A Due Diligence Data room is very important and can often increase the value of a company. A traditional, paper data room is usually more expensive to create and operate than an Online, Virtual Due Diligence Data room.
One of the main reasons to create a Due Diligence Data Room is to establish a common location where all important business records can be reviewed. This is important to the investor/buyer because it allows him to better understand your business and to alleviate any risk concerns he might have Concern over Risk is a primary reason an investor will lower his offer below market value. The more you can do to eliminate any risk concerns he might have the better. Even if a “risk” exists you need to quantify that risk and define a value for how it could impact your company. Low Risk equals High Valuation.
To create a Virtual Data Room the owner will need to have all of his corporate documents converted to an electronic format and placed onto a file server. This file server is then accessed by the prospective investors via the Internet. As you can assess, security is critical. The selection of the “third party” software of service provider is critical to ensure the virtual data room is secure and meets critical document handling integrity. Creating a “Do-it-Yourself” Data Room Once you have made the decision to take on additional investors or sell you company you should NOT attempt to create a data room on your own any more than you would draft the closing legal agreement on your own. Your focus should be on running the Day to Day business and keeping the value of your company at its highest possible level. You should hire three individuals:
- An Investment Banker to help you broker the deal and drive the value as high as possible. An Investment Banker has a list of potential buyers at his fingertips. He can usually expedite the process and save you months of work with a MUCH higher success rate. An investment banker will likely want a small retainer and a weekly fee which is usually deducted from the commission upon sale of the company. The total value of this commission is usually from 1% to 3% depending on the size of your company and the amount of work the banker has to provide. A good investment banker is well worth the fee paid. There are known numerous investment bankers drive the final offer up by over 10% during the final days of negotiation. Look for an investment banker that lives for the hunt and enjoys the kill.
- A Lawyer that has experience in M&A or securing Venture Capital and is able to construct all the necessary legal documents to insure a clean transaction. A good lawyer will also be able to identify potential “hooks” the buyer may insert that could limit that amount of actual money you take off the table. Be cautious of Escrow, Earn Outs or any other clauses that place a limit on your ability to access your money. A good lawyer will also bring in a Tax Consultant.
- A good Tax consultant can save save you 3% to 10% of the total value of your company. This could easily be millions more into your pocket.
A Data Room Service Provider to assume the responsibility of working with the investment banker and the lawyer to collect all of the documents, index them and load them into a secure server where the prospective bidders/investors securely review them. It is critical to look for a service provider that can collect information on the page views of the data room to help the investment banker know how to “work” the transaction to maximize the potential offers.