How to Read a CIM: A Business Buyer’s Guide to the Confidential Information Memorandum

By Chris Barrett, CPA · Founder and Managing Director, Midwest CPA

You found a business you’re interested in. You signed the NDA, and the broker sent over a CIM, a confidential information memorandum. Now you’re staring at a thick packet and wondering, “What the heck do I do with this thing?”

I’ve reviewed literally thousands of CIMs. This guide covers what’s in each section, what’s commonly missing or spun, the questions I’d send the broker before spending another hour on the deal, how to pressure-test the earnings, and how the CIM feeds into your LOI and quality of earnings.

Start With the Right Mindset: The CIM Is a Sales Document

The broker put this packet together to sell the business. Expect sales language and some fluff. That doesn’t make the broker dishonest. It means the CIM is the seller’s best case, not a neutral analysis.

Your goal is to cut through the fluff quickly so you don’t waste time on a business you won’t buy. Use the CIM to answer three questions:

Can this business support the debt I’ll need to buy it?
Are the earnings real, and are they likely to continue after the owner leaves?
Is this a business with problems I’m equipped to solve?

If the CIM can’t give you a credible “yes” or “maybe” on all three, move on. If it can, build a list of questions only the seller’s records can answer.

One more thing to keep in mind: nothing in a CIM is verified. The numbers usually come from the seller’s internal books or the broker’s recasting. They haven’t been audited and haven’t been tied to bank statements. Treat every figure as a claim to be tested later in diligence.

The 7 Sections of a Typical CIM and What to Do With Each

Most CIMs follow a similar structure, though not all CIMs are created equal, because not all brokers are. Some will be far more detailed than this; others will give you a fraction of it. Here’s how I approach each section.

1. Executive Summary: Skim It in a Minute or Two

What it usually contains: A short background on the business, how long the owner has been there, maybe what they do day to day, the headline revenue and earnings figure, and often the asking price.

What to look for: Note the headline earnings figure and whether it’s labeled SDE, EBITDA, “adjusted EBITDA,” or something vaguer like “cash flow” or “owner benefit.” Note the reason for sale. Then move on. This shouldn’t take more than a minute or two.

What’s commonly spun: The reason for sale. “Retirement” is often true, but find out whether the owner is also stepping away from a business that’s flattening out.

Questions to ask: – What’s the real reason the owner is selling, and why now? – What is the owner willing to do for a transition period after closing?

2. Company Overview: Read It for Context

What it usually contains: A more in-depth look at what the company does day to day, who its customers are, how large the business is, and how the team is set up.

What to look for: This gives you context for the rest of the CIM, so read it closely, especially the owner’s role. If the owner is the main salesperson, the estimator, the key relationship holder, and the person who signs off on every job, that’s a dependency you’ll be paying to replace.

What’s commonly missing: An honest description of what the owner actually does each week. CIMs often say the owner “oversees operations” or “works on strategic initiatives,” which can mean almost anything.

Questions to ask: – Walk me through the owner’s typical week. Which tasks would stop if the owner disappeared for a month? – Which customer and vendor relationships are held personally by the owner? – Are there any licenses, certifications, or permits held in the owner’s name that the business depends on?

3. Industry Overview: Low Priority on a First Read

What it usually contains: Market size, growth trends, and tailwinds, usually pulled from industry reports.

What to look for: Not much on a first pass. It’s built on a lot of assumptions and says little about the specific business you’re buying. It becomes more useful later, when you’re testing whether the company’s results track the industry, and why or why not.

4. Products and Services: How the Business Actually Makes Money

What it usually contains: What the business sells, how it’s delivered, and sometimes a breakdown of revenue by product line or service type.

What to look for: – Concentration in a single revenue stream. If most of the revenue comes from one service line, one product, or one contract type, the business is more fragile than the top-line number suggests. – Recurring vs. project-based revenue. Is this recurring revenue, like maintenance contracts, subscriptions, or routine service, or is it mostly project-based, one-off work? Recurring revenue is generally more predictable. Project-based revenue means the business has to win new work every year, and earnings can swing with the backlog. – Margin differences by line. If one service line carries most of the profit, you need to know whether that line is growing or shrinking.

