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This is the third installment in a series of articles providing practical information about all things business.
Electronic data rooms are integral to the due diligence process when negotiating the purchase and sale of a business. Sharing data electronically can streamline the process and be cost-efficient if managed well.
Data rooms are used to facilitate sharing what is usually an extensive amount of information during the due diligence process. A vendor shares with a purchaser the material features, obligations, liabilities and assets of the business it is purchasing, including material contracts, service agreements, employee information, leases, insurance contracts, financial statements, corporate governance documents, and intellectual property.
Key to the process is that the information shared in a data room informs what goes into a purchase agreement and, most importantly, the disclosure schedules. Failure to disclose the necessary information about the company and the business could result in a claim for breach of the purchase agreement or misrepresentation.
That said, populating a data room is time consuming and continual. Updates are often made daily.
Consider the individuals involved: data rooms are often managed by the sales broker and your other advisors should be involved early on, especially your legal counsel and accountants. Therefore, it is important to organize the data room early in the transaction. Consider creating a table of contents that is updated by those responsible for the management of the data room. As well, deficiencies in your documentation may need to be fixed, and all parties will want ample time to deal with them. Disorganization regarding the disclosure of data and maintenance of the data room could affect the deal, potentially putting it at risk.
Also, think about the tactical advantage of a data room. Each deal is unique, and impressions made at the beginning often influence the remainder of a transaction. Data rooms should not be considered pro forma. Rather, do some pre-planning. How would the purchaser want to view the information? Does the purchaser have a particular need or sensitivity that would be beneficial for you to address at the outset?
You should also consider what information is being disclosed and when. First and foremost is the importance of having a well-prepared confidentiality and non-disclosure agreement. As described in our previous installment, you may want to consider scaling access granted during the due diligence process to reduce the risk of disclosing valuable information too early in the process (see Letter of the Law, Fall 2017).
When it comes to the purchase agreement, ensure your agreement sets a date and time where no more changes to the data room can be made; a closing document should be a copy of the data room as of that date and time.
A well-thought-out, organized data room is extremely beneficial to all parties involved with a transaction. With some pre-planning and coordination among your advisors, a data room can be a strategic, streamlined part of your purchase and sale transaction.
In our next article, we will discuss purchase price adjustments in purchase agreements.
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