What Goes in a Data Room and How to Build One

Why a buyer wants the room at all

Early in a sale, a buyer works from a summary of your business and a handful of numbers. That is enough to decide whether to make an offer. It is not enough to decide whether to close, and a lender who is financing the purchase will not close on a summary either. The room is where the summary gets tested against paper.

Think of it from the buyer's side. They are about to put a large amount of money, often borrowed and often secured by their home, into a company they have known for a few weeks. Every document you hand over either supports the story or contradicts it. Buyers do not go looking for reasons to be angry. They go looking for the places where the story and the paper differ, because those places become the price conversation.

For you, the room does a second job. When everything a buyer needs is in one place, the questions come in a predictable order and you answer them once. When it is not, the same questions arrive by email, by phone and at inconvenient moments, and each one makes you look a little less prepared than you are. Our post on due diligence describes the stretch of the deal where the room gets used hardest.

The money folder

Start with financials, because that is the first thing a buyer opens. Three years of business tax returns, in full, with every schedule. Monthly profit and loss statements for the same period, and a balance sheet at each year end plus a recent one. A year-to-date statement through the most recent month. Bank statements for the operating account, since some lenders want to see the deposits line up with the revenue you reported.

Then the pieces that explain the numbers. A schedule of your add-backs, meaning the owner expenses and one-time costs you believe should be removed to show what the business earns, with a document behind each one. A list of accounts receivable with age, accounts payable with age, and a schedule of any debt, including equipment loans, lines of credit and credit cards used for the business. If you have inventory, the count and how it was valued. Our post on what counts as an add-back explains why each one needs support.

One practical point. The statements in this folder have to agree with each other. The profit and loss should tie to the tax return, or you should have a short written reconciliation that says why it does not. An owner who runs personal spending through the company, or who keeps two sets of numbers because one is better for taxes, will see that come out here. It is better found by you in the week you build the room than by the buyer's accountant in week three.

Corporate, tax and legal records

This folder is dull and the buyer will read every page of it. The formation documents for the company, the operating agreement or bylaws, and any amendments. A list of owners and their percentages, plus any agreements among them. Your state registrations and good standing certificates. Business licenses and permits, with expiration dates. Sales tax filings and payroll tax filings, and any notices from a tax agency along with how each was resolved.

Add the litigation history. If there is a lawsuit, a demand letter, a claim with an insurer, or an employee complaint with an agency, a buyer wants to see it and wants to hear your version of it. Silence on this subject reads worse than the item itself. Insurance goes in as well: the policies, the certificates, and several years of claims history, because a buyer will want to price coverage under their own ownership.

Intellectual property belongs here too, even in a business that does not think of itself as having any. Trademarks, domain names, the social media accounts, the phone numbers, the software licenses. A buyer wants to know that the name on the door, the website address and the main phone line belong to the company and not to a former employee, a nephew who built the site, or you personally.

Customers, vendors and people

Customer information is where owners worry about confidentiality, and they are right to. In the early stage, give a buyer the customer list with names removed or replaced by codes, along with revenue by customer by year. Later, once a buyer has made an offer and is serious, the names and contracts can go in. If a handful of customers make up a large share of revenue, expect the buyer to ask for those contracts first. Our post on customer concentration covers how a buyer weighs that.

Include every written contract with customers, distributors or referral sources, plus the standard terms you use when there is no contract. Vendor agreements go here, including any exclusive arrangements, minimum purchase commitments, or pricing that depends on your volume. A supplier who could change terms when ownership changes is something a buyer wants to know about before the closing, and so do you.

For people, a census of employees with title, hire date, pay, bonus eligibility and whether they are paid hourly or salary. Employment agreements, any non-compete or confidentiality agreements they signed, and the benefits summary. Hold back personal details like home addresses and anything medical, and leave names off until late in the process. The same goes for contractors, with their agreements and the 1099 forms you issued, since misclassified workers are a common finding.

The lease, the equipment and the day-to-day

Operations is where the room starts to look like your particular company. The lease for every location, with all amendments and the landlord's contact. If you own the building, the deed and a recent survey. A fixed asset list showing each major piece of equipment, its age, condition, and whether it is owned, financed or leased. Vehicle titles. Permits and inspection reports, and for some trades, safety records.

Also write down how the work gets done. Standard operating procedures, the software you use and what each system does, the password policy, who holds the logins. A one or two page description of a normal week is more useful to a buyer than a long manual that nobody follows. If something in the business lives only in your head, the room is the place to start getting it out, and our post on owner dependency explains why buyers care.

Marketing and sales material fits here as well: the pricing sheet, the proposal template, a summary of where leads come from, advertising spend by channel for the last few years. Buyers like to see that the pipeline works without you standing next to it.

Setting it up so you can use it

The structure matters more than the software. A numbered set of folders works well, one for each of the groupings above, with plain file names that say what the document is and what period it covers. A scan with a camera-roll name helps nobody. Put the date in the name when the date matters, and keep a short index at the top that lists what is in each folder and what is still missing. Tell the buyer what is missing before they notice.

Use a platform that lets you set permissions by person and folder, shows you who opened what, and lets you pull a document back. Free file sharing tools can do some of this, and paid data room services do all of it. Either can work for a company of this size, as long as you can see the activity log and control who has access. Do not send documents by email as attachments. Once a financial statement is out in an inbox you no longer control where it goes.

Check the room with fresh eyes before anyone else enters it. Open a few files on a different computer. Make sure the scanned pages are readable, that nothing is cut off, and that the tax return you uploaded is the version that was filed. Remove drafts. A folder with three versions of the same statement invites the question of which is right.

Releasing it in stages

You do not hand over the whole room on the first day, and a sensible buyer does not expect you to. The usual order follows the deal. Before an offer, a buyer sees a summary and the financials, with customers and employees anonymous. After a letter of intent is signed, the corporate records, contracts and more detail open up. The most sensitive items, such as customer names, supplier pricing and key employee pay, come late, once the buyer has paid for the right to see them with a signed agreement and a price they have accepted. Our post on letters of intent covers where that line usually falls.

Before anyone sees anything, they sign a nondisclosure agreement. A buyer who will not sign one does not get a look. If the buyer is a competitor, release less and release it later, and be prepared to keep some items back until the closing is very near.

When you build the room, you build it once and keep it current. Add the newest month's statements as soon as they are closed. If a buyer asks a question that the room does not answer, add the answer to the room as well as replying to them, because the next buyer and the buyer's lender will ask the same one. Most owners find the work takes a few weeks of evenings, spread out, and that the hard part is gathering what was never filed anywhere. If you start now, with the money folder first, you will have most of what a buyer asks for before anyone asks.

Business Advisors of America builds the room with owners before a business goes to market and keeps it current through the closing, which spares you from assembling it in a rush while a buyer waits.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.