Your Ultimate Virtual Data Room Due Diligence Checklist
Published - 4 November, 2020
Mergers and acquisitions are complicated, intricate affairs, and there’s a lot of data that you need to sift through to get all of the information you need to make an informed decision–and it’s not just one decision, but many, over and over. The entire process can take months or more than a year. Through a virtual data room (VDR) you are able to manage all of these facets of the process, but it can get complicated.
Here is a definitive ultimate virtual data room due diligence checklist – the things that you need to investigate in your virtual data room before you make any decisions about finalizing your M&A.
The first thing that you’re going to need to assess is the basics, the general information about the company that is involved in the M&A. While most of this information doesn’t require a VDR because it’s often public, it’s still important to include in this checklist. These things include the following: documents of incorporation, management bios, board members, executives, and an overview of any subsidiary companies that the company oversees. This will give you a 30,000 foot view of the company, laying out the topography before you get down into the weeds.
This is where the VDR comes in, because most of this information is kept under lock and key. In days past, you would have to travel to a brick-and-mortar data room to get access to all of this documentation, but through VDRs, you can get connected to it rapidly and easily from wherever you are, anywhere in the world.
Some of the financial information that you’ll want to look into is: Financial projections; income statements; balance sheets; cash flows; budgets; breakdown of sales and gross profits by channel type, geography, and customer analysis; marketing and sales costs; and other financial information.
All of this information is extremely sensitive and it is only through the use of a VDR that you can gain access to this without traveling to the other company and going through security procedures to sit down with their books.
One part of the financial information you’re going to want to access is the accounts payable, as it gives you a good understanding of the outflow of cash from the target business. You will want to know the top vendors as well as their outstanding invoices to make sure that you’re not stepping into a situation where the target company hasn’t been paying their bills and has a big backload in payables.
Just as you want to know how much money is flowing out of the company, you want an accurate view of how much is flowing in, where it’s coming from, and what terms the payers have. You’ll want to know the top customers, customer churn, and customer contracts so you can evaluate the future of the business.
Policies and Procedures
As another facet of the financial outlook of the company, you’re going to want to look at the financial policies the target company has in place. This includes accounting procedures, pricing policies, credit policies, return policies, and warranty policies.
You’ll want to do your own projections, but it’s important to also look at the projections that the target company has laid out for its own future. This includes quarterly projections; projections by channel, product type, segment and customers. You’ll want to take a glance at the target company’s perceived growth drivers and prospects, as well as their strategic plans, business and marketing plans, and financial arrangements. Granted, all of this may change when you acquire or merge with this company, but it’s good to know where they are currently positioned and what plans they have in place so you can evaluate if these plans are good or bad.
It’s essential to know the financial situation that the M&A target company is in, so you need to understand their capital structure. This includes current shares outstanding, options outstanding, warrants and rights outstanding, a summary of all debt instruments with key terms and conditions, and contingencies.
Contracts and Agreements
Contracts and agreements are one of the most important things to look at when considering a M&A, because it’s these contracts and agreements that will lay the groundwork to the future stability of the company (or reveal flaws that need to be rectified). These involve partnerships, joint ventures, distribution agreements, governmental contracts, purchase agreements, sales agreements, supplier and subcontractor agreements, and commissions or other payment agreements.
You may not think you need a VDR to understand a company’s products, because you can see them for sale by the company, but there are some secrets to the products that are trade secrets that are under lock and key. These include research and development, competitive analysis, new product pipeline, product margins, patents and trademarks.
Marketing, Sales and Distribution
You want to acquire a healthy company with good plans in place – or maybe you want to revamp the entire operation – but you’re going to need to know what they’re doing right now and what effects it’s having. This includes strategy and implementation, distribution channels, positioning, marketing opportunities and risks, pipeline analysis, and sales structure.
Management and Personnel
One of the hardest parts of an M&A is making decisions regarding the reorganization and personnel. You’re going to want to look at organizational charts, headcount by function and location, bios of the senior management, compensation plans, employment agreements, benefit plans, incentive stock plans, worker’s compensation, and union contracts.
Properties and Real Estate
One of the big things you’re getting when you acquire a new business is their physical assets. You’ll want to inspect the valuation documents for all properties, sale documents for properties, factory floor plans, and property tax information.
Insurance and Legal
For insurance, you’re going to want a good look at the current policies and history of major claims. In the legal realm, you’ll need to inspect the intellectual properties, licensing agreements, patents, any pending litigation, copyrights, licenses, and trademarks. You’ll also want a description of environmental and employee safety issues and liabilities.
Regulation can make a company sink or swim, and you need to go into the merger with your eyes wide open. This includes knowing any new regulations and their consequences, necessary authorizations, regulatory projects, and outstanding regulatory issues.
Finally, you will want to get a full understanding of the company’s tax obligations, historical tax assessments, governmental audits, and tax financial statements.
Learn more about how a Virtual Data Room can assist you in managing your due diligence.
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This article was originally published on the CapLinked website and has been amended for the Ince audience. Ince has partnered with CapLinked to bring their superior product to Africa under the InceLink brand. As a result of this partnership, you get all all the great features brought to you by CapLinked, priced in Rands and supported locally by the Ince team.