M&A Due Diligence & Transaction Support

Best Practices for Your Data Room in M&A

In any corporate debt or equity financing, merger or acquisition process, there will come a time for the two parties to exchange information in order to asses interest and assign value. Data exchange typically occurs during the due diligence process but may occur before or after, depending on the transaction type. To facilitate this need, companies set up data rooms where the interested parties have access to the most valuable corporate information.

The most important aspect of a data room is that it be secure, so corporate secrets don’t make their way to competitors or other nefarious entities. In the old days, companies would literally bring paper files to a locked room and allow bankers in there one at a time to make sure nothing was stolen. Today, we have virtual data rooms that may be accessed online, but security, confidentiality, and tracking of who looked at what is still the paramount concern.

Benefits of a Virtual Data Room in M&A

The benefit of a virtual data room in M&A is that buyers no longer have to visit a physical data room and may access newly added or amended documents immediately. Online data rooms also allow the seller, or its investment bankers, to parse out access as needed, review who visited the data room, how often and what they reviewed. This added level of control allows the seller to limit confidential information based on the buyer’s level of interest, competitive position in the industry, or for other reasons. Knowing who looked at what can also provide insight to the seller as to what is important to the buyer and lead to more nuanced negotiations. The ability to quickly update information in the data room, such as financial models, expedites the review process by the buyer and facilitates a faster M&A process.

What to Include in a Data Room in M&A

What should be included in the data room is a frequent question because of the sensitivity of corporate information. The answer is usually everything. The reason is that a buyer must have an honest picture of what they are paying for and their due diligence effort should work off the premise that there are no hidden surprises to be found after the purchase. The seller does not need to highlight any shortcomings or deficiencies, but these should not be excluded from a data room. It is the potential buyers’ responsibility to review the data, ask questions, and discuss any problematic issues they uncover.

Below is a short summary of some items typically included in a data room in M&A:

  1. Corporate documents establishing the incorporation of the company, current and past officers of the company, subsidiaries and divisions as well as licenses, permits and tax certificates.
  2. Capital structure and shareholder information with current capitalization table, list of options, warrants, debt agreements, stock purchase and voting agreements.
  3. Financial and tax information including audited statements for at least three years, current budgets, forecasts and financial models as well as federal and state tax filings, capital leases, inventories, capital expense and depreciation schedules and any other financial commitments.
  4. A list of property and assets documented with mortgage, loans, leases, and any environmental or regulatory support if required.
  5. Intellectual property documentation including a summary of patents and patent applications, trademarks, copyrights, domain registrations, software licenses, and any contracts discussing proprietary IP.
  6. General contracts related to joint ventures, vendors, customers, distributors, as well as sales, employment, and credit agreements.
  7. Customers and vendor lists with key metrics, sales commission plans, reseller information, list of products or services, and marketing materials.
  8. Other items may include: regulatory or government permits and licenses, litigation including current and past settlements, insurance as well as all human resources data including compensation and benefits.

Preparation of a data room is a laborious process and should not be rushed. Executives should review all the files posted to confirm accuracy, approve disclosure, and verify completeness of the information provided. Missing information will only slow down the due diligence process, cast doubt on the integrity of the data room and require additional time from executives. 

Do it right the first time and get help from data room vendors such as Box, Intralinks, Merrill Corp, or ShareFile. These vendors typically have flexible fees based on time and volume of storage used. They have important built-in organizing structures and security protocols that make setting up your data room less stressful. 

The online data room is a modern necessity in today’s complex financial transactions. The data room provides the benefit of access to documents when needed by those pre-approved to have them, ease of updating and adding new documents, and security of confidential information.

Need help with an M&A Transaction?

8020 Consulting has the expertise not only to assist you with your data room needs, but also with a wide range of specialties in merger and acquisition finance. To learn more, download our M&A Consulting Services Sheet.

We also have this free, helpful resource to help you make better decisions during sell-side due diligence:

sell-side due diligence decision tree

About the Author

Matt has over 20 years of finance and accounting experience across entertainment, business services, telecom and high-tech industries in both private and public companies. As a consultant, Matt has managed strategic projects, advised on M&A transactions, provided pre- and post-IPO services, created budgeting and forecasting models and performed financial system implementations, including Anaplan. Prior to 8020 Consulting, Matt worked at CSG International, Anthem, and Imperial Capital, where he provided buy-side and sell-side investment banking services to private equity clients. Most recently, Matt served as Interim CFO at GeoLinks, a high-growth wireless tech company. Matt completed his undergraduate work at UCLA and earned his MBA from USC Marshall School of Business.

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