What’s commonly missing: Revenue by line over multiple years, and gross margin by line. Ask for both.

Questions to ask: – Can you provide revenue and gross profit by product or service line for each of the last three years? – What portion of revenue is under contract or recurring, and what are the typical contract terms and renewal rates? – For project work, what does the current backlog look like compared with the same time last year?

5. Customers and Suppliers: Concentration and Churn

What it usually contains: Often a customer list with names redacted (“Customer A, Customer B”), a percentage of revenue for the top customers, and sometimes key suppliers.

What to look for: – Customer concentration. If you lose a key customer, how much of the business goes with it? Significant customer concentration adds risk, and it can make a deal harder to finance. – Supplier concentration. A single critical supplier can raise prices, change terms, or cut you off. – Churn. Look for customers or suppliers that are large one year and then disappear the next. That can point to churn problems the CIM won’t mention.

What’s commonly missing or spun: Year-over-year history. A single-year top-10 list hides churn. A CIM may also group related customers or present percentages in a way that makes concentration look smaller than it is.

Questions to ask: – Please provide revenue by customer (names can stay redacted) for each of the last three years plus year-to-date. – Which top customers are under contract, and when do those contracts expire? Do any contracts have change-of-control or assignment clauses? – Have any significant customers been lost or reduced in the last three years? Why? – Who are the top suppliers, and are there alternatives if one of them changes terms?

For more on evaluating and mitigating this risk, see our guide to customer concentration risk.

6. Financial Overview: Where I Start

This is the section I personally read first. If the numbers don’t make sense, I can put the CIM down and move on without wasting any more time.

What it usually contains: A year-over-year summary of revenue, expenses, and the broker’s EBITDA or SDE calculation, typically for two to three years plus the trailing twelve months or year-to-date. It usually includes a table of add-backs.

What to look for: – Large swings in margins. If gross margins are 40% one year and 60% the next, something changed, and you need to know what. It could be pricing, mix, a change in how costs were booked, or an accounting cleanup. – The trend in revenue and earnings. Steady growth, steady decline, and a sudden spike in the most recent year each tell a different story. A sharp jump right before a sale deserves extra scrutiny. – The add-backs proposed by the seller. Some are simple, like adding back depreciation and interest, which by definition belong in an EBITDA calculation. Others are much more complicated. Complicated add-backs are often a sign that your diligence process will be harder, and that getting the deal funded will be harder too.

What’s commonly missing: The source of the numbers (tax returns, internal statements, or CPA-reviewed statements), whether they’re cash or accrual basis, and a balance sheet, which you’ll need for working capital. Add-backs get their own section below, because that’s where CIM numbers most often get stretched.

7. Growth Opportunities and Projections: Take With a Grain of Salt

What it usually contains: A list of growth ideas and sometimes multi-year projections.

What to look for: Like the industry section, this part is full of fluff and assumptions. It’s essentially a list of everything the owner says you could do that they haven’t done. I wouldn’t put much weight on CIM projections. Build your own assumptions about how you’ll run the business. And remember: don’t pay the seller for growth you’ll have to create yourself. Your offer should be based on the earnings the business produces today.

Question to ask: – If these opportunities are real, what has kept the current owner from pursuing them?

How to Pressure-Test Add-Backs, SDE, and EBITDA

The second thing I look at in every CIM is how the earnings are calculated: which add-backs are included, and whether they’re legitimate or something seems off.

SDE vs. EBITDA: Know Which Number You’re Looking At

EBITDA is earnings before interest, taxes, depreciation, and amortization. “Adjusted EBITDA” adds back items the seller argues are non-recurring or discretionary.
SDE (seller’s discretionary earnings) goes a step further and also adds back the owner’s compensation. It shows the total cash benefit to one owner-operator.

SDE is common on smaller deals. But if you’ll need to hire someone to do any part of what the owner does today, that salary has to come back out before you can judge what the business really earns.

