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How to Build a Virtual Data Room

When contemplating financial, corporate, or M&A transactions, it is important to have a comprehensive data room in place. Any potential partners, whether investors, merger partners, or strategic partners will want to review all of the company’s documentation relating to their corporate structure, operations, and financings.

The Steps to Building a Virtual Data Room

Step 1: Find a Data Room Provider

There are many data room providers out there. Some of the important differentiating attributes to consider are:

  • Permissioning: most data room providers allow permissioning, with which you can grant different file access to different individuals. This can be useful if you have multiple types of potential partners accessing the data room at the same time. Most platforms can also limit file downloads so that certain people can only view files on the web, not download.
  • Auditability: it can be very helpful to know who is looking at what files, for how long, and how often. This can help you gauge the interest of potential partners. For example, partner A may tell you they are interested in pursuing a relationship but they’ve only looked at three files and only logged in once, while partner B may have logged in numerous times and looked at every file in the data room.
  • Pricing: pricing can vary dramatically between platforms. Some platforms charge flat fees while others charge per user.
  • User Interface: the user interface can affect how potential partners view the process of conducting due diligence on your company. If the interface is slow, it may cause potential partners to fatigue of the process. Additionally, it may be important to choose a platform where users granted access to the data room cannot see who else has been granted access.
  • Storage/File Size/File Type Limitations:some data room providers have very strict limitations on the file types and file sizes allowed as well as the total amount of storage available. It is important to understand these limitations prior to selecting a platform.

Here is a list of some of the top rated data room providers from G2 Crowd.

Step 2: Determine Data Room Structure

Having a cohesive data room folder structure can make the process of conducing due diligence much easier. This is the structure we use for our clients’ data rooms:

  • Corporate Documents and Corporate Matters
  • Securities and Securities Matters
  • Financing Documents
  • Properties/Leases/Insurance
  • Intellectual Property; Rights and Permits
  • Other Contracts/Agreements
  • Products and Inventories
  • Regulatory Documents/Litigation
  • Employees and Consultants
  • Financial Information
  • Environmental Matters
  • Miscellaneous

Building a data room? Download our full due diligence list here. This due diligence list is in the form generally used by investment banks, private equity firms, venture capital firms, family offices, strategic partners, and M&A partners.

Step 3: Upload and Organize Files

When uploading files, you should rename files so the user knows what the file is without having to review it. For example, documents with names like “scan” and dates should be renamed to the actual file type. Additionally, consistent filing nomenclature and format should be used.

Text-based documents should be uploaded as PDFs which makes them easier to view. Financial documents should be uploaded as Excel files when applicable. This allows data room users to manipulate numbers to see how changing variables affects financials.

Step 4: Grant and Monitor Access

Once your data room is built, you are ready to grant access to users. Make sure you pay close attention to the permission settings for each user.

If your platform has auditability features, check frequently to see how active users are and what files they are viewing most. If you see that many users are accessing the same files multiple times, these may be critical files or they may have issues.

Let’s discuss how we can guide you through your transaction. Get in touch with our team below.

What is Due Diligence?

Perhaps the most important aspect of any corporate transaction, whether a private offering of securities, a public offering, a merger or acquisition or otherwise, is what is known as “due diligence”.

“Diligence is the mother of good fortune.” – Benjamin Disraeli

The Basics of Due Diligence

Due diligence requires the review of all material documents and other information with respect to a company in order to ensure that any disclosures which a company makes, whether in offering materials or an agreement, are true and correct and satisfies any applicable standard of liability.

What does “material” mean?

The Supreme Court has held that something is “material” if there is a substantial likelihood that it would be deemed important by a reasonable investor in making a decision to purchase or sell a company or its stock or as to how to vote their shares.

A due diligence review will inform you as to the material attributes of a company or person, including their commitments, contracts, and liabilities, their business, prospects, financial condition, and results of operations.

  • Does the company exist?
  • Who are the owners?
  • How does the business work?
  • Who are its customers?
  • How do you know that a company has the contracts it claims?
  • How do you know if the projected financial results are based upon accurate and reasonable assumptions?
  • What are the liabilities or contingencies?
  • The answer to these questions, as well as many more, lies with effective due diligence.

Due Diligence for Public and Private Securities Offerings

Securities offerings are governed federally by the Securities Act of 1933, as amended. Pursuant to Section 11 of such Act, as a general matter, if any disclosure with respect to an offering of securities contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the issuer of such securities, the officers and directors of the issuer, partners in the issuer, the investment bankers conducting such offering, and professionals retained by the issuer with respect to such offering, are subject to liable for such material misstatements or omissions.

While there are no defenses to the foregoing available to the issuer and only limited defenses available to the members of the board or executive officers of the issuer, the other parties listed above may rely upon what is known as the “due diligence defense”.

