Raising capital or preparing for a potential sale is a critical phase for any growing company. This process often involves a comprehensive due diligence exercise where potential investors or buyers scrutinise every aspect of your business. To facilitate this, a well-organised virtual data room (VDR) is essential. But what exactly should you populate this data room with, and what will the due diligence process entail?
Building Your Virtual Data Room
A virtual data room is an online repository used for storing and sharing documents during the due diligence process. Here’s a detailed look at what to include:
1. Corporate Documents
Articles of Incorporation: Including any amendments.
Bylaws: The company’s rules and regulations.
Organisation Chart: Showing management structure.
Shareholder Agreements: Details of shareholder rights and obligations.
Board Minutes: Records of board meetings.
2. Financial Information
Historical Financial Statements: Typically for the past three to five years.
Interim Financial Statements: Up-to-date financials for the current year.
Projections and Forecasts: Future financial performance expectations.
Audit Reports: External audits if available.
Tax Returns: Filed for the last three to five years.
3. Operational Information
Business Plan: Detailed company strategy and growth plans.
Product and Service Information: Descriptions, pricing, and development stage.
Market Research and Analysis: Industry reports, market size, and competition.
Customer Contracts: Key agreements and sales contracts.
Supplier Agreements: Contracts with suppliers and vendors.
4. Legal Documentation
Intellectual Property: Patents, trademarks, copyrights, and trade secrets.
Litigation Documents: Any ongoing or past legal proceedings.
Employment Agreements: Contracts with key employees.
Insurance Policies: Coverage details and claims history.
5. Human Resources Information
Employee Handbook: Policies and procedures.
Organisational Structure: Roles and responsibilities.
Compensation and Benefits: Details on employee packages.
The Due Diligence Process
Due diligence is a thorough investigation conducted by potential investors or buyers to assess the viability and risks associated with an investment or acquisition. Here’s what you can expect:
Initial Review
The initial phase involves a high-level assessment of your business. Investors will review the provided documentation to understand the overall health and potential of your company.
In-Depth Analysis
Following a positive initial review, investors will dive deeper. They will scrutinise financial statements, validate projections, and evaluate operational efficiency. Legal documents will be closely examined to uncover any potential liabilities.
Management Meetings
Investors will likely arrange meetings with your management team to gain further insights into the business operations, strategic vision, and management’s competence.
Site Visits
If applicable, physical inspections of facilities and operations might be conducted to corroborate the information provided in the VDR.
Final Negotiations
Upon satisfactory completion of due diligence, final terms will be negotiated. This includes valuation adjustments based on findings and finalising the structure of the investment or acquisition.
Q&A:
Q: What are Articles of Incorporation?
A: Foundational legal documents that establish the existence of a corporation and outline its basic structure and governance.
Q: What is the purpose of an Interim Financial Statement?
A: These are financial statements that cover a period shorter than a fiscal year, providing up-to-date financial performance.
Q: What are Projections and Forecasts?
A: Estimates of future financial performance, often based on historical data and planned business activities.
Q: What constitutes Intellectual Property?
A: Legal rights to inventions, designs, and artistic works, including patents, trademarks, and copyrights.
Q: What is an Employment Agreement?
A: A contract outlining the terms of employment between a company and its employees, including roles, responsibilities, and compensation.
Enquiries
For further information, please contact info@langdoncap.com
About the author
Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
Langdon Capital assists SMEs and mid-market companies with capital raising, M&A and disposals up to £250m in transaction size; and innovative, high-growth companies with >£1m in annual revenue and >30% in annual revenue growth raise debt or equity, at Series A and later funding rounds, from a network of alternative investors spanning private equity firms, venture capital funds, corporate VC arms, family offices, venture debt funds, private credit funds, real estate funds and hedge funds.
contact info@langdoncap.com | visit www.langdoncap.com/corporate-finance
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This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.
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