Common Add-Backs and How to Test Them

Add-back	Usually legitimate?	How to test it
Depreciation and amortization	Yes, by definition for EBITDA	Make sure ongoing capital expenditures (trucks, equipment) are still accounted for in your own cash flow analysis
Interest	Yes, if the seller’s debt is being paid off at closing	Confirm the debt won’t transfer to you
Owner’s salary and payroll taxes	Yes, for SDE	Replace with a market salary for whoever will do the owner’s job
Owner’s personal expenses (vehicle, phone, travel, insurance)	Often	Ask for the general ledger detail and confirm the expense truly won’t continue
Family members on payroll	Depends	Did they do real work? If so, someone will need to be paid to do it
“One-time” expenses (legal, repairs, consulting)	Sometimes	If a “one-time” expense shows up every year in a different form, it’s an operating cost
Below-market rent to an owner-related landlord	No. This works against you	Adjust rent to the market rate you’ll pay under a new lease

A Simple Worked Example

The figures below are illustrative, not from a real deal.

A CIM shows a services business with an asking price of $3.0 million and SDE of $900,000. The broker’s add-backs:

Owner’s salary: $200,000
Owner’s spouse on payroll (bookkeeping): $60,000
Owner’s truck and personal expenses: $25,000
“One-time” legal fees: $40,000
Depreciation: $35,000
Interest: $20,000

Now pressure-test it:

You’ll need a general manager. You plan to be involved, but the owner currently runs estimating and scheduling. A market salary for someone to do that work, say $120,000 with payroll taxes and benefits, comes back out.
The spouse’s bookkeeping is real work. Replacing it with an outsourced bookkeeper or part-time hire might cost $30,000.
The “one-time” legal fees turn out to come from recurring contract disputes with customers. Prior years show similar costs, so they stay as an operating expense.
The truck is used for the business half the time, so only part of it is a fair add-back. Say $12,000 of the $25,000.

Adjusted for those items, the earnings available to service debt and pay you look more like $900,000 − $120,000 − $30,000 − $40,000 − $13,000 = about $697,000. That’s before thinking about the capital expenditures the depreciation add-back assumed away.

At the same $3.0 million price, you’re now paying a meaningfully higher multiple than the CIM implies, and you’ll need to check whether $697,000 comfortably covers your annual loan payments plus a reasonable salary for yourself. That’s the first thing I check with any CIM: are the earnings large enough to support the debt load I’ll need to finance this purchase? You can run your own numbers with our DSCR calculator.

Reconcile the CIM to the Tax Returns and Bank Statements

You won’t be able to fully verify the numbers until you’re under LOI, but you can start testing them early:

CIM to tax returns. Ask for the business tax returns for the years presented. Revenue on the CIM should be reasonably close to gross receipts on the return. If it isn’t, ask why. Common reasons include a cash-to-accrual conversion, a different fiscal year, or a related entity, but you need an explanation.
Tax returns to bank statements. In diligence, a proof of cash ties the seller’s books to actual bank deposits and withdrawals. This is where unrecorded cash, misclassified transfers, and revenue that doesn’t actually exist tend to show up. See what a proof of cash is.
Watch for “the real numbers aren’t on the return” stories. If a seller says the business makes far more than it reports for taxes, you can’t verify it, and a lender won’t finance it.
Cash vs. accrual. Many small businesses keep books on a cash basis. That can shift revenue and expenses between periods and distort margins year to year. See cash vs. accrual accounting.

The 5 Things I Check Before Spending Any More Time on a Deal

After reviewing thousands of CIMs, these are the five questions that decide whether a business gets more of my time:

Are the earnings big enough and stable enough? Have there been large swings in earnings or margins? Are earnings large enough to support the debt load I’ll need to finance the purchase?
How are the earnings calculated? Which add-backs are included, and are they legitimate, or does something seem off? If add-backs make up a large share of stated earnings, expect a harder diligence process and more pushback from lenders.
What’s the service offering, and can I run it? Is it recurring or project-based? And will the business produce problems I’m equipped to deal with, or problems my skill set isn’t well suited to?
Are there concentration issues? Significant customer concentration makes a deal harder to finance and adds risk when a large share of revenue is tied to one or two customers.
How is the team structured? If the owner hasn’t built a strong team, or employees haven’t been there long, there’s a higher chance you’re buying a job. A tenured, structured team gives you more confidence that you can work on the business rather than in it. Ask for an org chart with tenure and pay for each role, who the key employees are, and whether any are related to the owner.

