Due diligence 101: a VDR overview with Estelle Black

• Practical tips for managing a VDR in a live deal.
• An adviser's view of the data room's role in due diligence.

Hands-on, practitioner advice on running a data room well.

Hey guys, I spoke with Estelle Black today over at Medworld Advisors about her experience managing the virtual data rooms on behalf of Medworld's clients.

I thought it was a really great conversation.

Estelle has intimate knowledge of the data room process and how that works on behalf of clients, not only as a data collection and management tool, but as a marketing tool.

Hope you enjoy it.

It's definitely first-hand experience from somebody who knows what she's talking about.

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, so Estelle, you work with Medworld Advisors, Intermediary, you guys mainly focus on the middle market, healthcare, based here in Boston, even though we're doing this virtually, maybe at some point we should actually start having some of these Medworld presentations in person, since the world's got back to normal.

But yeah, I asked you to come on today for an exit prep session, basically on the VDR, on the virtual data room, because exit prep, again, is just this program for first time sellers who might know, like you've heard of a virtual data room, , but they don't know really what it is, what kind of data goes in, what role an intermediary plays.

And I know that you are just quarterbacking all things data room with Medworld.

So you agreed to pop on and just run through that with me for the exit prep session.

So thank you.

Yeah.

Happy to be here.

Thanks for asking.

Appreciate it.

All right.

And we'll wait for about 20 minutes, but really we'll see where the conversation goes.

Basically, I'd just love to cover when the diligence process really starts for the seller and what kind of information they should be compiling for whatever goes into that .

And then really the role that an intermediary will play, like with MedWorld, if you guys can maybe speak to one of your engagements anonymously, obviously, just use that as a reference.

I think that would be super helpful.

But maybe if we could just start with the general outline.

What is the VDR?

How does the intermediary play a role there?

What info goes in?

And I'll just shut up and let you run with it.

Sure, yeah.

Happy to go into it.

So I guess to start a VDR, yeah, Virtual Data Room.

It's a tool that's used in the M&A process.

And it's a couple different things.

It's a repository of information.

It's also a living organism, really, that's used throughout the M&A process.

And what it holds, really, is the seller's information that's going to become important for a buyer during a transaction.

So what's different about a VDR as opposed to, let's say, a Dropbox or even Google Drive is the level of security that it has.

, which is important in any industry.

MedWorld, as you mentioned, is a healthcare-focused M&A advisory firm, and so we need those extra levels of data protection and confidentiality to adhere to some regulations within our industry.

Additionally, VDR is really important because it allows you to have control of who's entering the room, so who's seeing the information, not only who's seeing it, but when they're seeing it, and you have that visibility and that level of control, which is really important when you're working through an M&A process.

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So that's kind of what a VDR is.

And I guess I'll go into next.

When is a good time to really start using a VDR?

So.

Yeah, I think just on that point, there's a chat about that for a little bit.

So you guys are using whatever software you're using, you don't need to disclose it, but there's a number of solutions out there for the VDR.

And the main point that you're saying, you have a ton of people who are just throwing the stuff in the Dropbox.

And Dropbox has some nice functionality with security, but the VDR is typically something that the intermediary will provide for a seller, right?

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You at MedWorld, you're going to set everything up and you've got the whole process set, right?

So you're right.

So we'll get to who you let in there.

But when you're talking about security and tracking with the VDR, that plays a big role, right?

You want to see who's logging in multiple times because maybe that indicates, hey, they're really interested in the deal.

Maybe who popped in there for two seconds and hasn't come back.

They just kind of ghosted the VDR.

Well, maybe you deprioritize them.

I think an intermediary, I know you are doing a lot of of that.

But MedWorld, any intermediary, good intermediary like MedWorld, will focus on that and try to use the VDR as a tool to assess the buyer interest on an ongoing basis once they're in there.

Yeah, absolutely.

Yeah.

Okay.

So then you were popping into timeline or whatever your next step was.

Absolutely.

Yeah.

So I think that, you know, aside from telling you what the VDR is, I just want to say when is a good time to really start using a VDR.

And so while there's not one specific time where you should start using a VDR, .

So we do some pre-due diligence work with our clients early on in the process, which kind of gets them into the exercise of what a VDR is, as well as what documentation is going to be going into the VDR.

