What is in a Due Diligence Data Room ?
A Due Diligence Data Room is the place where your company places copies of the financial, legal and business documents that define the history and future of the company for prospective investors to review prior to submitting a formal offer.
A due diligence data room
is accessed by potential buyers or investors after being approved by
the seller and after having signed an Non Disclosure Agreement (NDA). The investment banker
representing the seller is responsible for identifying viable
buyers/investor, securing signed
NDA’s and scheduling access to the
due diligence data room information.
There are two types of Due Diligence Data Rooms: Traditional Due Diligence Data Rooms and Virtual Due Diligence Data Rooms.
Pro’s and Con’s of both of these types of data rooms can be found on the Traditional Due Diligence Data Rooms vs. Virtual Data Rooms page.
Greatest Risk for the Seller
The most important decision a Seller can make is selecting a good investment banker to assist in navigating thru the process. The worst thing a seller can do is focus too much time and energy on the construction of a due diligence data room and the selling process and by doing so, neglect the business resulting in poor sales and earnings during the process. The performance of your company during the sales process if the MOST IMPORTANT OBJECTIVE. The creation of the due diligence data room should be done with your general oversight but conducted by individuals not need to manage the day to day business. For this reason many have turned to a service provider to create the due diligence data room or an “easy to use” software solution that allows you to create a virtual due diligence data room with very little effort.
If your company is small or just getting started with very little history of sales, then you might be able to construct a due diligence data room on your own without impacting day to day sales performance. If you are hoping to sell your company or secure additional investment in excess of $1,000,000 you should definitely not risk constructing a due diligence data room by yourself. The small amount you pay to have your investment banker or a third party due diligence data room service provider create a professional due diligence data room for you will be more than be recovered at the end of the transaction.
The Seller’s Key Objective of the Due Diligence Data Room
The main objective of the due diligence data room for the seller is to:
Remove any concern the potential buyer or investor has in the viability and profitability of the company
Disclose all data required or requested by the buyer/investor to close the sale quickly
Present business records with emphasis on growth and future value to maximize the offer amount
Expose any “skeletons” up front in the most positive way possible before final valuation offers to minimize any potential downward trend in the offers
A Seller uses the due diligence data room to draw attention to
the best attributes of the business to try to INCREASE the
buyer’s/investor’s valuation of the business. A well constructed
due diligence data room can increase the final valuation offer
by several percentage points.
The Buyer’s/Investor’s Key Objective of the Due Diligence Data Room
The main objective of the due diligence data room for the potential buyer/investor is to:
Use financial data to arrive at Valuation Model
Determine any operational costs when can be reduced or eliminated
Identify and business data or trends that could be used to justify a lowering of the valuation offer
Identify any "skeletons" that will risk achieving future revenue or earnings projections
A Buyer/Investor uses the
data in the due diligence data room to validate their valuation
model and to identify anything that could risk future earnings thus
providing a reason to LOWER his valuation offer.
In summary, the proper creation of a due diligence data room can be time consuming and potentially risk the day to day operation of the business if created by existing management. To maximize the benefit of a due diligence data room the owner should research and secure a software solution to utilize a virtual due diligence data room and hire an affordable third party to construct this due diligence data room.