A Confidential Private Placement Memorandum is a document used in mergers and acquisitions to convey important information about a business that’s for sale including its operations, financial statements, management team, and other data to a prospective buyer. Who prepares the Offering Memorandum?When any company goes through a sale process, it hires an investment banker. The first step of the banker is to understand the company and gather as much information as possible from top management to come up with a profile the company. The banker prepares the CIM and uses it as a marketing document, which is intended to make the company look attractive as the objective is “not just to sell, but to sell for maximum value.” The reason an investment banker tries to sell a company at the maximum value is because they represent the best interest of their client (the seller), and that their commission is based on the sale price. Executive SummaryThis is a 1-2 page summary of the entire memorandum. It contains at least the following: Investment ThesisThis section of the CIM contains the investment rationale in detail, i.e. why would the “target company” be a great fit for the acquirer. Typically, it may include the following (as hypothetical examples): Overview of the MarketIt is imperative for the acquirer to know the market size and current market trends. It is the duty of the banker to give an overview of the market and make the company’s case stronger. The investment banker prepares the market overview from credible data sources, such as World Bank, Gartner, IDC, Forrester, Bloomberg, Reuters, etc. Credible sources provide reliability to the data points and help the acquirer to better understand the market and formulate the right strategy. Products and ServicesThis section contains a detailed analysis of the products and services offered by the company in its day to day business operations.For the product categories, the company will include a list of the products it offers under various segments, the differentiating factors of the products, the target segment of each product, etc. Revenue ProfileIt shows the revenue profile of the company from different aspects, which is very important for the acquirer. It shows the revenue mix according to Geo, Product, Business Segments, etc. By showing the information in this manner, buyers can see where the major revenue comes from and if it is aligned with their business strategy. Employee ProfileSegregation of the employees is shown so that buyer has a fair idea of existing personnel mix and can plan changes that will help them achieve cost optimization, or whatever strategy they plan to execute.An employee profile can be shown in several ways, including by Function, Qualifications, Geography, Pyramid, etc.It’s important to have full profiles on all the key employees. Customer ProfileFor any acquirer, it would be important to know what kind of customers the company would be serving in future. Some of the popular questions the acquiring company would be interested in includes: Will the customers be large enterprise customers or too many small customers, years of relationship with the customers, revenue contribution from Top 5 or 10 customers, etc. Financials – Historical & ProjectionsThis is perhaps the most important section from a valuation perspective, as it gives a detailed analysis of the profit and loss account. It contains actual financial information from previous years, as well as financial projections by the management of the target company. The assumptions of such projections are also written so that the buyer understands the rationale for such projections.Since the target company is preparing the projections, it will try to show the company in a very positive position and make it attractive in order to achieve a higher valuation. Management StructureA brief profile about key personnel of the company, highlighting their role(s) in the company, years of experience, previous work experience, etc.This section is extremely important, and also one of the most matter-of-fact sections. It typically includes each person’s photograph, name, title, and a multi-paragraph description of what they do, their background and their claim to fame.An organizational chart may also be useful in this section to illustrate the hierarchy and reporting structure. What a Confidential Private Placement Memorandum is NotAs discussed above, a typical Confidential Private Placement Memorandum will include all of the above information. Private PlacementThe private placement definition is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Private placement occurs when a company makes an offering of securities to an individual or a small group of investors. Since such an offering does not qualify as a public sale of securities, it does not need to be registered with the Securities and Exchange Commission (SEC) and is exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way for small businesses to raise capital without going public through an initial public offering (IPO). Institutional investors include the following: Restrictions Affecting Private PlacementThe SEC formerly placed many restrictions on private placement transactions. For example, such offerings could only be made to a limited number of investors, and the company was required to establish strict criteria for each investor to meet. Furthermore, the SEC required private placement of securities to be made only to “sophisticated” investors—those capable of evaluating the merits and understanding the risks associated with the investment. Finally, stock sold through private offerings could not be advertised to the public and could only be resold under certain circumstances. In 1992, however, the SEC eliminated many of these restrictions in order to make it easier for small companies to raise capital through private placements of securities. The rules now allow companies to promote their private placement offerings more broadly and to sell the stock to a greater number of buyers. It is also easier for investors to resell such securities. Although the SEC restrictions on private placements were relaxed, it is nonetheless important for small business owners to understand the various federal and state laws affecting such transactions and to take the appropriate procedural steps. It may be helpful to assemble a team of qualified legal and accounting professionals before attempting to undertake a private placement. Many of the rules affecting private placements are covered under Section 4(2) of the federal securities law. This section provides an exemption for companies wishing to sell up to $5 million in securities to a small number of accredited investors. Companies conducting an offering under Section 4(2) cannot solicit investors publicly, and the majority of investors are expected to be either insiders (company management) or sophisticated outsiders with a preexisting relationship with the company (professionals, suppliers, customers, etc.). At a minimum, the companies are expected to provide potential investors with recent financial statements, a list of risk factors associated with the investment, and an invitation to inspect their facilities. In most respects, the preparation and disclosure requirements for offerings under Section 4(2) are similar to Regulation D filings. Regulation D—which was adopted in 1982 and has been revised several times since—consists of a set of rules numbered 501 through 508. Rules 504, 505, and 506 describe three different types of exempt offerings and set forth guidelines covering the amount of stock that can be sold and the number and type of investors that are allowed under each one. Rule 504 covers the Small Corporate Offering Registration, or SCOR. SCOR gives an exemption to private companies that raise no more than $1 million in any 12-month period through the sale of stock. There are no restrictions on the number or types of investors, and the stock may be freely traded. The SCOR process is easy enough for a small business owner to complete with the assistance of a knowledgeable accountant and attorney. It is available in all states except Delaware, Florida, Hawaii, and Nebraska. Private Placement MemorandumsA Private Placement Memorandum (PPM) provides critical details about the offering. This differs from a business plan, which does not provide information about the technical structure of an offering. A PPM is used to raise capital from a number of investors instead of trying to find one with the entire amount of required capital. Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. 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