How to Structure Your Data Room For M&A

There can be many reasons why mergers and acquisitions (M&A) happen in the business world. The most common reason is that two companies combined are worth more than they were individually. It can also be to achieve quicker growth, though that growth is inorganic rather than organic. Another common reason is that any new entity has a stronger market presence and more power than the individual companies did.

Whatever the reason for M&A, it’s not something any company rushes into. There are several steps in the due diligence process and they can be lengthy depending on the size and complexity of the two companies involved. From looking carefully at website valuation to accounts to analyzing market share and business systems, it can be a process that involves a lot of work on the part of those undertaking due diligence.

One thing stands out, however. In order to carry out an efficient due diligence process, each company has to share data, a lot of data. That means you need a mechanism that allows secure sharing of information that is highly confidential and often sensitive. Step forward data room. What is a Data room for M&A and how do you structure one in such a way that it aids the M&A process?

What is a Data Room? 

As the name suggests, a data room is a space where data, usually private and confidential data, is stored and where it can be accessed by those authorized to do so. That space may be physical or virtual, though in this increasingly cloud-based business world, it is more likely to be virtual. In some cases, it may even be a combination of the two.

If you are ‘constructing’ a data room for M&A, then both entities will add documents and major files to that room that are needed to undertake the due diligence process. This allows both parties to examine all the documents and information that allows transparency on either side, and that can lead to a successful merger or acquisition.

Why Use a Data Room for M&A?

No matter the size of the organizations involved, the M&A process requires sifting through huge amounts of data in order for both parties to be sure they want to proceed with any major changes. A lot of that data will be highly sensitive and may include historical company financials as well as information on current employees. The last thing you want is for that data to fall into the wrong hands. So, you want to minimize the risk of any data breaches or leakage.

Having all relevant information and data in one central repository can make the due diligence process a lot easier and smoother. Data can be organized in such a way that those conducting the process can access what they need when they need it. The total amount of data involved in any due diligence prior to a merger or acquisition can be overwhelming at times, as there can be hundreds of files. Having it well organized can be a great help.

The people carrying out the due diligence process will likely have had some level of data analysis training to make their tasks easier. Advanced data analysis techniques, such as Bayesian neural networks, can also be used to aid in the due diligence process and help those involved make better-informed decisions.

Given the complexities that can be involved in the M&A process, having a well-structured data room for M&A and any tools needed to aid those involved means that the overall job should be simpler than without.

Benefits of Using a Data Room for M&A

While some processes may use, even partly, a physical data room for physical files, the majority of such scenarios will see a virtual data room being utilized. There are a number of benefits that come from sharing data and information in this way:

• Security: As already stated, a lot of the data involved is highly confidential so security is one of the key factors when structuring a data room if you want to merge two separate businesses. Most providers offer robust security for your data so that everything you add to the data room is encrypted and 100% secure.

• Access: Another aspect to security is who can access the data. With an efficient data room for M&A, you not only have encrypted data, you also have secure login features, detailed activity logs that show who logged in and when, as well as advanced user permissions if some data is more confidential than others and you want access to that limited.

• Collaboration: Due diligence is a two-way street as both companies want to be sure they are doing the right thing. Using an online data room for M&A ensures that a high level of collaboration can be attained and means that you can communicate with each other, add Q&A sections, request clarification (or additional documents or files), and comment on documents.

Due diligence is an essential aspect of M&A, and a well-structured data room can make the process more manageable. By providing secure access to confidential information, enabling collaboration, and facilitating efficient communication, data rooms ensure a successful M&A process. As businesses continue to evolve and new technologies emerge, companies can future-proof their business with IoT data analytics to make better-informed decisions and stay ahead of the competition

How to Structure Your Data Room for M&A: Five Easy Steps

Due diligence may take time, and periods of relative inactivity will be offset by times when activity is frantic. Having your data room and associated processes well-structured can mean that every aspect of the entire process is easier for all concerned.

