Due Diligence Best Practices: Be Prepared for M&A Success

Preparing for a potential acquisition can be daunting, especially when you consider the level of scrutiny involved. Buyers will want a comprehensive look behind the scenes, examining your company’s history and operations in detail. Ensuring you’re well-organized and prepared can make a significant difference, setting a positive tone for the entire process and helping to avoid last-minute scrambling. One of the most effective ways to achieve this preparation is through setting up a data room.

Data Rooms

A data room is an organized online folder structure that enables you to share your company’s documents with potential buyers in a secure, controlled environment. Although the term may sound high-tech, a data room is simply a collection of organized digital files. Buyers may require the use of specific platforms for functionality, but ultimately, the goal is the same: providing access to key information in an orderly fashion.

There are two common types of data rooms, each serving a different stage of the acquisition process:

Data Room 1: High-Level Information

This initial data room provides potential buyers with a high-level overview of your company and this data room is often shared before a Letter of Intent (LOI) is in place (but usually under the protection of an NDA). At this stage, you’ll typically share essential documents like your pitch deck, financial statements, and other core information. If you’re working with an investment banker or broker, they can help organize these materials and create an appealing package for potential acquirers.

Data Room 2: Detailed Due Diligence

Once a buyer is ready to move forward, you’ll typically sign an LOI, after which the second data room comes into play. This data room contains more detailed information about your company, including more detailed financial records, contracts, employment records, all corporate and financing documents, information on IP, and other documents. This in-depth access helps buyers complete their due diligence and prepare for the acquisition.

Key Due Diligence Categories

While you may not need to include every single document initially, certain categories of information are critical to any due diligence process. Preparing and organizing these materials will streamline the process and make a positive impression on potential buyers.

1. Corporate Records

Organized corporate documents establish your company’s commitment to good governance. Be sure to include:

• Certificate of incorporation (or other charter document) and other foundational documents and all amendments to those documents.
• Documented board meetings and actions.
• Documented shareholder meetings and actions.

2. Stockholder Information

Provide a clear and accurate picture of your company’s ownership structure. This includes:

• An up-to-date, understandable cap table, preferably managed through an online cap table platform.
• Documentation of board approval for all stock issuances and options.
• Records of approvals from preferred stockholders when required.

3. Securities Issuances

Buyers will want to see that all securities issuances complied with securities laws. This includes documentation of required federal and state securities filings for stock and options issued to investors, employees, and other service providers.

4. Financing Documents

Ensure that all financing documents are organized and accessible. This includes convertible notes, SAFEs, priced round documentation, and debt agreements.

5. Material Contracts

Buyers will need to review all of your company’s contracts. This often involves:

• Organizing files for all contracts, including customer agreements, vendor contracts, and distribution agreements.
• Clearly distinguishing between standardized template agreements and customized contracts.
• Using spreadsheets to track contract values, renewal terms, and other essential details.

6. Management and Employees

For a smooth transition, buyers need comprehensive information about your team. Prepare:

• A list of all current and former employees and contractors, including compensation and benefits.
• Signed contracts with confidentiality and IP assignment clauses.
• Documentation of any personnel policies and benefits.

7. Financial Information

Buyers need assurance that your financials are accurate and compliant. Key documents include:

• Standard, GAAP-compliant books (audited financials may be necessary for later-stage companies).
• Filed tax returns.
• A complete list of company assets.
• Clean balance sheets, and profit & loss statements for the past several years.

8. Sales and Marketing

Include relevant sales and marketing materials to provide insight into your company’s customer acquisition strategies. Examples include:

• Market research and marketing studies.
• Sales literature, purchase orders, user manuals, and price lists.
• Any agreements related to distribution or channel partners.

9. Real Property

If your company owns or leases any property, include related documentation. Be mindful that commercial leases can impact an acquisition, particularly if they contain challenging terms or long-term obligations.

10. Intellectual Property

Demonstrating ownership of intellectual property (IP) is essential. Make sure to prepare:

• A comprehensive list of (registered and unregistered) trademarks, patents, copyrights, proprietary technology, and trade secrets.
• Documentation proving the company’s clear title to all IP, including IP assignment agreements for all employees and contractors.

11. Privacy and Data Security

For companies handling personal data, buyers will look closely at your data security practices. Include documentation of compliance with relevant data privacy laws and policies.

12. Environmental Compliance

While this may be less relevant for many tech companies, businesses with environmental considerations should demonstrate compliance with applicable environmental laws.

13. Governmental Regulations and Filing

For companies in regulated industries (e.g., FinTech, healthcare), show documentation of compliance with all necessary regulations.

14. Litigation and Audits

Prepare documentation detailing any past or ongoing disputes. This includes descriptions of disputes, resolutions, or any outstanding issues.

15. Insurance

Ensure all insurance policies are documented and accessible. This provides assurance that your company is protected against potential risks in a way that is customary for your company’s stage and industry.

Preparing for due diligence requires thoughtful organization and attention to detail. By setting up well-organized data rooms and ensuring that all key documents are prepared in advance, you can approach the acquisition process with confidence. Thorough preparation not only creates a positive first impression but also enables a smoother, faster transaction that benefits both you and the buyer.

If you need help getting your due diligence documents and data rooms in place, reach out to our team.