So first-time sellers, you guys maybe have never been through this process before, and you have no idea exactly what is going to be looked at by a potential buyer.

And it could be anything at the end of the day.

So what's important in an M&A process, and what can kill an M&A process very quickly is time.

So the earlier you start a due diligence process using a VDR, creating an internal VDR before a potential buyer even comes in is going to save you time down the line because you're going to be gathering that documentation, engaging partners that you may need to in order to get the information that you need as well.

So we always recommend that starting creating a VDR early on in the process and beginning that due diligence process earlier is going to just make you more successful later on.

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And so I know you guys have a really regimented process for this, which you're on the front lines of.

So at Medworld, for example, you're probably going to be one of the first people who meets with a client and goes to that checkbox and starts going through the information from a gathering standpoint, like you're highlighting, but also maybe that information is just not good enough.

I mean, some of your engagements might be a few years before you're taking them to market.

So I think in terms of just fleshing that out and leading with what goes into the VDR, but then actually just digging through the information from there, this is a great process.

.

That's just to begin that conversation.

Yeah.

In doing so, you're really giving yourself more time, which is going to become important later on.

And whatever work you do now is time that you're going to save later on.

So starting earlier is always a good thing to do.

Got it.

So the seller engages with an intermediary.

Ideally, the intermediary does have a structured process.

So there's someone on the team, like Estelle, who will quarterback this and just give a roadmap of what's coming.

Then once you start opening up the VDR, what are the big items that are going to go in there?

.

So I think at first I'll mention that there's different levels for who and when people are going to go into the VDR as well as what they're going to see.

So there's two levels.

There's level one and level two.

And level one is post-NDA.

So you've signed an NDA with this potential buyer.

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So there could be multiple different potential buyers within the VDR at that point.

You obviously want to have a VDR that can manage users in a way that they obviously don't see each other, or at least you will create separate portions of the room that they can all be going into.

And then level two is post-executed LOI.

So you have one potential buyer that you guys are heading towards, hopefully a transaction with, and they are now in the VDR.

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Financials are obviously a huge part of what a buyer is going to be looking into.

They're going to be interested in your corporate structure.

So investors that you have, do you have a board?

If you do have a board, are there board meeting minutes?

Even company bylaws, the whole gambit of your company structure.

And then of course, vendors, suppliers, if there's regulatory or clinical studies, at least in the healthcare industry, those are important things for us as well.

So in terms of things that can go into a VDR, it's really anything and everything.

.

So it's best to be generally prepared to show any information that you have on your company because the potential buyer may be interested in seeing it.

And so some of that information you just went through, like vendors and suppliers and customer data, maybe you'll have that anonymized in that level one.

And then level two, you have the big reveal.

Yeah, especially in the case of if, say, it's a competitor of your company that's interested in potentially purchasing you, you don't want to necessarily give your secret sauces too early on in the process.

So yeah, there's definitely some information that's redacted in a level one.

And then once you get into level two, you will most likely have to start allowing some of that information to be shown.

But yes, absolutely.

And so to clarify, if a seller engages an intermediary, you are doing all of this for them.

Like you're setting up the VDR and they obviously have to give their blessing for any data that goes in there and presentation, et cetera.

But once that's done, it's you and you're proving maybe with the seller's blessing who gets into the level one VDR.

role.

is a link between the buyer and the seller.

And when it comes to the VDR, we are helping put together and manage not only what's going in.

So we don't create any documentation, obviously, but we support in managing it and making sure that it's presented in an effective way.

But we also do have the ability to decide who goes in, who sees what, and when at the end of the day.

So yeah, the advisor has control of that and really takes that on for the seller.

I mean, the seller at the end of the day has a lot of their own work to be doing.

in this whole process.

And these kind of little details, we support them with those details.

Yeah.

And so, I mean, that's a huge value add, I think, for the intermediary, obviously, is being able to manage the day-to-day of your business while the intermediary goes off and does the intermediary's job with the data room, with the transaction.

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Aside from just the management of the VDR, maybe we can talk a little bit to how that's used as a sales marketing tool.

The other side of the coin there with hiring an intermediary, you get to focus on your business while the intermediary is doing everything .

