An investment memorandum is a document that contains all the information about an enterprise drawn up for an offer to a potential investor. The methodology by which it is formed is well developed and therefore it is not worth deviating from its rules.
The investment memorandum contains the information, the structure of which was developed by the world investment practice, the rule of law, court decisions and simple everyday prudence. The information that is in it should allow any investor to draw the required conclusions. Since the competence of potential investors can vary in a wide range, the memorandum is a fairly detailed document that allows you to understand and evaluate investment attractiveness for almost any of them:
- If we take, for example, an individual private investor, then he is the least competent, but at the same time is best protected by law.
- At the institutional level, the level of competence and documentation requirements are very high, especially if the manager of a joint or pension fund acts in his role.
- The competence of the corporate may depend on its size, as well as on whether it works in the same industry as the company that wants to attract investment.
- Commercial banks can direct investments for the acquisition of fixed capital of the enterprise, if this is part of their activities.
- Trading and investment banks pay great attention to competence, as the well-being of their customers depends on it.
- But venture capital funds are the most demanding and competent, they are interested in maximum openness and the possibility of participation at each level of the company’s activities, including personnel management.
- For government and agency-sponsored foundations, priority lies in achieving specific, pre-agreed political and social goals. At the same time, there may not be a return on investment - the main thing is that the desired result is achieved.
Do not confuse the investment memorandum with the business plan, since the essence and objectives of these documents are very different from each other. If the memorandum is a document aimed at attracting an investor, then the business plan is a practical guide to action for top managers. First, a business plan is drawn up, which indicates the direction for further development, and then a memorandum is formed to attract investments. It is unlikely that a company will be able to access investment if it does not have a good business plan.
Despite the fact that there are no strict rules on how the investment memorandum should be drawn up, the example structure, which is provided in almost every source, includes the following mandatory points:
- Summary - A brief overview of investment opportunities.
- An overview of the sector of the economy in which the firm is located (general state of the industry, opportunities, threats, state of the market, etc.).
- Information about the invested company (history of the company, its organizational structure, characteristics of the main shareholders and owners).
- Production and characteristics of products. This section describes in detail all stages of the production process and the technologies used. Data on the cost of goods, existing patents and trademarks are also provided. Opportunities for expanding production and R&D must be indicated.
- Marketing and sales. Here market analysis is done, the used marketing policy is described, and potential consumers of manufactured products are determined. The dynamics of sales.
- Personnel composition (assessment of the professional level of both management and employees themselves).
- Other corporate matters.
- Financial information (feasibility study, basic accounting documents, etc.).
- Financial plan ( finance movement plan , scheme of return on invested funds, assessment of probable financial risks, etc.).
In the end, they usually write general conclusions, recommendations, suggestions.
Thus, as we see, an investment memorandum is a great way to interest investors.