Other Red Flags the CIM Won’t Spell Out

Beyond the five checks, a few issues frequently surface after the CIM and catch buyers off guard. Raise them early.

The lease. How many years are left, what are the renewal options, and can it be assigned to a new owner? If the seller owns the building, will the new lease be at market rent? A business that depends on its location with only a short lease remaining carries real risk.
Working capital. The CIM rarely says how much working capital, such as receivables and inventory, is expected to come with the business. That number directly affects what you’re really paying. Start estimating it before your LOI. See estimating working capital before an LOI and calculating net working capital.
Deferred capital expenditures. Aging equipment or vehicles mean replacements you’ll fund soon after closing.
Owner dependence. If key relationships or know-how sit with the owner, plan for a real transition period and consider structures, like a seller note, that keep the seller invested in a smooth handoff.
Unearned revenue and customer deposits. If customers have prepaid for work not yet delivered, you’ll be responsible for doing that work after closing. Make sure it’s accounted for in the deal.

A Quick CIM Review Checklist

Use this as a first-pass screen. Anything you can’t check off becomes a question for the broker.

Area	First-pass question	Pass / Question / Fail
Earnings	Is SDE or EBITDA large enough to cover debt service and a market salary for whoever runs the business?
Earnings trend	Are revenue and margins reasonably consistent, with swings explained?
Add-backs	Are add-backs simple and well supported, or large and complicated?
Source of numbers	Do the numbers come from tax returns or reviewed statements? Cash or accrual?
Revenue quality	Is revenue recurring or project-based? Is there a backlog?
Concentration	Does any single customer, supplier, or revenue line dominate?
Team	Is there a tenured team, or is the owner the business?
Lease	Are term, renewal options, and assignability acceptable?
Fit	Are these problems you’re equipped to solve?

How the CIM Feeds Into Your LOI and Due Diligence

The CIM is the first step, not the last.

Before the LOI: Use the CIM plus the broker’s answers to your questions to build your own view of earnings, your own projections, and an initial working capital estimate. Base your offer on that, not the broker’s adjusted number. Learn more about deal breakers to watch for at the LOI stage.

In the LOI: Condition your offer on financial due diligence confirming the earnings, and address working capital up front so it doesn’t become a fight later.

After the LOI: Financial due diligence, typically a quality of earnings (QoE) analysis, tests everything the CIM claimed. That includes reconciling the books to bank statements and tax returns, validating each add-back, and analyzing concentration, margins, and working capital. If the numbers come in lower than the CIM suggested, that analysis becomes your support for renegotiating. See what a quality of earnings report is and our due diligence checklist.

If you’re financing with an SBA 7(a) loan, note that larger acquisitions may now require a QoE as part of the lender’s process. Ask your lender early how that will work on your deal.

Frequently Asked Questions

What’s the first thing to check in a CIM?

The financial overview. Check whether earnings are large enough to support the debt you’ll need, whether margins swing sharply from year to year, and how complicated the add-backs are. If those don’t hold up, you can move on quickly.

What questions should I ask a broker after reading a CIM?

Ask for revenue and gross profit by line and by customer for three years, tax returns for the years presented, the source and basis (cash or accrual) of the financials, support for each add-back, the owner’s actual weekly role, team tenure, lease terms, and the real reason for the sale.

Which add-backs in a CIM are red flags?

Be cautious with “one-time” expenses that recur every year in a different form, family members on payroll who do real work, owner compensation added back without accounting for who will replace the owner, and any add-back the seller can’t support with records. Large or complicated add-backs usually mean a tougher diligence process and more lender pushback.

When should I bring in a CPA or QoE provider?

A second set of eyes is useful as early as the CIM stage to spot red flags and shape your questions. A full quality of earnings analysis typically begins shortly after you sign the LOI.

Get a Second Set of Eyes on Your Next CIM

A good CIM process saves your time and money for the deals worth pursuing. If you’re looking at a CIM and want a second set of eyes on it, reach out. I’m Chris Barrett, owner and founder of Midwest CPA. We help acquisition entrepreneurs avoid buying the wrong company and successfully grow the right one.

Schedule an appointment with Midwest CPA →

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Disclaimer

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.