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What Should Be in Your Data Room? Due Diligence Checklist

Kison Patel
CEO and Founder of DealRoom
Kison Patel
CEO and Founder of DealRoom

A data room checklist is a sometimes-overlooked component of the M&A journey.

The fact that all of the world’s largest investment banks now use virtual data rooms is an indication of their importance to the M&A process.

All of them, in turn, have a data room checklist that they follow before every single assignment. The best virtual data rooms now offer outstanding user experiences from start to finish, along with a complete set of project management capabilities.

At DealRoom we help dozens of companies preparing for M&A or investments and in this article, we provide a data room checklist for your data room, to ensure that its capability is being maximized.

A note for start-ups

A competent virtual data room is a must-have for start-ups looking for funding.

Even more than larger companies in their M&A process, start-ups will speak to dozens of potential funders as they seek growth capital.

Repeating this process without a virtual data room is giving your company a handicap before it even begins. The presence of a virtual data room also shows the investors that you’re serious.

For these reasons, the list we provide below is as applicable to start-up founders as it is to mature companies involved in deal making.

What should be in a data room and why

Let’s assume that you’ve just invested in a virtual data room. Now, it’s time to begin adding documents, and you pause and wonder:

“what am I supposed to add here?” 

Don’t worry, you’re not the only one to have had this thought.

Unfamiliar with the functionality of virtual data rooms with project management capabilities, many first-time users can be slightly overwhelmed with the depth of options that project management tools offer them. 

In short, anything that enhances your M&A process - whether you’re on the buy or sell side - should be in the data room. 

On the buy side, this means documents already provided by sell-side companies, valuations of those companies, and other details pertaining to those companies (e.g. supporting documents, email chains, NDAs, etc.).

On the sell side, it’s all of the documents that buyers ask for at the initial stage of contact (sales memorandum, independent valuations, etc.) through due diligence (see checklist in the next section).

The more buyers you speak to, the clearer it will become what documents you require.

For the buy side in particular, the due diligence process can amount to a significant project in itself (or a project inside a project).

Having the proper setup in place maximizes value for your company, ensuring that due diligence provides insights that enable better decision making.

This is explored a little further in the next section. 

Deal rooms’ role in effectiveness

Virtual data rooms have undergone a rethink over the past five years.

Far from being storage facilities for documents, they are now tools whose goal is to make M&A (and especially, the due diligence component of M&A) more effective.

Here’s how they achieve that:

  • Requests: Rather than emailing requests back and forth, DealRoom (link) allows users to make requests within the data room, and to set the urgency levels of each request
  • Access: Include or exclude people from parts of the deal that are sensitive, specific, or just general access. People only see what they’re supposed to see.
  • Progress charts: No project should be without an ongoing progress tool, showing where everyone is, who’s behind, and what remains to be completed..
  • Structure: Virtual data rooms use index structures so that all documents are organized and easily accessible.
  • Safety: Google Drive is a valuable personal tool, not intended for the corporate world. A virtual data room shows the counterparty that you take data safety seriously.

Ultimately, a compliant organization is an efficient organization. A high quality data room proves the point.

This is simply not an area where companies that are serious about mergers and acquisitions can cut corners. 

Speaking of not cutting corners, the next section looks at the due diligence checklist. 633

Data Room Due Diligence Checklist

If you are looking for a data room checklist that will help with your due diligence, you are in for a treat.

We’ve broken this checklist down into sections that cover the main focus areas of data room due diligence; legal, commercial, financial, Human Resources, intellectual property, IT, environment and tax.

There’s a good chance that you already have many of these points in check, and if you do, great! 

However, we also notice that majority of companies have opportunities to improve upon their due diligence audit or information accuracy, which makes us confident that you will find at least some best-practice areas that you have overlooked. 

Without further ado, here is a due diligence checklist to make the most out of your data room:

1. Legal

  • Organizational chart showing the corporate structure of the Target and all subsidiaries and affiliates.
  • List of all jurisdictions in which Target and its subsidiaries and affiliates are licensed to do business.
  • Summary of all related party transactions entered into in the past 3 years, including the key terms thereof and review/approval procedures applicable thereto.

2. Commercial

  • List of the top 25 customers for each of the past 3 years, including revenue.
  • List of all material customers that have ceased doing business with Target in the past 12 months.
  • List of all material sales channel partners for each of the past 3 years.

3. Financial

  • Copies of audited financial statements and each subsidiary and affiliates.
  • Copies of unaudited financial statements.
  • Detailed description of any off-balance sheet/statement of financial position items, liabilities or obligations of any nature.

