Selling Your Business: The Data Room
Potential M&A acquirers request a massive amount of information pertaining to every aspect of a target business. They present the seller with a due diligence request list, which typically runs over multiple pages, detailing the information they want to review to get comfortable with negotiating the definitive agreements and closing the deal.
Typical requests include financial and employee records, incentive and benefits plans, contracts, patent and other intellectual property materials, real property information, stockholder and board meeting minutes, operating, marketing, and strategic plans, and on and on.
In short, information and details about the intricate inner workings of the target business. Once your potential buyer has signed what should be a carefully crafted NDA, this sensitive and confidential information is typically provided via an online data room.
What is a Data Room?
In the past, a data room was just that – a monitored, secured room on company premises or at the offices of the seller’s M&A legal counsel or investment bank, populated with physical copies of requested documents. While an effective method for disseminating information, the setup and policing of a physical data room is time-consuming and costly.
Buyers would set up appointments to view the information, as only one buyer team at a time could be granted access. A large buyer team often incurred hefty travel expenses to visit the “physical” data room. I can remember working on the buy and sell-side M&A deals in the early 2000s and flying across the country only to engage in endless hours of physically sifting through documents at the client’s (or the target’s) headquarters.
More recently, data rooms have moved to the virtual world where electronic copies of documents are securely stored on a specialized platform. Virtual data rooms offer various levels of access so the seller can choose who sees which documents and when.
Multiple buyer teams can look at and often print information simultaneously, and due diligence travel expenses have decreased dramatically. For the seller, the cost of monitoring drops significantly and, as most of the information already exists in electronic formats, populating the data room is largely a simple uploading process.
What Is In The Data Room?
While buyers will request company and industry-specific information, there are many common elements that all sellers will be expected to produce. For example, at a minimum, virtually every deal will require a population of the following:
- Confidential information memorandum
- Target company organization documents: articles of incorporation, corporate bylaws, shareholders and operating agreements, board minutes and resolutions, etc.
- Financial information: current and historical financial statements, projections, schedules of property and equipment
- Tax information: sales, income, and other tax return filings made at the state and federal levels over a period of years
- Prior equity financing agreements and loan documents
- Listing of assets: real estate, capital expenditures, inventory, furniture, fixtures, and equipment
- Environmental studies, including Phase 1’s and 2’s, etc.
- Employee documents: organizational charts, employee compensation, employment agreements, and benefit plans
- Market information: industry overview, competitive analysis, regulatory landscape
- Sales and marketing: sales reports by customer and product line, sales incentive plans, marketing plan
- Customer and vendor contracts
- Regulatory information
- Litigation documentation: historical and pending
- Intellectual property: IP filings, descriptions of underlying IP, descriptions of IP processes, and company know-how
- Insurance: declaration information and copies of underlying policies
- Privacy and data security policies and related information
- IT systems and network information
Why Is The Data Room Important?
A well-prepared data room, ready when needed by potential acquirers, showcases not only your well-run operation but also demonstrates your motivation to do a deal and streamlines the transaction process.
It’s far more efficient to focus on producing the needed documentation on your own schedule, rather than repeatedly dropping everything to react to buyer requests. Early in the process, you may have several competing potential buyers.
Certain information is made available to all of them and creates a level playing field so each buyer can formulate an offer based on the same facts. Once you receive proposals and negotiate a letter of intent with your chosen buyer, you will enter the due diligence phase of your sale.
Your buyer will have an exclusivity period, during which your company is off the market to competing buyers and your buyer will conduct extensive due diligence on every aspect of your business. Finally, should the deal with your initial buyer fall through, the data is already prepared for the next possible buyer.
Who Runs The Data Room?
You’re probably thinking that setting up the data room will take time and preparation. You’re right! And that’s why preparation should begin prior to or very early in the transaction process.
- Your M&A attorneys and investment bankers, who have seen a great many due diligence request lists, will guide you as to what should be prepared and help you avoid mistakes such as the use of draft versions of documents or missing materials.
- You should consider how you will assign the tasks involved in populating the data room. In our previous article, we spoke about developing your management team in preparation for the sale of your company. Ideally, members of your management team will take on the responsibility for gathering the documents and information that fall under their purview.
- Your M&A attorneys play a critical role in reviewing much of the material that makes its way into the data room. For example, they will monitor the information for contracts that call for change in control requirements and numerous other agreements and information that you will be required to disclose, or not, depending on the various representations and warranties you’re being required to make in the definitive acquisition agreement. The review will alert them to situations that need to be addressed later during the negotiations, as well as give them a handle on what of your information is relevant or not for the legal part of the transaction.
- Your deal professionals will generally handle the responsibility of administering the data room and monitoring usage by potential buyers and their deal teams.
A thorough and well-prepared data room is essential to the due diligence process. M&A transactions are affected by momentum. Getting your data room prepared in advance so a potential buyer doesn’t sit idle waiting for information is an important demonstration of seller organization, cooperation, and overall preparedness. Potential buyers left sitting on the sidelines for too long may begin to turn their attention elsewhere.
At Linden Law Partners, we specialize in quarterbacking all aspects of M&A deals, and we’ve represented buyers and sellers in hundreds of M&A deals. While there are many common threads among the most successful transactions, we recognize the uniqueness and personal attention required for each deal. Contact us to discuss how we can help.