The Act provides that it shall be a defense to such liability if such other party had, after reasonable investigation, e.g., a “due diligence review”, reasonable grounds to believe and did believe that the statements in such disclosure were true and that there were no omissions to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

Due Diligence for Mergers and Acquisitions

In the context of mergers and acquisitions, due diligence serves the role of fact finding, disclosure checking, and confirmation, e.g., that the representations and warranties set forth in the operative transaction documents are true and correct.

While the standard of liability in this context can be modified by contract, a due diligence review ensures that the purchaser or purchasers are receiving what they believe to be correct.

Importance of Due Diligence

The failure to engage in a complete and effective due diligence process can be catastrophic and result in substantial litigation.

Below is a list describing some of the greatest due diligence failures of all times and some of the consequences that resulted.

ClearThink Capital’s Due Diligence Process

Any due diligence process is based upon organization: the company subject to the review will need to organize its material documents and descriptions of undocumented material facts so as to provide full disclosure in all material respects.

Although most companies can accomplish this process with little disruption, companies that have not kept complete and organized records and documents may be required to dedicate substantial time to establishing an organization process and adhering to the process.

ClearThink seeks to make the due diligence as easy and simple as possible and provides a form of initial due diligence request list that reflects the organization expected by transaction participants and provides a structure for the categorization of documents.

In order to expedite the transaction process and assure full disclosure, ClearThink does the following:

  • Dataroom: ClearThink will establish for each transaction an organized dataroom in the form expected by the transaction participants and corresponding to our initial due diligence request list.  ClearThink reviews and remediates the due diligence of its client in advance of disclosure to others
  • Report: ClearThink will review all due diligence materials provided by its client, as well as other parties to the contemplated transaction, will document its review, and will make suggestions regarding, and endeavor to assist with, remediation, amendments, or explanation required in order to provide full, fair and accurate disclosure
  • Gatekeeping: ClearThink will act as the gatekeeper to the dataroom, providing access only with the consent of the relevant parties, thereby minimizing the possibility of the compromise of sensitive data

As a philosophical matter, ClearThink is a strong proponent of full disclosure of both positive and negative information.  That being said, proper management of the due diligence process will assure that corrective measures are completed prior to disclosure to third parties, thereby maximizing the probability of a successful transaction.

ClearThink and its principals have extensive experience in the management of due diligence reviews, including reviews relating to 240 public offerings raising an aggregate of $9 billion of public debt and $6 billion of public equity for companies such as The News Corporation Limited, Fox, Comcast, TCI Communications, British Sky Broadcasting, and Liberty Media, among others, as well billions of dollars of mergers and acquisitions.

Planning a corporate or financial transaction? Let’s discuss how we can be helpful. Get in touch with our team below.

Valuing SaaS Companies

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The Top 5 Reasons Investors Say No

Throughout our careers, we have been pitched by thousands of companies and worked with countless companies to prepare them for and match them with the right capital partners. Here are the top five reasons we’ve seen why investors say no.

The 5 Most Common Reasons Investors Say No

Management’s inability to tell the story

If you can’t get your point across in the time it takes to ride up 20 floors in an elevator, you should refine your pitch. We’ve had calls with companies after which we could not even tell you what the company’s business is. It’s important to be clear and concise when pitching investors, and to make clear the benefit of your company to your target market

Valuation too high

Often, companies will approach us with an unjustifiably high valuation. They often say that these valuations were verified by third parties. Our response is: “Great, then have them invest at that valuation.” The most important valuation is the valuation that gets your transaction done. It does not matter what you think your company is worth if investors don’t agree.

No plan to liquidity event

What is the biggest fear of an investor in a private company? The biggest fear is that the company will succeed, but there will never be a liquidity event, thus making the investors captive minority stockholders, and their shares worthless. It’s important to have a clear path to a liquidity event, whether it is a public offering or a buyout. We like to structure our transactions as public-market based transactions when appropriate. This allows for higher valuations, friendlier terms, and happier investors.

Unattractive industry

As a management team, you could be doing everything right and hitting the ball out of the park within your market segment, however if the industry in which you operate is not attractive to investors, they will likely not take a chance on your company. An industry can seem unattractive to investors for a number of reasons: the industry could be highly competitive, the industry could be in decline, or the industry could be out of their area of expertise. You may be the highest grossing frozen fish distributor in the world, but if you approach a technology investor, chances are they will pass on the investment.

Uncertainty as to management’s ability to execute

Convincing investors of your ability to lead your company is just as important as convincing them of your company’s ability to succeed. Although an investor is purchasing a stake in your company, they are purchasing a stake in you as well.

Seeking financing? Let us help. Get in touch with our team below.