4. Human Resources

  • Copies of all employment agreements and indicate those affected by the transaction.
  • To the extent not already provided, copies of all agreements relating to any compensation arrangements between the Target and any third party.
  • Copies of all confidentiality, non-competition, nondisclosure, non-solicitation, intellectual property, or similar agreements. 

5. Intellectual Property

  • Copies of all agreements under which the Target is granted the right to use IP owned by a third party.
  • Copies of all agreements under which a third party is granted the right to use IP owned by the Target.
  • Summary of any past or current instances where any third party actually or allegedly infringed on the Target's IP or where the Target actually or allegedly infringed on a third party's IP.

6. Information Technology

  • Details of any current and planned IT initiatives/key projects.
  • Summary of the Target's policies and practices regarding the purchase and maintenance of software.
  • Summary of all key IT resources. 

7. Environmental, Health & Safety

  • Summary of all environmental investigations, citations, or notices of violation received from any environmental regulatory agency.
  • Summary of all litigation in which the Target has been involved in the last ten 10 years.
  • Description of any past or on-going remediation efforts relating to environmental matters.

8. Tax

  • Summary of the results of all tax audits conducted in the past 5 years, including the resolution of any findings.
  • Summary of all property taxes paid by the Target in the past 5 years.
  • Copies of all material communications and agreements between the Target and any taxing authority for the preceding 5 years. 

How to use this Data Room Checklist properly?

Incomplete or improper due diligence is actually one of the major culprits when it comes to deal failure.

You will certainly not be able to go through this whole checklist in a single day, and that’s OK.

In fact, due diligence is an ongoing, complex and time consuming process.

With that said, it is no secret that data management, research and analysis of your company are critical parts to a deal's success.

1. To get started, download the data room checklist here

2. Open a FirmRoom's virtual data room by starting a free trial

FirmRoom's free trial

It does not require any credit card to start, so it will be easy and safe for you.

3. Open the Import tab in a room settings and import the template

import data room checklist

That's all, you can start collecting and organizing your documents.

imported data room template

Conclusion

The data room checklist should be seen as a roadmap for due diligence, arguably the most important step of the M&A process.

By having one in place before the process even begins, your team is prepared for every eventuality. The counterparty will also have no excuses to delay the provision of documents.

Good practice is to make virtual data rooms and, by extension, a data room checklist, a core tenet of your deal making process.

firmroom

A data room checklist is a sometimes-overlooked component of the M&A journey.

The fact that all of the world’s largest investment banks now use virtual data rooms is an indication of their importance to the M&A process.

All of them, in turn, have a data room checklist that they follow before every single assignment. The best virtual data rooms now offer outstanding user experiences from start to finish, along with a complete set of project management capabilities.

At DealRoom we help dozens of companies preparing for M&A or investments and in this article, we provide a data room checklist for your data room, to ensure that its capability is being maximized.

A note for start-ups

A competent virtual data room is a must-have for start-ups looking for funding.

Even more than larger companies in their M&A process, start-ups will speak to dozens of potential funders as they seek growth capital.

Repeating this process without a virtual data room is giving your company a handicap before it even begins. The presence of a virtual data room also shows the investors that you’re serious.

For these reasons, the list we provide below is as applicable to start-up founders as it is to mature companies involved in deal making.

What should be in a data room and why

Let’s assume that you’ve just invested in a virtual data room. Now, it’s time to begin adding documents, and you pause and wonder:

“what am I supposed to add here?” 

Don’t worry, you’re not the only one to have had this thought.

Unfamiliar with the functionality of virtual data rooms with project management capabilities, many first-time users can be slightly overwhelmed with the depth of options that project management tools offer them. 

In short, anything that enhances your M&A process - whether you’re on the buy or sell side - should be in the data room. 

On the buy side, this means documents already provided by sell-side companies, valuations of those companies, and other details pertaining to those companies (e.g. supporting documents, email chains, NDAs, etc.).

On the sell side, it’s all of the documents that buyers ask for at the initial stage of contact (sales memorandum, independent valuations, etc.) through due diligence (see checklist in the next section).

The more buyers you speak to, the clearer it will become what documents you require.

For the buy side in particular, the due diligence process can amount to a significant project in itself (or a project inside a project).

Having the proper setup in place maximizes value for your company, ensuring that due diligence provides insights that enable better decision making.

This is explored a little further in the next section. 

Deal rooms’ role in effectiveness

Virtual data rooms have undergone a rethink over the past five years.

Far from being storage facilities for documents, they are now tools whose goal is to make M&A (and especially, the due diligence component of M&A) more effective.

