Confidential information memorandum: how to read a CIM skeptically
Short answer
A confidential information memorandum (CIM, or offering memorandum) is the marketing document a broker prepares after you sign an NDA. It describes the business, its history, customers, staff, operations and growth opportunities, and includes summarized financials and the seller's add-back schedule.
It's useful for understanding the business and dangerous as a source of numbers. Read it to generate questions, then verify every financial figure against tax returns and bank statements.
A CIM is the business's best outfit. Read it like a first date's dating profile: informative, sincere, and selectively lit.
What's in a typical CIM
- Business overview, history and reason for sale.
- Products, services, customers and markets.
- Staff and organization chart.
- Location, lease and equipment.
- Summary financials, often several years, plus a recast showing SDE or adjusted EBITDA.
- Growth opportunities.
Read each section for questions
| CIM says | Ask |
|---|---|
| "Loyal, long-standing customers" | Revenue by customer for 3 years; top 10 share |
| "Experienced team in place" | Who'd leave if the owner left? Tenure and pay? |
| "Owner works part-time" | What exactly does the owner do each week? |
| Add-back schedule | Document for every line; three-year view |
| "Significant growth potential" | Why hasn't the seller done it? |
| "Modern equipment" | List with ages and maintenance records |
| "Favorable lease" | The lease itself; years left; assignment |
Turn your questions into a list for the broker, and keep the financial ones for the tax return and bank statement comparison. See add-backs and questions to ask the seller.
NDA when buying a business: what you're signing and what to watch
Before a broker or seller shares financials, you'll sign a non-disclosure agreement (NDA) promising to keep the information confidential, use it only to evaluate the purchase, and not disclose that the business is for sale. Most are standard and short.
Read four things before signing: whether you can share information with your advisers and lender, any non-solicitation clause covering employees, customers or suppliers, how long it lasts, and what remedies the seller can claim. Not legal advice; have your attorney glance at anything unusual.
An NDA is usually the first document you sign in a deal, and most buyers sign it without reading. Usually that's fine. Occasionally a clause in it matters a lot.
Normal terms
- Information is confidential and used only to evaluate the purchase.
- You won't disclose that the business is for sale.
- You may share with representatives who need to know and are bound by confidentiality.
- You'll return or destroy information if you don't proceed.
- Contact with employees, customers and suppliers only through the broker or seller.
Clauses to read carefully
| Clause | Why it matters | What's reasonable to ask for |
|---|---|---|
| Representatives | You need your attorney, CPA, lender and service providers | Explicit permission to share with them |
| Non-solicit of employees | Could block hiring someone who applies to you independently | Exclude general job ads and unsolicited approaches; set a time limit |
| Non-solicit of customers | Problem if you already operate in the industry | Carve out existing relationships |
| Term | How long obligations last | A defined period |
| Remedies | Injunctions, damages, fees | Mutual and proportionate |
Once signed, you'll usually get the CIM and some financials.
Worked example: reading the CIM's numbers against the tax return
Illustrative example, not a real CIM
The CIM's summary shows revenue of $2,050,000 and "adjusted EBITDA" of $410,000 for last year, with a note that figures are "management prepared". The tax return for the same year shows gross receipts of $1,960,000. The $90,000 difference turns out to be revenue the CIM counted on an accrual basis (invoiced in December, collected in January) while the return is on a cash basis, which is legitimate but needs to be consistent year to year. The adjusted EBITDA includes $55,000 of "non-recurring" legal fees from a dispute with a former partner and $40,000 of "owner's discretionary marketing". The legal fees may be genuinely one-time, if the dispute is settled; the marketing probably isn't, since the business needs marketing. Remove the $40,000 marketing add-back and the profit effect of the revenue timing difference (about $30,000 on the $90,000 in this example), keep the documented legal fees, and EBITDA is closer to $340,000 ($410,000 − $40,000 − $30,000). The CIM wasn't misleading; it was making the seller's case. Your job is to rebuild yours.
What a CIM usually leaves out
- Bank statements, which are how you test whether revenue arrived.
