What should I look for in the data room?

Hope everyone's well! Private credit guy here. Just got access to a shit ton of data in a data room for a potential deal we're viewing. This is one of my first ones. Generally, what do you guys look for in data rooms that assist you throughout the deal process/what analysis do you do with the data? What should I look for first? What can I find from these data rooms that will contribute value to the investment process and ultimate decision? Thanks WSO for the advice!

 
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Look at the forecast model and see how it is built up.  Do you have any breakout on a segment level?  Can revenue cleanly be broken down so that you can isolate price vs. quantity?  Look at the company's historical financials.  What is the top line growth profile?  How have margins trended?  How capital intensive is the business?  Are there any levers to trim down SG&A / corporate expenses?  What are the different buckets of expenses?  Will the company need to invest more in its facilities and equipment to sustain longer-term growth?  Is there any seasonality and/or cyclicality?  Look at the EBITDA addbacks.  Do they seem defensible?  You may need to look at the Quality of Earnings report separately.

Customer level databases can be immensely helpful.  Who are the top customers?  How concentrated is the company's revenue base if you were to look at the top customers, programs, products / SKUs, etc.?  Are top customers growing business with the company over time?  How long have they been customers?  Any key customers that stopped doing business with the company?  What do the contracts look like?  Are they diversified across different programs / products / SKUs?  To what extent is the business recurring in nature?  What sort of pricing power does the company have over its customers?  Are customers sole sourcing the company's products?  What sort of wallet share does the company have among its top customers?  Is there runway for increased penetration?  Pipeline / backlog detail can also be super helpful and can feed into the customer level data discussed above.  Can you quantify the go get needed to hit the projections?  How is the pipeline probability weighted?  Are there any key contracts that could make or break the forecast?  

Is the go get all organic or is there any M&A baked in (and are you pursuing a roll-up strategy)?  If M&A is a big part of the thesis, look at historical deals the company has done.  What multiples have they been able to acquire bolt ons at?  How have those multiples trended over time?  How have they funded the deals and how has the acquired business performed?  Do they have any deals under LOI?  Any in the near-term pipeline?  Deals under LOI sometimes feel like a land grab for extra purchase price (e.g., buy add on for 12x during process and then expect to sell platform for 18x, getting several turns of multiple arbitrage in the process).  If it's a very acquisitive business model, can you run some M&A cohort analyses by year acquired?  Is there a de novo model?  How long have de novos taken to become profitable?  Can you run a cohort analysis?  You can look at revenue growth, volume growth, margins, etc.

Technology, patents, licenses.  Anything noteworthy?  Do the IT systems need further investment?  Is any proprietary technology protected?  Talked about the customers above.  What about the suppliers?  Any dependence on key vendors?  How are contracts structured?  

Who are the key employees?  Are these salaried or hourly workers?  What does the compensation structure (i.e., base salary vs. bonus) look like at different levels?  Is it structured effectively to incentive employees appropriately?  Has the company experienced any labor / staffing challenges?  How have staffing ratios trended over time?  How have wages trended over time?  How has retention / turnover trended over time?  Why do employees leave the firm?  Are they quitting or are they getting fired?  

Does the company have any KPI dashboards?  How have KPIs trended over time?  Do they differ significantly across segments, geographies, facilities, etc.?  How do they compare to that of competitors?  Are there any quality / compliance metrics that get tracked?  Utilization rates, error rates, volumes, etc.

Any lawsuits to be aware of?  Does the company operate in an industry that is tightly regulated?  

Look at the cap table.  Is management going to get a big payout in the deal?  At various purchase prices, what kind of payout would you expect them to earn?  Will the team be incentivized to stay and/or perform?  Usually a good sign if they want to roll a significant chunk of equity into the new deal.  That is assuming there's a good team in place. Is there any key man (or woman) risk?  If a key management team member (or top performing sales rep) leaves, how likely are you to lose the client?  Are there multiple people assigned to cover each account or project (feeds into the customer piece above)?

I've found old board materials to be pretty helpful.  MD&A often makes it much easier to contextualize a bunch of numbers in a spreadsheet.  Market studies can also be super helpful in developing a better understanding for the space the company plays in and can (hopefully) lend some degree of support to various modeling assumptions.

This was a longer response than you (or I) probably bargained for but hopefully has some value. 

Made a few minor changes since I didn't re-read this before posting.  As Associate 2 in PE - Other and OverlyAdjustedEBITDA have pointed out, this would be a) a more detailed review (and not just an initial pass) and b) more suited for someone on the equity side.  I have seen some lenders really dive deep in diligence but for the most part, they won't get nearly as caught up in the weeds as those on the equity side.  Definitely didn't hit on every single detail but think this should give you a pretty holistic sense of what to look for. 

 

I really liked the other poster's detailed answer on things to go looking for in the VDR. However, I would absolutely not recommend digging through that level of detail on a first or maybe even second pass of a VDR. OP, I am assuming from your initial post that you're asking for what to look for when you first get access to the VDR...on a first pass, I would recommend sticking to the CIM or investor presentation management has put together, quarterly FS/MD&A as available, BoD reports, and monthly KPI dashboards as available. These items should be sufficient to put together an initial view on an opportunity and you can strategize on where to dig in next whether it be a detailed customer analysis, revenue disaggregation, attrition curve analysis, etc. 

 

You first need to spend time understanding the business (ie what are its key drivers) and then think of the issues that are MOST pertinent to it , which will affect those key drivers (and consequently top line and op profit and fcf). Some like going through the financials (audited, qoe) and taxation are just cookie cutter items. V Important to understand commercial , legal and all that  

 

Biggest tip is go in and download the data room index. Then you can see each file listed out, highlight which ones are worth taking a look at and putting in a key downloads folder. Always download the data room onto the shared drive and make sure to keep up to date

 
chihayafull

Look for hidden sheets / tabs that some poor sleep deprived fuck might have forgotten to delete.

In a similar vein I've had a couple of VDRs where the bankers didn't anonymize the other users of the VDR so I could see exactly what other funds were looking at the opportunity / progressing to later stages of the process.  Almost entirely lateral deal team from non-IBD backgrounds in both cases (RX consulting, Transaction advisory, MBA new hires, etc.). 

 

Reading the board minutes from the last 12-24 months is an absolute goldmine people tend to skip. It gives you recent nuances, developments, and "unfluffed" insights not tainted by sell-side marketing. For the rest agreed with others:
1) Download index list
2) Screen/highlight for key investment/credit hypothesis elements and review these key documents
3) Read management minutes
4) Read Strategy presentations
5) Review BP building blocks/excel model
6) Do a deep screen/skim read of the remaining docs

After steps 2, 4, 5, and 6 I would send summary e-mails/key findings to the deal team in your organization. It shows (i) ability to focus on core deal topics, (ii) synthesizing info capabilities, and (iii) saves them time. 

LBO-modeling companies on a Corona-adjusted normalized proforma run-rate EBITDA basis since 2020.
 

And also as a first thing I like to do is to turn on e-mails notifications on when new docs are uploaded because it will show what others are requesting/focusing on (unless they have shielded VDRs per firm/bidder/lender), and you can keep track of whats coming in more easily.

LBO-modeling companies on a Corona-adjusted normalized proforma run-rate EBITDA basis since 2020.
 

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LBO-modeling companies on a Corona-adjusted normalized proforma run-rate EBITDA basis since 2020.

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