Revenue business, then a section on Churn, and Customer Acquisition Costs (CAC) and detailed data on customer retention (sliced and diced a lot of ways) will be critical. No talking about a recurring revenue business without those. Growth is SUCH a big part of the value add (along with debt leverage and multiple arb) that I think it deserves its own section (not to be buried inside of a section). Of the Big Three (growth, Multiple Arb, Debt) it is the only one that is internal to the org - so, again, I think it is SO IMPORTANT that it deserves its own well-done section. I think Lisa's comment on blending in the Value Creation into the Exec Summary is spot on (but it also needs its own in-depth spot inside the detail too). So, for me, it is not a "Move" the detail into the summary as much as it being in the detail AND in the summary. Depending on the data, I might also add comps - seeing what deal flow is saying about value can bolster your case. I'd also think through the order - get it to flow well. I'd wireframe out the sections to get a general idea of the size. I'd creatively create an On Brand template and then drop in the content - and. pass it along for review. So it looked as good as it read - smart design is worth the small cost.

Just my $.02... hope it helps.

I didn't - It was the idea that if you were a homebuilder and you picked Aspen as the place to set up shop, then you would do pretty well (even if you were an average builder), but if you picked Rocky Ford (a tiny farming town) then you could be the best builder and still not do well. High tide rises all boats - and the INDUSTRY doing well was a big factor in your success (not just the company you picked). I attended Harvard and Columbia in###-###-#### maybe it was part of the Columbia course? I'll check my other folder and see if I can find it. Getting old sucks.

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