Even in strong economies, the M&A process can be a rocky road to navigate. Too often, organizations seeking a profitable exit make the flawed assumption that the due diligence process is solely the responsibility of the buyer. This assumption can lead to fatal mistakes that can undermine deal value, slow the process, or even kill the deal. The truth is, by being proactive in the due diligence process, selling companies can play a significant role in shortening due diligence timelines, reducing a buyer’s perception of risk and maximizing the value a buyer ultimately assigns to the company. Using a full-featured virtual data room to facilitate the due diligence process can reduce or eliminate many of the common M&A pitfalls that often cause deals to unravel.#1 Reduce Due Diligence Surprises
Buyers don’t like surprises during due diligence.
Financial discrepancies, unresolved litigation, employee liabilities or cloudy IP ownership can cause buyers to back out of deals, delay the process while issues are resolved, and reduce the price and terms. At the very least, unexpected revelations can erode trust and have a negative impact on negotiations.
A virtual data room is the best tool for ensuring that all corporate information is presented in an organized and transparent manner and that nothing is missing, inaccurate or unresolved.
Conduct a pre-sale transaction readiness assessment to help avoid due diligence surprises. Put yourself in the shoes of the buyer and anticipate their issues and concerns. What will they want to see? Are there any red flags? Would you be impressed if you were the buyer? If problems are identified, resolve them. Organize everything in a virtual data room so that everything a buyer would want to see is easily accessible, complete and resolved.
#2 Eliminate Slow Responses
During the due diligence process, time is not your friend. The more prolonged the deal, the more likely issues can surface that will reduce the deal value or cause the buyer to walk away.
Modern virtual data rooms are built to reduce transaction timelines by expediting the document review process, facilitating Q&A, and providing time-saving features such as batch download, continuous scrolling, and robust search capabilities.
Many virtual data rooms also include powerful auditing and reporting features providing sellers with insights into a buyer’s interests and areas of concern further allowing them to proactively address those potential areas of contention.
When buyers have questions or concerns, address them immediately and keep the due diligence process on a rapid path to a successful conclusion.
#3 Cast a Broader Net
One of the most significant benefits of a virtual data room is that it makes due diligence materials available on a 24/7 basis, thus facilitating more interest of potential buyers across multiple regions and time zones. Once a virtual data room is set up, it’s a seamless process to invite new users and grant their level of access based on their stage in the due diligence journey and the seriousness of their intent. Adding new users or removing ones that have lost interest in the deal is as simple as a click of a mouse.
#4 Manage Buyer Issues
The majority of issues that surface during due diligence are typically on the seller side, however, sometimes complications can arise with the buyer. Their business could take a downturn, their financing could fall through, or they could be acquired while they are engaged in due diligence.
And, while sellers may feel they have little control over a buyer’s issues, deploying a virtual data room for the due diligence process likely means that other buyers have expressed interest in the acquisition. If a buyer is not moving quickly to complete the deal, it is likely there is something taking place in the background and it may be time for the seller to seek a backup buyer. Having a virtual data room in place makes that transition as easy as flipping a switch.
#5 Prepare for Outside Market Issues
Market fluctuations are also largely out of a seller’s control. If the general market or economy is not in good health, then it is usually not good for sellers. However, if a company continues to thrive in a down market, that could make the company more attractive.
The best way to weather a fluctuating market is always being prepared to sell. Attempting to time the market accurately is challenging and rarely works. When the economy is good, everyone is trying to sell and buyers may not have time to react to another fluctuation. Having a virtual data room at the ready means that whenever buyers approach, your company will be prepared for rapid due diligence.
#6 Avoid Data Breaches
Data breaches are costly, damaging for your brand, and can destroy deal value. You may remember that in the wake of an agreement by Verizon to purchase Yahoo for $4.8B, Yahoo disclosed that it had suffered two security breaches exposing personal information in over 1 billion Yahoo user accounts. As a result of that disclosure, Verizon ultimately shaved $350M off the transaction price.
According to the SEC, hackers are increasingly tapping into sensitive M&A information by targeting weakly secured lines of communication such as emails and unsecured cloud storage. Hackers couple their hacking savvy with business deal intelligence to hijack email threads and mine them for data to glean the credentials of shareholders and investors.
Email and unsecured cloud storage should never be used to convey sensitive deal information. Using a virtual data room from the earliest stages of a transaction is the best way to ensure that nefarious Wall Street-savvy cybercriminals cannot gain access to critical business communications and compromise your deals.
#7 Improve Deal Management
Virtual data rooms are excellent tools for managing and sharing confidential documents during due diligence, but that’s really only half of the equation. Also vital is maintaining and managing the relationships with the individuals and groups who are viewing those documents. A virtual data room with powerful reporting features allows administrators to glean useful analytics on investors and potential buyers by tracking user activity in the data room. A virtual data room’s audit log shows which individuals have looked at which documents and for how long. This equips sellers adequately with actionable deal intelligence which allows them to anticipate potential inquiries or concerns and determine what information is of most interest to engaged buyers. It also provides insight into which buyers are the most committed and the seriousness of their intent.
Sharing information during due diligence is fraught with risks and shouldn’t be taken lightly. The potential costs associated with a breach or transaction intelligence getting into the wrong hands can devalue a deal or kill it entirely. Using a state-of-the-art virtual data room is the best way to ensure that your M&A transaction doesn’t unravel.
Learn more about virtual data rooms at www.sharevault.com
Richard Andersen is the founder and CEO of ShareVault. He has an MBA from the University of California at Berkeley and has worked for companies such as Apple, eBay, Ernst & Young and MarketFirst. He brings an entrepreneurial mindset to everything he does and is passionate about creating strategic partnerships.