Data Rooms and Due Diligence
Diligence is often performed by the potential buyer or investor on the business of the potential seller. Due Diligence could be considered an exhaustive review of all business documents and records in an effort to assess the health and viability of the business in question.
Due Diligence is permitted by
the seller once one or more prospective buyers or investors have
been identified. The identification of potential buyers is a roll
that can be greatly enhanced by employing an Investment Banker. Due
Diligence is often only permitted once the prospective buyers have
signed a NDA (Non Disclosure Agreement). The due diligence data room
often contains copies of the most confidential data a company
The process of creating a Due Diligence Data Room will primarily under the direction of your Legal Council. The lawyer you select to assist in transaction will provide an exhaustive list of all the documents which should be in the due diligence data room (here is an example Due Diligence Checklist). The documents in the Due Diligence data room are often arranged by topic. Below is an overview of each Due Diligence data room category.
Financial Due Diligence
The Finance area is the most common section of the due diligence data room. This section contains not only the last two to three years historical financial records but also financial forecasts for the current year. Many companies would also include a 2-3 year financial forecast in the data room. Be careful not to forecast sales that are not realistic as terms of the sale may be tied to the successful achievement of the sellers forecasted revenue projections. These are called “earn outs”.
Legal Due Diligence
The Legal Due Diligence section of the data room is frequently the largest section. It contains all the business legal documents as well as copies of all annual meeting minutes. The Legal Due Diligence should also contain a detailed explanation on ownership and owners of the company. Additionally, copies of all contracts and agreements should be in this section of the due diligence data room. If you company has intellectual property or patents, copies of all employee and company documents related to ownership of corporate intellectual property should be included in the legal due diligence data room.
Operational Due Diligence
The Operational due diligence section of the data room should contain well documented overviews of the processes associated to the operation of the business. Business relationships, suppliers and distribution channels should also be clearly documented. The buyer/investor will be looking for areas of risk such as a single supplier that could affect ongoing success. Another area of concern would be an unbalanced sales distribution network where one channel has a disproportionate amount of channel sales.
The seller should also include a summary of their business plan in the due diligence data room with emphasis on the next 1-3 year business plan and how improved efficiencies, additional products, expanded distribution will increase revenue and net profit. This business plan should also be referenced in the financial due diligence section.
IT and Intellectual Due Diligence
The IT Due Diligence data room area should include a detailed listing of all IT systems used in the normal business processes. If the company is a Software Development company or has developed any software for internal all of these programs should be documented in detail. Any use of third party software of software contracts should also be documented. Any use of “open source” software should also be included in the IT due diligence data room.
Personnel Due Diligence
Documents contained in the Personnel Due Diligence data room area should include an Org Chart of all management, a Bio/Resume for each executive, a resume on each critical employee (key developers, designers, programmers, etc.), wages and salary contracts for all executives and key employees. This section should also contain any and all HR, benefits, and compensation contracts and policies.
On to the real data . . . . .