When it comes to the crucial step of raising capital for a private business — whether a fledgling startup or an emerging growth company — nothing may prove more “make-it-or-break-it” than your offering package. This package may be referred to as a private placement memorandum (PPM), an offering memo or, for the sake of simplicity, a prospectus. Regardless of how it’s labeled, this package can help generate interest from private equity investors and lenders, while simultaneously reducing the potential for future lawsuits.

Unlike a prospectus for a public offering, which must include specific information required by the Securities and Exchange Commission, your PPM needn’t satisfy any formal content requirements.

However, a PPM customarily provides descriptions of the following seven critical components of an offering:

1. Product/service. A PPM should provide a thorough description of the products and/or services the company sells. In other words, how does or will the company generate revenue? This section also should address scalability, so readers can see that the company is well positioned to take advantage of increased (or reduced) demand and respond promptly to other changes in the market.

2. Market. This section addresses the current and projected size and conditions of the company’s market. The objective is to demonstrate that the business “has legs.” Ideally, this section works in conjunction with the description of products and services to clearly convey the company’s profit potential.

3. Management team. Think of this section as an opportunity to demonstrate that your leadership team is qualified to run the company, execute strategies and manage capital. It should feature profiles of the company’s leaders, including their education and other related credentials, skills and experience. You also might want to include such information for the board of directors, if applicable.

4. Financial information. A PPM must provide readers with detailed financial information on the company’s past and present financial performance (if any). Investors and lenders will also want to see a full set of financial projections (including a projected balance sheet, income statement and statement of cash flows). Readers are likely to scrutinize the assumptions underlying these projections, so it’s important that they’re realistic and supported by objective market data.

5. Risks. From a legal perspective, this is the most important section of a PPM. You should disclose all of the risks associated with the company’s operations and long-term sustainability, including:

• Company-specific risks, such as competitors, suppliers and the pending expiration of intellectual property rights,
• Industry-specific risks, such as changing regulations and shifting consumer tastes, and
• More general external risks, such as recessions, inflation, rising interest rates and natural disasters.

It pays to be upfront about your risks. An unmistakable acknowledgement can provide a strong defense if an investor or lender subsequently claims fraud or misrepresentation.

6. Use of proceeds. This section lays out how you plan to use the capital you raise. For example, you might explain how you’ll fund new products or equipment, expand facilities or markets, acquire leases, obtain licenses on intellectual property, compensate employees, or increase working capital.

7. Terms. For equity offerings, you’ll need to outline the terms of your offering to investors. Details should include the number of shares, the share price, your investor requirements and information about the underwriters (if any). For loans, you should specify whether you’re looking for a credit line that can be tapped into gradually or whether you’d prefer a lump-sum up front to allocate to various investment projects.

First Impressions Matter

This information will play an integral role in raising the capital your business needs to thrive. Equally important, though, is how you communicate the information. Your audience may only scan the PPM, at least initially, so you need to get to the point and stay on message. Contact our CFO Services team for help drafting an effective and lucrative offering package.