Analyzing a Confidential Information Memorandum (CIM) is one of the most critical skills for search fund operators. You'll review dozens of deals, and most will be garbage. Here's how to identify the 5% worth pursuing in under 60 minutes.
1. Start with the Executive Summary
The executive summary tells you 80% of what you need to know. Look for:
- Deal size: Is it in your sweet spot ($2-10M EBITDA)?
- Asking price multiple: 3-5x normalized EBITDA is typical for search funds
- Owner motivation: Retirement, succession planning, or distress?
- Business model: Recurring revenue, sticky customers, or project-based?
2. Quality of Earnings (QoE) Red Flags
This is where most searchers get burned. Look for these red flags:
Critical QoE Red Flags
- Customer concentration: >20% from single customer is risky. >50% makes SBA financing impossible.
- Revenue volatility: Year-over-year spikes or drops >20% need explanation
- Aggressive addbacks: Owner salary addbacks >$300K are suspicious. Market rate is $150-250K for $2-5M revenue businesses.
- One-time revenue: Asset sales, legal settlements, insurance claims should be excluded
- Working capital issues: Increasing AR days, inventory buildup, negative working capital
- Related party transactions: Rent, services, or sales to owner/family entities at non-market rates
3. Financial Analysis Checklist
Financial Metrics to Verify
- EBITDA margin: >15% is good, <10% is risky for SBA financing
- Revenue trends: 3-5 years of financials showing growth or stability
- Normalized EBITDA: After QoE adjustments, can it support debt service?
- DSCR calculation: Normalized EBITDA / Annual Debt Service should be >1.25x for SBA
- Working capital: Positive and stable or improving trend
- Debt levels: Existing debt that needs to be paid off at closing
4. SBA 7(a) Eligibility Assessment
Most search fund deals use SBA 7(a) financing. Verify eligibility early:
- Max loan: $5M (2026 rules)
- Customer concentration: <50% from single customer required
- DSCR: Minimum 1.15x, lenders prefer 1.25x+
- Equity: Minimum 10%, lenders prefer 15%+ for deals >$1M
- Passive income: <50% of revenue from passive sources
- US ownership: 100% US citizens or permanent residents
5. Business Model Analysis
Look for search fund-friendly characteristics:
- Recurring revenue: Maintenance contracts, subscriptions, retainer clients
- Customer stickiness: High switching costs, long-term contracts
- Owner dependency: Can the business run without the owner? Key person risk?
- Scalability: Can you add locations, customers, or services?
- Market position: Local leader, niche player, or commodity?
6. Red Flags That Kill Deals
- Customer concentration >50% (SBA ineligible)
- Normalized EBITDA <$200K (can't support debt service)
- Revenue declining >20% per year (structural issues)
- Negative working capital and deteriorating
- Owner unwilling to stay 6-12 months for transition
- Regulatory issues, lawsuits, or environmental concerns
- Asking price >5x normalized EBITDA (overpriced)
7. Your Analysis Framework
Use this decision framework for every CIM:
- PROCEED: Submit IOI if deal passes QoE, SBA eligibility, and fits your criteria
- PARK: Interesting but need more info (financials, customer list, management depth)
- PASS: Too many red flags, wrong size, or not search fund-friendly
8. Speed Matters
The best searchers can analyze a CIM in 30-60 minutes and make a PROCEED/PARK/PASS decision. Don't waste weeks on deals that don't fit. Use tools like SearchFindr to automate the initial screening and focus your time on the deals that matter.
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