1. Think, plan, and draw up a blueprint

As with many aspects of business, planning your data room in advance can help avoid issues. What are going to be the needs of the due diligence being carried out? What data and information do you have to share with each other? It can also help at this stage if you draw up a list of the people involved in due diligence.

You wouldn’t buy a product without first performing research into it. It is no different when looking to purchase, or merge with, another company.

While the majority of people involved are likely to be employees of either company, you may also outsource some of the process to specialists such as accounting firms with previous experience in M&A. While your room may be virtual, drawing up a ‘floor plan’ of the types of files and ranking them in order of importance can help you better implement the actual data room when it’s time.

2. Assigning access

You should have planned a rough list of who will need access to your data room for M&A. You don’t want too few people to be involved, but equally, you don’t want too many (too many cooks spoil the broth!). Identifying the optimum number of people for your particular process means that you can have better transparency and more efficient communication.

There are some things to consider when it comes to creating access levels – particularly limited access – to the data in your data room:

• NDA: Even when a non-disclosure agreement is in place, you may want to limit access to some data and reserve that access for C-suite level staff. 

• Human resources: You also need to realize that much of the HR data, such as employee contracts, are sensitive documents and can’t be shared with users outside of the HR department and senior managers. 

• Compliance: Do either of the businesses deal with data that is protected by law or regulatory frameworks? Just as data analytics and AI for federal agencies are protected by law, so might some of your info.

• Pending deals: This is another question of confidentiality. If either entity has pending deals or business transactions, then you can disclose figures but not company names.

3. Create a filing system

If you’ve planned well, you should already have an idea of how any system will look. You should create a system that identifies data by type (financial, legal, etc.) but also by importance. For example, data on total sales in the previous year is far more important than how much you spent on travel. It’s also a good idea to have a master file that contains the most important and commonly accessed documents and separate files for the most confidential info.

Some of the information to make sure you include is:

• Financial: This will include financial documents including financial statements, loss statements, and details of any outstanding loans.
• Tax: Information on tax audits and a summary of all taxes paid, including property taxes.
• Commercial: Client information, sales strategy, and recent sales.
• Intellectual Property: Details of agreements to use IP owned by a third party and any IP owned by either company.
• Legal: Legal documents such as share certificates, contracts, details of resolved legal cases, and a corporate structure overview.
• HR: All employee agreements, salary, and pension details.
• Marketing: Information on any marketing plans in progress and agreements with affiliates.
• IT: Details of all IT resources, policies, and any planned initiatives.
• Environmental and Health & Safety: Details of all environmental investigations and remediation efforts connected to environmental issues.
• Private and Confidential: This will be one of the top-level folders and will have restricted access. It will include pending deals, information on potential investors, and legal cases.

4. Maintain & update

Due diligence is not an overnight process and can take as long as three months to complete. Of course, things change in business on a day-to-day basis, so it’s essential that you maintain and update the data in your data room for M&A and that outdated documents are replaced or deleted. While there is no rigid rule to this part of the process, reviewing any changes at the end of each week makes good sense.

5. Engage regularly 

While there may be lulls in the due diligence (and overall M&A) process, engaging with your data room is essential. Not only does it allow you to maintain and update the data, as mentioned, but it also keeps communication channels open and enables either party to respond to queries quickly. Another advantage of regular engagement is that it allows you to tweak the folder structure as needed so that all workflows are as streamlined as possible.

The Takeaway

Due diligence is an essential part of the M&A process and having a good data room for M&A is just as essential. Just as you might use engineering management software to manage a project, a well-structured data room lets you manage the due diligence aspects of your planned merger or acquisition.

If you are planning on a merger or acquiring another business, then you need a good data room so that sharing of info is a simple process and so that relevant personnel can collaborate and communicate with each other. By doing so, you can make the entire process simpler, more efficient, and hopefully successful.