Don’t Make the Mistake of Neglecting the Data Room?

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 fully 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 a letter of intent signed by both of us, we will provide you access. And we’ll stand by prepared to explain all documents to your satisfaction.”

So, we highly recommend establishing a secure data room with one of the many providers of online data vaults, or even Dropbox or Google Drive, thoroughly organizing it and then stocking it with all documents and information that the buyer could conceivably request.

What to put in the data room? Well, a seller who works with us will have the benefit of an institutional-quality due diligence request list that has been compiled over 30 years.  We just know what buyers want.  If you are not working with us, we suggest you start with using AI, prompting it with a request such as: “I am selling my company and I want to prepare a virtual data room with all the necessary documents a potential institutional buyer of my company will want for their due diligence. Prepare a due diligence request list I can expect to receive from a potential buyer so I can begin to assemble a response to the request.” We recommend asking for institutional quality, understanding you may not have a company that will attract institutional buyers but knowing you will be far better off having more data than may be needed than chasing the process when you don’t have enough. Supplement this with deep thought around every element of your business and create a list of every conceivable document that could explain, support, or justify every element of your business. And be sure to organize it as well as you possibly can.

The only party that should be granted access to your data room is a buyer with whom you have signed a letter of intent ("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 a prospective buyer that pushes 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 a signed LOI, will substantiate our representations.”

GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market.  Visit us here.

For a short video clip on this topic, click here.