- Customer names and revenue by customer, often held back until later.
- The reasons previous buyers walked away.
- Deferred maintenance and capital spending coming due.
- Owner hours and what exactly the owner does.
- Risks the seller knows about: a competitor opening, a customer reviewing suppliers, a lease ending.
None of that makes a CIM useless. It just means the CIM is where your questions start.
Questions a CIM should prompt
- Are the financials from tax returns, reviewed statements or internal books? On what accounting basis?
- What exactly is in each adjustment, and where is the support?
- Why is the owner selling now, and what has the trend been in the last six months?
- Who are the top customers (by revenue share, even if names come later)?
- What does the owner do, and who on the org chart could take it over?
- What's the lease term, and has the landlord been approached?
NDAs: what to check before you sign
- Can you share information with your lender, attorney, CPA and investors? Most NDAs allow "representatives".
- Does a non-solicitation clause stop you hiring the business's staff if you don't buy it, and for how long?
- If you already work in the industry, is there a customer non-solicit that could restrict your current business?
- How long does the NDA last, and what must you return or destroy?
- Is it mutual, if you're sharing your own financial information?
Red flags in a CIM
- No tax return figures anywhere, only management numbers.
- Projections presented as if they were results, or "run-rate" figures from one good month.
- Large adjustments with vague labels: "owner discretionary", "non-recurring", "normalization".
- An org chart where every line leads to the owner.
- Growth opportunities the seller never pursued offered as reasons to pay more.
Turning the CIM into your first request list
Every claim in a CIM is something you will want to confirm with a document. As you read, write each claim next to the record that would prove it:
| CIM claim | Document that tests it |
|---|---|
| Revenue and adjusted earnings | Tax returns, bank statements, the add-back schedule with support |
| "Loyal, long-standing customers" | Revenue by customer for three years |
| "Experienced team in place" | Payroll by employee with hire dates and roles |
| "Owner works part-time" | The owner's actual weekly tasks, and who covers them |
| "Room to grow" | Capacity figures, pricing history, marketing spend |
| "Recent investment in equipment" | Invoices and the fixed asset register |
| "Long lease" | The lease, options and assignment clause |
Send it as one numbered list after your first call. How quickly and completely the seller answers is itself useful information.
Who wrote the CIM, and why it matters
A CIM is usually written by the seller's broker or adviser, from information the seller gave them. It is a marketing document, and most include a disclaimer saying the broker hasn't verified the figures and the buyer must do its own diligence. Read the disclaimer: it tells you that nothing in the CIM is a promise. What protects you is what ends up in the purchase agreement, especially the reps and warranties and the financial statements attached to it. If a figure in the CIM matters to your decision, make sure the same figure, or the records behind it, is covered by a rep in the final agreement.
Keep the CIM and your notes on it after the deal closes. If a figure in it turns out to be wrong, you will want to show what you were given and when.
Frequently asked questions
Who writes the CIM?
The seller's broker or M&A adviser, with information from the seller. It's a marketing document.
Is the financial information in a CIM verified?
Usually not independently. It's the seller's figures, often recast with add-backs. Compare it with the tax returns.
What's typically missing from a CIM?
Weaknesses: customer losses, lease problems, staff turnover, deferred maintenance, recurring 'one-time' costs, and the reasons previous buyers walked away.
Can I share the CIM with my advisers?
Most NDAs allow sharing with advisers who need to know, such as your attorney, CPA and lender. Check yours.
Why do I need to sign an NDA to see a business's financials?
Sellers don't want staff, customers, suppliers or competitors to learn the business is for sale, or to see its financials.
Can I share the information with my lender and accountant?
Most NDAs allow disclosure to representatives (advisers, lenders, investors) who need it and are bound by confidentiality. If yours doesn't, ask for that change.
Sources
- SBA: Buy an existing business or franchise
- IRS: Get transcript (verify the returns behind CIM financials)
- SBA SOP 50 10 8.1 (lenders verify returns against transcripts; adjustments must be justified)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.