One of the crucial phases of selling a business occurs when the seller, usually supported by advisors, establishes a data room to permit one or more investors to perform detailed due diligence.  

Depending on the size and complexity of the company being sold, a data room may contain thousands or even hundreds of thousands of documents, including all relevant client, supplier, employee, financing, and other contracts, as well as title documents, board minutes, and many other documents.  Indeed, any document that could have an impact on the value of the company should be in the data room.

As the establishment of a data room requires an enormous amount of work on the part of sellers and advisors, and often involves the disclosure of highly confidential information, most sellers insist that, as a pre-requisite to providing access to a data room, investors should have placed a non-binding offer, perhaps even signed a term sheet, acceptable to the sellers. 

The data room then provides the detailed evidence that then permits the investor(s) to provide a binding offer within days or weeks of the closure of the data room.

A data room may be in physical form (e.g. literally a room full of data) or the seller and its advisors may opt for a virtual data room, which means that investors may access documents via the internet.  Sometimes the parties opt for a combination of virtual and physical data rooms, with the most confidential documents only appearing in the physical data room.

In a physical data room, a representative of the seller is usually present at all times to ensure that only authorised personnel from the investors are in attendance, that no one is making unauthorised copies or scans of information, and to co-ordinate legitimate information requests.  A data room is often governed by rules set by the sellers, which investors must sign or acknowledge in order to gain access.

Because of the cost of running a data room and the need to observe timelines, each investor is usually given limited access to a data room, usually measured in days.  For the seller of a business, the preparation and running of a data room is typically the most intensive phase of selling a business, given that in most sale processes management presentations and site visits are also usually concurrent with the opening of the data room.  The complexity of managing this process is further augmented where there are multiple investors to be co-ordinated.

During the data room process, the seller and its advisors must typically be prepared to answer questions and provide supplementary information to investors.  Answers are typically expected within one or two days, failing which investors may ask for an extension of the period during which the data room is open.

At the time of negotiating the sale and purchase agreement, investors will usually ask for a representation and warranty that the data room was complete, and that all of the documents in the data room represent a true and complete reflection of the state of affairs of the company.  It is therefore vital that the seller and its advisors ensure the completeness and accuracy of documents in the data room.  We are aware of one situation, for example, where a seller (whether deliberately or inadvertently) withheld a document from a data room, resulting in millions of euro of potential liability.

As we can see then, the quality of a data room, and how the process is managed, can make or break a sale process, as well as dramatically affect valuation, as investors often use shortcomings in the data room to drive down price.  It is important that no one person become a bottleneck in the process, but that the seller establishes a multidisciplinary team covering each major area (sales and marketing, legal, production, finance, taxation, etc.)   

In a nutshell, there are just three words of advice when it comes to data rooms:  preparation, preparation, and preparation.

*Les Nemethy is the CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions.