M&A: Prepare a Data Room

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Newport LLC

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In any sale transaction, the Buyer will have a multitude of requests for information about virtually all elements of the business.  They will want your formation documents, your tax returns, your accounting records, leases, employee records, and on and on through something like 100+ documents and pieces of information.  Many Sellers simply wait to see exactly what the Buyer requests, and then start to assemble a response.  This is a mistake.

First, once you factor in your response time on the request, it can be a month or longer before you can full comply with the request.  And then it can easily be a month before the Buyer can digest all that material.  We are big believers of flow in any transaction, and a delay of this magnitude in any deal will usually kill the flow, and the deal.

Second, waiting for the Buyer’s request and then responding to that request puts you back on your heels, almost on the defensive.  It is far more impressive, sets the tone for the transaction, and validates you as a credible and highly professional business to say, “We have a highly secure data room set up and as soon as we have an LOI signed by both of us, we will provide you access.  And we’ll stand by prepared to explain any and all documents to your satisfaction.”

So, we highly recommend establishing a secure data room, thoroughly organizing it, and then stocking it with all documents and information that the Buyer could conceivably request.

How do you know what to put in the data room?  Well, you can think through every element of your business and create a list of every conceivable document that could explain, support, or justify every element of your business.  Or you work with Newport’s transaction advisory team that (1) provides you a proprietary due diligence list that has been time- and transaction-tested in scores of transactions, some with the largest companies in the world, and (2) provides guidance on how to set up and stock the data room.

The only party that should be granted access to your data room is a Buyer with whom you have signed an LOI.  First, no one that has not signed an LOI deserves to know everything in that data room.  Second, it is extremely difficult to manage the due diligence activities of one, let alone multiple, parties.

Of course, prior to signing an LOI, one or more parties may make reasonable requests for specific data that is in the data room, and we see no issue with providing that data outside the data room, provided it is not of a highly confidential nature.  An example might be a market study.

To those prospective Buyers that push for access to the data room prior to entering into a signed LOI with you, we suggest saying, “Our data is highly proprietary, and we don’t disclose it to anyone who has not proven their seriousness in this transaction.  We have made representations to you, and we are confident that the data room, when it is opened to you, after we commit to each other in as signed LOI, will substantiate our representations.”

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