Whether you’re on the buy-side or the sell-side of the M&A process, you’ve experienced the joys and pains of filling and navigating data rooms. In this article, we dive into the dynamics of data room strategy and etiquette from the perspective of the buyer side of a transaction.
Data rooms and the diligence process
Diligence requires a balancing act to evaluate a target thoroughly and ensure comprehensive valuation, but without imposing undue demands on the target company. This involves strategically leveraging information to ensure minimal disruption to the day-to-day operations of a profitable business, particularly in competitive situations with multiple PE firms involved; requesting too much detail can be overwhelming to the target, while requesting too little can leave the stakeholders without necessary information. Ideally, interested parties should aim to be low-maintenance and considerate of the data room dynamics.
Avoiding overload: essential strategies
To avoid overload while still gathering essential information, we recommend PE firms adopt the following key strategies:
- Tailor information requests: Make the most of the opportunity to ask for information by customizing requests to focus on the most critical data required for valuation and risk assessment, avoiding generic or overly broad requests that can lead to unnecessary work, or an overload of imprecise documentation being provided.
- Prioritize existing documentation: We recommend making the most of existing documents wherever possible, rather than requesting new content solely for due diligence. Leaning on documents currently in use at the target organization paints the most accurate picture. Most importantly, this reduces the workload on the target company and speeds up the process.
- Craft detailed agendas: Evaluators should always go into interview sessions with a plan to address the key questions left unanswered by the data room. Leverage face-to-face time with the target to go a level deeper in analysis, armed with questions that uncover accretive detail and complexity. The data room is the jumping off point for the creation of these agendas.
- Make incremental data requests: We suggest taking a phased approach to data requests, starting with introductory information at the outset and gradually moving to targeted, more detailed documents as the evaluation proceeds. This allows the target company to manage its workload more effectively and efficiently.
Adopting a streamlined and light-touch approach to leveraging the data room offers several key benefits for PE firms. By prioritizing existing documentation and implementing phased information requests, PE firms can obtain the necessary data more efficiently, reducing the time and resources required. Crafting detailed agendas ensures key focus areas are adequately scrutinized. Minimizing the need for the target company to produce new content alleviates their administrative burden, allowing them to focus on core business activities during the transaction process. Finally, requesting additional information strategically ensures optimal valuation and a comprehensive understanding of potential risks.
A case study in action
Our client, a mid-sized private equity firm, was interested in acquiring a high-tech software company coming out of start-up mode, operating with lean resources. This target was juggling rapid growth along with the hurdles that come along on the path to acquisition. The day-to-day needs of the business were competing for bandwidth against handling due diligence document requests.
As part of every technology diligence, our team asked thoughtful, meaningful, and in-depth questions that helped us understand the company as efficiently as we can. Given that we had minimal time with the target company, collecting as much information up front via the data room was a foundational step in our evaluation. For Cuesta, developing tailored data requests started at the initial client interaction and continued and evolved throughout the process, with leverage of the data room as a key component.
Our initial data request contained a customized list of tactical items designed to create a view of the most crucial areas of risk evaluation and upside potential. The target company provided a set of documents in response, and we got to work planning for diligence sessions digesting the information provided.
The most effective agenda incorporated the PE firm’s objectives and the specific characteristics of the target company. Leaning on what they learned from the data room, the team put together an agenda that they would use to facilitate a thorough discussion around key topics. This was essential for effective sessions. As such, the time with the target was filled with illustrative and detailed conversations, exposing additional depth of information around their technology environment, made possible by Cuesta’s mastery of the data room materials.
This led to the next step of the phased approach to information requests, as the session discussion illuminated areas where detailed documentation and specific reports would help answer key questions for the deal. Cuesta requested those items tailored to the company’s operations, and this focused approach allowed the target company to manage its workload effectively and efficiently.
A frictionless experience is key in supporting the deal process
For private equity firms, executing due diligence with minimal administrative burden on the target company is a delicate balancing act. By leveraging data rooms as part of a strategic toolkit, PE firms can achieve comprehensive valuation and risk assessment without overwhelming the target company. Cuesta’s expertise in this area demonstrates the value of a tailored, phased approach to information requests, streamlined communication, and efficient data room utilization. This strategic, light-touch strategy promotes transparency, mitigates risk, and empowers PE firms to extract valuable intelligence swiftly and make informed decisions with greater confidence.
