3 Ways Financial Modeling Enhances the Information Memorandum

 

If you frequently prepare Confidential Information Memorandums (CIMS), then you are well aware of the role of financial modeling in their creation. If you are new to information memorandums and business deals, you may be less aware. If you fall into the latter group, read on. This article is for you!

First, it is important to fully understand what financial modeling is. A financial model is an interactive document, usually created in a spreadsheet like Excel or Google Sheets, or through specialized financial modeling software. They are created to allow you to view the potential output of various different inputs.

Financial Modeling allows you to determine many of the key figures that will go into the information memorandum. Most importantly, the following three:

1. Financial Projections – One of the ways that potential acquirers or investors will evaluate your business is through your financial projections. They want to have an understanding of where the business is going. They want to see the historic results applied to what is known about the future to understand what could happen.

Financial modeling plays a key role in arriving at financial projections. You will likely have a model of base numbers or variables – also known as assumptions – that will play into the financial projections in the information memorandum. The inputs will then flow through to models of each of the standard financials (income statement, balance sheet, statement of cash flow) and others as appropriate.

2. Valuing the Company – Another important metric in the Information Memorandum, or something that a potential buyer may want to see, is a valuation. Though it is likely that they may want to do their own financial modeling to calculate this based on their preferred method. In this case, the modeling may be done by them or you, or possibly both. Either way, it still plays an important role in the document.

3. Investment Opportunities – If you’re not looking to sell outright and are owning looking for a partial investment, you need to show the potential return. It is through financial modeling that you will determine this. Usually, you will need to explore multiple scenarios to determine how you wish to structure this or what you want to offer.

Much like valuing the company, both you and the potential investor may run these numbers themselves. An investor may wish to negotiate. Their suggestions will most likely be based on their own financial modeling as well.

This is only a sampling of how financial modeling ties into the information memorandum. In nearly every type of business document, from business plans to pitch decks, to CIMs, financial modeling is at its core. It will be used in a variety of ways to create some of the most important aspects of the plan.

It doesn’t matter who your audience is, they will be interested in your financials in some way. It is business, after all. In order to have strong and believable financials, you must start with proper Financial Modeling. This will give you the foundation for a strong information memorandum overall.