You can almost think of an Information Memorandum as a business plan. Although it is a marketing document used specifically in mergers & acquisitions, it is quite comparable and will have many of the same sections. Much like in the business plan, one of the sections people will be most interest in is the financial projections, which will be created through the use of financial modeling.
Understanding Financial Modeling vs. Financial Projections
First thing in understanding the role of Financial Modeling when it comes to the information memorandum is to ensure you understand what it is. People often confuse financial modeling with financial projections. However, financial modeling is the process by which you arrive at your financial projections. Projections, once established, do not change.
Financial modeling on the other hand is a dynamic, interactive tool. Financial models are typically set up in a spreadsheet, template format most commonly in Microsoft Excel. They are meant to allow you to explore various scenarios and potential inputs to see the impact it will have on final outputs.
How Financial Modeling Impacts the Information Memorandum
In the information memorandum, the financial projections play a large role in drumming up interest. However, they must be reasonable as potential buyers and investors will quickly spot those that are not. So, how do you make sure they are realistic? It all starts with financial modeling.
First, you will want to present and take into account your historical financial performance. Next, you should plug in justifiable assumptions on future performance based on market research. Market research informs many aspects of business plans and information memorandums and the financial projections are no exception.
Your Market Research will impact financial modeling in two key ways. It will give you an indication of whether sales are likely to go up or down and be your guidepost to determine how much of a change in either direction to expect. Now, you may very likely have an idea of a number you want to put forward. You should not just alter numbers to fit your narrative but, there is some flexibility when it comes to the assumptions that will go into the financial modeling.
What your market research is really going to do is give you a realistic range of numbers you could apply. You may choose to play with these numbers to see how different – yet reasonable and justifiable – assumptions about opportunities and changes will impact the final number. You will then arrive at a final number you can support but, are comfortable presenting as your final financial projections.
Bringing it All Together
Like Financial Projections in any business document, the projections in the information memorandum are created through financial modeling. However, you can’t simply make up numbers to apply to the model to get the number you want or think looks good. Financial modeling allows you to break down “real” numbers – in this case your actual prior performance – and combine that with reasonable assumptions based on market research and industry knowledge. Together, these allow you to put forward a number you can defend and is attractive to potential buyers or investors.
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