Businessmen running towards a light bulb and text lesson learned from larger transactions

Corporate C-suite: Your M&A data room pains

 

Let me share a public secret: building data rooms is boring. It is time-consuming, troublesome and just plain boring. But that doesn’t mean we can’t make it less time-consuming, less troublesome and less boring. You could also easily ask: so why are you specializing within the field? Well, let’s just say that we saw some room for improvement…

So here is the deal: when planning to build a(virtual) data room (a VDR) in a larger organization, time and quality are two key factors. They will significantly impact the outcome and perception of the due diligence investigation. In this respect, I have highlighted the key pains that we have identified through extensive knowledge as M&A lawyers and data room consultants. Which also resulted in us building software and having a team of data scientists and developers to remedy these pains.

 

In short, these pains cover:

  1. Time will be wasted
  2. You don’t know what to collect
  3. A VDR structure is logical for M&A professionals – often not for others
  4. Incomplete VDRs are the rule rather than the exception
  5. Show or tell, please

 

1. Key employees’ time will be wasted

Most – if not every – M&A process in large organizations is confidential meaning there will only be a small amount of key employees in the know. This means that these key employees are to collect the documents for the VDR. Unfortunately, the key employees are usually not “key” because they are great at finding documents. They are key due to their expertise and their ability to run and represent the company. And you want to make sure that they actually have time to do this. Do whatever is necessary not to waste too much of your key employees’ time and start organizing the “basics” before the M&A process really starts. There can be several good reasons to collect your contracts, company documents or IPR documentation any day in advance by involving the people that actually know these documents–and this without ringing any alarm bell revealing that an M&A process is about to start.

 

2. Most people don’t know what to collect before they start collecting

No matter how we look at this, key employees have to spend some time on collecting and organizing documents. But to make this efficient, make sure you know what to collect. Advisors have a tendency to use M&A jargon for most things which may not be apparent for everybody else (having worked 10 years with M&A, I still struggle to understand a standard “request list”). So prepare before loading the wheelbarrow and potentially wasting precious time. This may seem like truly basic advice but what’s

important in M&A is not always 1:1 with what is important in day-to-day business. Luckily, the solution is also basic: seek advice. And seek advice from the start. From your lawyer, your banker or your VDR consultants.

 

3. VDR structure is a language – and it is hard to speak

Just as your key employees are not necessarily key to finding important documents, their main expertise is likely not structuring such documents for an M&A process. This, of course, unless you have a Head of Legal (but if you do, she could probably need a helping hand as she will likely be insanely busy with all other legal parts of the M&A process). The VDR structure is indeed a language. Though the structure may not seem logical, not speaking this language will, unfortunately, show when you invite the crowd of mad bidder lawyers into the VDR. They are hired to find ͞holes͟ and they are expecting everything to be organized as they are used to. Remember, due diligence is a dish most often served during the long and lonesome hours at the law firm from 1 am to 5 am and anything you can do make this dish more digestible is met by applause by your bidders’ advisors.

 

4. An incomplete VDR is the rule rather than the exemption

Incomplete VDRs are not only giving your bidders and their advisors hell and wasting their expensive time. It will also give you hell. When the bidders fail to understand your business, they will drown you in time-consuming and unnecessary questions in the Q&A. Questions like “Why is the document not signed? Where is schedule X for document Y?” etc. etc. And this is at a time where you are already insanely busy answering all the unavoidable ͞good͟ questions that will justify the “hockey stick” you just drew for your valuation. Having a solid VDR from the very beginning is not only a matter of spending time right – it is an investment that will save you time overall AND at a stage where time is truly critical.

 

5. Show or tell

You either have the documents – or you don’t. However, this is not necessarily an issue. It is perfectly normal to have “holes” in your documents. It makes perfect sense not to have any signed customer agreements if you deliver SaaS on standard one-click terms & conditions. But in the VDR this may not be apparent. Lawyers would expect to see customer contracts – otherwise, you probably have a business without customers and you will for sure have a “red flag” in the bidders’ due diligence reports. So make sure to tell –it’s usually quite easy. It is all about “educating” the bidders about your business. And for nothing else make sure to tell your own advisors in due time – they can then tell you if something needs remedy.

 

Overall, the harsh truth is: Time is NOT on your side

Frankly, there are plenty of good arguments for not throwing resources after the VDR too early. But there are NO good arguments for not planning the VDR build-up in advance. Planning does not necessarily mean building. Planning is getting an understanding, preparing, identifying key documents/resources and considering if any known defencies exist. One day, artificial intelligence will take over the task of building and you will mitigate your VDR pains. Actually, it is already here but this is not a sales pitch…

See more about our M&A use case at archii.ai.

*This article was originally published on March 15, 2018, on LinkedIn
https://www.linkedin.com/pulse/corporate-c-suite-your-ma-data-room-pains-s%C3%B8ren-munk-hansen/