When selling a business, after an initial letter of intent, the buyer will want to do due diligence on a selling party’s data. This information can be gathered in the data room.
What is a data room?
The data room is usually digital. The data room contains all relevant information from the selling party so that a buyer can conduct due diligence. The due diligence can be done virtually – via the Web.
What should be in the data room?
All relevant information that a buyer needs to know in the transaction should be included in the data room. This includes all financial documents, legal documents and business documents relevant to the business transfer.
A well-designed dataroom is entirely company-specific but includes at least:
- General company data
- Financial overviews, current financial information
- Overview personnel and organization
- Pension overview
- Tax overviews and agreements
- Overview of legal documentation and agreements
Why a data room?
Such a dataroom is indispensable when you want to sell your company.
Because:
– When selling a business, you as the seller have a duty to provide a potential buyer with all the information needed to make the decision of acquisition. With a well-designed data room, you give the buyer (and his advisors such as the M&A advisor, lawyer, accountant) easy access to the documents.
– The buyer himself has a duty of inquiry. He must conduct due diligence on the transaction before buying the company. With a digital data room, the buyer has easy access to all the information.
If a buyer has additional questions during his research to which you provide the answers, this information will also appear in the data room. Afterwards, it is then clear which information was reported to the buyer.
Setting up a data room
Setting up a data room when selling a company is no easy task. Setting up a data room properly takes time and must be done carefully. Therefore, it is better to hire an outside party to compile the information and the complex procedures surrounding the data room. The outside party should be involved in the transaction as early as possible in the sales process.
Preventing claims and litigation
After the transaction, you as the seller may face claims and litigation from the buyer. The buyer claims damages afterwards because the transaction turned out differently than he thought. The data room may be important evidence. With a well-documented data room, you can easily prove what information has already been provided and what the buyer could have known. This makes it much harder for the buyer to argue that he was misled and suffered damages. On this basis, a potential claim can be averted. This indicates the importance of the data room being as complete as possible.
Don’t skimp on the data room
There are several technical providers of virtual data rooms. Despite all the benefits, companies are skimping on the data room. Setting up a good data room takes time from yourself and your consultant. The technical cost of a good data room is relatively limited and proportional to the data it contains and the length of time it is available. To limit these costs, information is sometimes provided in addition to the data room. However, because it is then difficult to determine in retrospect what information has and has not been provided, this is not a good strategy for possible claims. Also, answering additional questions about the information in the data room is best done by making answers available digitally in the data room.
Interested in sparring with us about a sales process and assistance in setting up a due diligence data room?
Please contact us with Gonneke van der Lee or Maarten Vijverberg at welkom@cliftonfinance.com.