But it's also just the experience that someone like a Medworld, right?

If you're a healthcare company, Medworld obviously has relationships with the buyers who might be interested in a deal.

But your experience with coordinating the interest, right?

Coordinating the timing.

So if you've got this VDR, it's something that you're going to tease.

Hey, we're going to let you in.

And then you obviously try to approach the buyers who are a fit right off the bat.

But then you bring them all in so that there's this coordinated interest.

So they know that there are other people looking at the same data.

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When they go to shape their LOI, they're going to put together the best competitive offer that they can for a deal that they might be interested in.

That's a huge piece of what you do, of what any intermediary does.

But with the VDR, that's a nice tool to help execute that.

Yeah, absolutely.

And it's easier to keep track as well as who's involved in that process.

Because, I mean, everyone uses email, but things can get lost in there very quickly.

And it's who has what and where is it and that sort of thing.

And a VDR just allows you to kind of streamline that communication.

and who is seeing what.

And like you said, tell the story and, you know, push the process along in a constructive way.

Yeah.

And are there any documents that you put in there that help with that?

I'm thinking like with the FAQ, right?

So if you know there's something that might be coming up in the discussions with the business, good or bad, you have a chance to frame that conversation in the VDR as an intermediary, you know, asking a question, putting in an answer.

You're doing that as well in stage one.

Yeah, absolutely.

And at the end of the day, that's what helps to have or an intermediary or an advisor that's really tuned into the industry that you're in as well, because they can help you frame some of those things that might be, you know, bringing up questions on the buyer side and frame them in a way that ends up showing why you, the seller, are the right buy for them or something along those lines.

So, yeah, absolutely.

Yeah.

I want to highlight that point.

That's really something that a niche intermediary will provide, right?

So, I mean, if you're focused on healthcare, so you know the universe of healthcare buyers and you stay pretty close to them with the industries and beyond .

.

So the BDR is a tool for data collection, data presentation, but it's also a tool for sales and marketing.

You manage it all, so you're basically managing everything at Medworld because you're spearheading this whole process and then organizing the collection of data from there.

That's great.

So financials, suppliers, vendors, customers, maybe information about competition, .

If there's anything that you need to kind of explain through an FAQ, like seasonality or customer concentration or something that you want to have, the first crack at explaining as an intermediary to frame that conversation, the FAQ, the level one BDR room is a good place to start that process.

Timeline.

So I know it's different for every deal, but you do have, like with lower middle market deals, that's typically what you guys are focusing on.

You are trying to do a coordinated, like IOI to LOI.

, you're opening this thing up, and then you're pushing it to LOIs.

You're drumming up that interest in a period of time with bookends, right?

You are doing that with the VDR?

Yes.

And I guess, like you said, it's different for every case at the end of the day.

So I can't tell you it's going to be one month in or two months in that you open it to potential buyers, whatever it is.

It really depends on the specific situation.

But the VDR itself, even just internally along with the advisor and with the client, the seller, you can start the VDR as soon as possible and have that already building before you you even get to that point of having a level one and of course a level two enter into the VDR.

We can start building it as soon as we really engage with you because at the end of the day, the effort that you put in now is only going to help you later on.

Yeah, really interesting.

And then once it's opened up, you can structure the conversation internally and with the seller according to the activity that's taking place in the VDR.

So if someone is, there's a buyer who's downloading the list of competitors or opening and looking at the list of anonymous competitors over and over and over again, you know, that might be somewhere where you want to start the conversation.

when you get that buyer on the line.

Absolutely.

And even later on in the process, you know, we as advisors can help shape the data room so that the information is disseminated to the buyer in a way that's effective for them too, because they're going to be coming in with their own questions, their own ideas and the way they want to see the information.

And we can help support that as well later on in the process.

Yeah.

And put together a valuable conversation in a limited amount of time because we're all very busy.

So that's great.

Exactly.

Exactly.

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this.

I do know a little bit about it if you have any questions.

Yeah, day in, day out is what your quarterback and that's why I asked you to come on and explain it.

So thank you.

I appreciate it.

All right, Estelle.

Happy to be here.

Have a great day.

Thanks, Adam.

Bye.