Here’s how they achieve that:

  • Requests: Rather than emailing requests back and forth, DealRoom (link) allows users to make requests within the data room, and to set the urgency levels of each request
  • Access: Include or exclude people from parts of the deal that are sensitive, specific, or just general access. People only see what they’re supposed to see.
  • Progress charts: No project should be without an ongoing progress tool, showing where everyone is, who’s behind, and what remains to be completed..
  • Structure: Virtual data rooms use index structures so that all documents are organized and easily accessible.
  • Safety: Google Drive is a valuable personal tool, not intended for the corporate world. A virtual data room shows the counterparty that you take data safety seriously.

Ultimately, a compliant organization is an efficient organization. A high quality data room proves the point.

This is simply not an area where companies that are serious about mergers and acquisitions can cut corners. 

Speaking of not cutting corners, the next section looks at the due diligence checklist. 633

Data Room Due Diligence Checklist

If you are looking for a data room checklist that will help with your due diligence, you are in for a treat.

We’ve broken this checklist down into sections that cover the main focus areas of data room due diligence; legal, commercial, financial, Human Resources, intellectual property, IT, environment and tax.

There’s a good chance that you already have many of these points in check, and if you do, great! 

However, we also notice that majority of companies have opportunities to improve upon their due diligence audit or information accuracy, which makes us confident that you will find at least some best-practice areas that you have overlooked. 

Without further ado, here is a due diligence checklist to make the most out of your data room:

1. Legal

  • Organizational chart showing the corporate structure of the Target and all subsidiaries and affiliates.
  • List of all jurisdictions in which Target and its subsidiaries and affiliates are licensed to do business.
  • Summary of all related party transactions entered into in the past 3 years, including the key terms thereof and review/approval procedures applicable thereto.

2. Commercial

  • List of the top 25 customers for each of the past 3 years, including revenue.
  • List of all material customers that have ceased doing business with Target in the past 12 months.
  • List of all material sales channel partners for each of the past 3 years.

3. Financial

  • Copies of audited financial statements and each subsidiary and affiliates.
  • Copies of unaudited financial statements.
  • Detailed description of any off-balance sheet/statement of financial position items, liabilities or obligations of any nature.

4. Human Resources

  • Copies of all employment agreements and indicate those affected by the transaction.
  • To the extent not already provided, copies of all agreements relating to any compensation arrangements between the Target and any third party.
  • Copies of all confidentiality, non-competition, nondisclosure, non-solicitation, intellectual property, or similar agreements. 

5. Intellectual Property

  • Copies of all agreements under which the Target is granted the right to use IP owned by a third party.
  • Copies of all agreements under which a third party is granted the right to use IP owned by the Target.
  • Summary of any past or current instances where any third party actually or allegedly infringed on the Target's IP or where the Target actually or allegedly infringed on a third party's IP.

6. Information Technology

  • Details of any current and planned IT initiatives/key projects.
  • Summary of the Target's policies and practices regarding the purchase and maintenance of software.
  • Summary of all key IT resources. 

7. Environmental, Health & Safety

  • Summary of all environmental investigations, citations, or notices of violation received from any environmental regulatory agency.
  • Summary of all litigation in which the Target has been involved in the last ten 10 years.
  • Description of any past or on-going remediation efforts relating to environmental matters.

8. Tax

  • Summary of the results of all tax audits conducted in the past 5 years, including the resolution of any findings.
  • Summary of all property taxes paid by the Target in the past 5 years.
  • Copies of all material communications and agreements between the Target and any taxing authority for the preceding 5 years. 

How to use this Data Room Checklist properly?

Incomplete or improper due diligence is actually one of the major culprits when it comes to deal failure.

You will certainly not be able to go through this whole checklist in a single day, and that’s OK.

In fact, due diligence is an ongoing, complex and time consuming process.

With that said, it is no secret that data management, research and analysis of your company are critical parts to a deal's success.

1. To get started, download the data room checklist here

2. Open a FirmRoom's virtual data room by starting a free trial

FirmRoom's free trial

It does not require any credit card to start, so it will be easy and safe for you.

3. Open the Import tab in a room settings and import the template

import data room checklist

That's all, you can start collecting and organizing your documents.

imported data room template

Conclusion

The data room checklist should be seen as a roadmap for due diligence, arguably the most important step of the M&A process.

By having one in place before the process even begins, your team is prepared for every eventuality. The counterparty will also have no excuses to delay the provision of documents.

Good practice is to make virtual data rooms and, by extension, a data room checklist, a core tenet of your deal making process.

firmroom

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