Investment memorandum

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Investment memorandum (IM) is a document, created in cooperation with experienced accountant and attorney, that contains relevant and reliable information about an investment idea or project in a structured and understandable form[1]. The investment memorandum serves as a decision-making tool for potential investors, because on its basis investors make a decision about possible future cooperation (about investing in a project or about refusing of cooperation). Its content should contain information about the investment attractiveness and possible investment risks. It should also contain information about project description, team description, ways of project implementation and development[2].

Investment memorandum answers the main questions of the investor:

  • What amount of investment will be required?
  • What is the basis for the calculation of the expected yield?
  • When and how will the investor get his profit?
  • What profit can be expected?
  • What are the risks of investment?
  • What is the probability of loss?

Structure of the investment memorandum

The investment memorandum should include the following sections[3]:

  • organization description and its activities,
  • required investment volumes, as well as a forecast of the results of investments,
  • information about direct competitors and level of competition,
  • information about the development strategy of the organization,
  • production information (equipment maintenance, production volume and production costs, raw materials and supplies,research and development etc.),
  • marketing information (market, marketing strategy, products, sales structure, pricing, promotions, place etc.),
  • required investment volumes, as well as a forecast of the results of investments,
  • information about the property of the organization (real estate, transport, equipment, raw materials, patents and licenses etc.),
  • financial performance of the organization (income statement, cash flow, balance sheet),
  • information about directors, managers and staff.

The difference between business plan and investment memorandum

Business plan is a project description, blueprint of the business and develop guide for the management of the company[4]. Investment memorandum represents the view of the project through the eyes of an investor. As a rule, the preparation of a general business plan precedes the writing of a memorandum for a specific investor.

Examples of Investment memorandum

  1. Private Equity Investment Memorandum: A private equity investment memorandum is used when a private equity firm is looking to invest in a company. It typically outlines the structure of the proposed deal, the financials of the company, the strategy of the investor, and the risks associated with the investment.
  2. Real Estate Investment Memorandum: A real estate investment memorandum is used to present an investment opportunity in a real estate project. It contains detailed information about the project such as the market, the location, the financials, and the projected returns.
  3. Venture Capital Investment Memorandum: A venture capital investment memorandum is used to present an investment opportunity in a startup or early-stage company. It includes detailed information about the management team, the product, the market, the financials, and the exit strategy.
  4. Initial Public Offering Investment Memorandum: An initial public offering (IPO) investment memorandum is used when a company is preparing to list its shares on a public exchange. It includes detailed information about the company, the market, the financials, and the risks associated with the offering.

Advantages of Investment memorandum

An investment memorandum (IM) is a document created in cooperation with experienced accountant and attorney, which contains relevant and reliable information about an investment idea or project in a structured and understandable form. This document can provide numerous advantages for potential investors. Below are some of them:

  • An IM helps investors to assess the risks associated with the investment project, as it provides comprehensive information about the project, including financial statements and forecasts.
  • By providing detailed information about the financials of the investment project, an IM can enable potential investors to make more informed decisions.
  • An IM can help investors to identify any potential problems or issues that may arise during the course of the project execution.
  • IMs can be used to demonstrate the credibility of the project to potential investors and stakeholders.
  • An IM can be used to communicate the investment strategy of the project to potential investors.
  • An IM can help to increase the transparency of the project, as it provides detailed information about the project and its objectives.

Limitations of Investment memorandum

An Investment Memorandum (IM) offers a comprehensive overview of an investment idea or project; however, there are several limitations associated with the document. These include:

  • Unverifiable information - An IM contains information about the investment that the author believes to be true, but may not be verifiable. This can lead to misunderstandings or incorrect assumptions about the investment.
  • Lack of legal protection - Although an IM can be used as a reference document for legal purposes, it is not a binding contract. It does not provide legal protection from potential losses or liabilities.
  • Not tailored to specific investors - An IM is created with a general audience in mind and may not be tailored to the needs of specific investors.
  • Limited scope - An IM typically only provides a brief overview of the investment, and does not provide a comprehensive analysis of all aspects of the investment.
  • Lack of accountability - An IM does not hold the author responsible for any losses or liabilities resulting from the investment.

Other approaches related to Investment memorandum

An Investment Memorandum (IM) provides comprehensive information about an investment project or idea in an organized and understandable way. In addition to IM, there are other approaches that can be employed to evaluate an investment opportunity. These include:

  • Financial Modeling: Financial modeling is a process of creating a set of projections for a specific investment. The projections include future cash flows, expenses, and returns. Financial models give investors an understanding of the dynamics, risks, and potential returns associated with the investment.
  • Risk Analysis: Risk analysis is a process of assessing and analyzing the risks associated with an investment. It involves identifying potential risks and determining their impact on the project. It also helps investors understand the potential returns and assess the level of risk they are willing to take.
  • Due Diligence: Due diligence is a process of investigation and analysis of an investment opportunity. It involves reviewing financial statements, legal documents, and other information related to the investment. This helps investors gain a better understanding of the project and make informed decisions.
  • Market Research: Market research is a process of gathering and analyzing data to understand the market environment. It involves studying the market trends, economic conditions, competition, customer needs, and other factors that could impact the success of the investment.

In summary, Investment Memorandum is a document that provides comprehensive information about an investment project or idea. Additionally, there are other approaches such as financial modeling, risk analysis, due diligence, and market research that can be used to evaluate an investment opportunity.

Footnotes

  1. Barnwell R., (2018) p. 55
  2. Klonowski D. (2010), p. 184
  3. Klonowski D. (2010), p. 41
  4. Pinson L., (2008) p. 2


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References

Author: Andrii Didukh