When a business owner prepares to sell all or part of their business, or they want to secure funding to grow their business, they understand the process will require providing a lot of financial data. However, many owners may not appreciate that these transactions can involve many different types of data--data that can make or break the deal.
Today, investment banks routinely prepare virtual data rooms to store all of the information potential investors will need to complete their due diligence process. These data rooms are digitally secured and access is allowed only via a secure login process. The secure login enables the investment bank to know exactly who has accessed the data room and what they have viewed or downloaded.
Owners planning to sell or recapitalize their business need to understand the different types of data they will have to provide, why the data is important to potential buyers and when to provide the data. For example, a buyer just entering the process may have limited access to preliminary financial records, but buyers who have signed a letter of intent (LOI) will have access to the complete data set. Here's what data to include to effectively sell your company:
The investment bank will create an Executive Summary that describes the company, being careful not to disclose any proprietary information, as well as a Confidential Information Memorandum (CIM) that is the primary marketing information shared with potential buyers who have signed a confidentiality agreement. This document contains background information used by potential buyers or investors to gain a quick insight into the company.
The majority of the information utilized in any investment transaction is comprised of financial records. These will include five years of financial statements showing revenue, costs, profits and projected growth. Ideally, these are audited financial statements that have been reviewed by a reputable third party accounting firm for accuracy. Financial data is the most important information buyers need to determine interest level in pursuing the company.
This data category will contain a wide variety of information. It should include documents such as: partnership agreements, operating agreements, articles of incorporation, customer contracts, purchase agreements, information on pending or past law suits, etc. Potential investors need this information to ensure the company has not or is not involved in a legal matter or encumbered by an agreement that could affect future company values.
As you would imagine this data will include a list of major customers and the amount of revenue the company has derived from them. This data is important to investors to demonstrate diversification in the customer base and to outline opportunities for future growth.
Most businesses own or leases equipment and/or assets. In some businesses, equipment values will constitute a large percentage to the company's overall value. Equipment data should include a complete list of equipment or similar assets the company owns along with the date the equipment was purchased. Equipment purchase agreements or financing documents should also be included in the data room. If equipment is a major value component in the transaction it would be advantageous to secure third-party appraisals and include these documents in the data room.
Real Estate Data
Any documents that evidence ownership of real property should be included in the data room. These can include: mortgage documents, liens, property descriptions, titles or deeds and easements. They may also include receipts for all integrated equipment or fixtures located on the property. Investors use this information to ensure that property included in the transaction is correctly recorded and owned by the company.
While confidential HR records would never be included in the data room, a list of employees, special credentials, payroll, benefit costs and any special employee compensation agreements or long-term commitments should be included. This would also include existing employment agreements for senior management as well as any employee non-competes. A company's employees are among its most valuable assets. Potential investors will want to know who they are and the value they bring to the company today and in the future.
Any missing data generates buyer questions and can erode trust--or break the deal. One important step for any business owner considering a change in ownership or seeking investors is to ensure all company data is updated, accurate, organized and of course, readily accessible. A virtual data room created and managed by a seasoned banker is among the tools utilized by the investment bank representing the business owner in the transaction.