Investing early in a virtual data room can deliver real deal value

For any business that is considering an exit, early preparation is key.

One of the best ways to get organized is to create a virtual data room, which is essentially a confidential electronic filing system of your company’s main documents. Virtual data rooms allow potential buyers to make reasonable and timely bids by having the ability to perform due diligence of the business in an orderly fashion.

A virtual data room should be created with a comprehensive index that is easily searchable. Typical categories of documents include standard organizational documents and minutes of board, committee and shareholder meetings; material contracts, including key supplier or customer agreements; financial statements; capitalization tables; and employee information.

Prospective buyers are let into a seller’s data room once a confidentiality agreement between the two parties is executed. A well-organized and comprehensive data room will speed up buyers’ due diligence process and increase their confidence that they fully understand the business. If the data room is incomplete or insufficient, it is more likely that the buyer will grind the seller on price, or demand more all-encompassing representations and warranties and more onerous post-closing indemnities.

So how does a seller best prepare the data room in a way that increases deal value?

Start early. This allows the seller’s management team to identify deficiencies (such as contracts not fully executed, or missing documentation). Further, it allows the seller to identify any confidential information that might need to be redacted. It is important that corrections be made by the seller before the buyer identifies the deficiencies. Resolving data-room deficiencies once the deal process is underway serves only to highlight such deficiencies, which can cause delays in the process and erode prospective buyers’ confidence in the integrity of the data-room disclosures.

Get the right internal and external team involved. Individuals with knowledge and access need to be in the tent early to ensure that the process is minimally disruptive and as efficient as possible. As recently as four years ago, investment bankers were routinely selecting the data-room providers for their clients; these days the data rooms are often being set up by proactive companies well in advance of the investment banker bake-offs so that the company can do its due diligence on the bankers. By the time the seller is in full deal mode, management will not have capacity to deal with document gathering.

Sit down with your external legal counsel and walk through the detailed representations and warranties being asked of you in the draft purchase agreement, relating each of them to the material in the data room. Ask yourself how you need to qualify each such representation and warranty by reference to disclosure in the data room so as to limit your post-closing indemnification obligations.

Spend the money on an external data-room provider. A sophisticated online data room provides you with the ability to (1) limit access to certain information to specific individuals, creating tiers of people in the know and the type of access that they have – such as read only or the ability to print; (2) track who logs in and for how long to get a flavour of potential buyers’ behaviour, where their specific concerns are and if they are really serious about doing a deal; (3) ensure and give comfort that proper cybersecurity is in place; (4) provide around-the-clock technical support; and (5) deal with the overall organization, notification and other functions of your data room.

Management often relies on internal document systems such as Dropbox, but the features are limited, and not having any type of system support can be troublesome. Furthermore, a company has to consider whether it can sacrifice the time in managing the data room itself or if it’s worth the expense of using a third-party provider.

The seller that prepares in advance and spends the time and invests the resources early will educate bidders on its business with confidence and, as a result, is more likely to create top value in the merger and acquisition process. 

Denise Nawata (dnawata@farris.com) is a partner at Farris, Vaughan, Wills & Murphy LLP and practises in the areas of securities and corporate finance and mergers and acquisitions. She sits on the board of directors of the Association for Corporate Growth’s B.C. chapter.

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