Buy-Side M&A Step-by-Step Guide and VDR Tips

10 min

Virtual data rooms (VDR) accelerate deal-making across all industries. In M&A cycles, VDRs are typically set up by the sell side, as they help gather and securely store loads of data. However, there are several substantial advantages of using a buy side M&A data room.

Read more about the virtual data room setup process

In this guide, we break down the M&A deal process from the buy-side perspective and explore how a VDR can streamline the flow at every stage. 

A 9 step buy-side M&A process

While the buy side M&A process is unique to every case, the general deal course comes down to the following nine stages.

1. Outline an acquisition strategy

A calculated strategy is the foundation of any M&A process. Having a clear goal in mind will help to effectively navigate numerous opportunities and make the right decision. To structure a comprehensive strategy, the buy-side has to answer the big question, “Why?”

As in, “Why are we looking to expand our organization? What is the desired outcome?

For example, the buying company might seek acquisition to extend their expertise in the field, establish a presence in the new regions, explore rising markets, or improve the organization’s sustainability.

In many scenarios, professional buy side M&A advisory is done by investment banks. The bank’s expert, along with the company’s acquisition team, will map out the strategy and define the necessary steps of its pursuit.

How a VDR can help: VDR software often acts as an internal collaboration tool and corporate repository. During the initial stages of buy side M&A, the organization’s team can use the platform to discuss the possibilities, communicate with advisors, and create a unified data space for multiple simultaneous acquisitions.

2. Narrow down the search criteria

Based on the buy side M&A advisory and the strategy, the buying company will outline the criteria to define the ideal candidates. There are many approaches to take at this point. For instance, the buy-side can look for a specific:

  • Geographic location
  • Market niche
  • Profit margin
  • Customer demographics
  • Social impact, and so on.

To get a clear idea of which acquisition scenarios will benefit you the most, it is crucial to have a good vision of your company’s current standing. Focus on your organizational values, business conduct principles, and ethics. Then, look at the weaker areas and consider the solutions to strengthening them.

How a VDR can help: Information is an excellent asset to every step of the M&A process. Use your virtual data room to analyze the present-day state of your organization and gather input from the internal and external experts.

3. Select-fit candidates and targets

Once you know what to look for, it is time to start browsing the market for fitting opportunities. The tricky part of this phase is that many companies choose to keep their sale confidential and unlisted. 

Professional buy side M&A advisory from an investment bank will help avoid awkward situations and make the acquisition inquiries look transparent and trustworthy. The investment banker will reach out to companies that fit your criteria and filter out the ones who either don’t wish to sell or are asking for a number outside your desirable budget.

If a company is actively selling, you will also be dealing with an investment banker from their side. While the name and exact details of the sell-side might not be public, you will have an idea of what you are dealing with and receive a complete investment memorandum after signing a confidentiality agreement.

Some organizations might also pitch to you directly, offering partial access to their virtual data room with all the necessary files.

How a VDR can help: Use your buy side M&A data room to collect the gathered data and compare the opportunities. 

4. Shortlist the candidates

At this point, you should have an overview of all potential deals. The following phase of the M&A process is narrowing down the companies you wish to proceed with. This stage can include a search for absolute deal-breakers, such as:

  • Financial statement discrepancies
  • Pending and potential lawsuits
  • Negative image
  • Alarmingly high employee turnover
  • Customer retention issues, etc. 

Additionally, you will need to perform preliminary valuation using publicly available data. If there is not enough information to estimate the value, you can get an idea from similar companies within the same segment or evaluate the approximate cost of the target’s underlying assets.

The final stage of shortlisting the candidates is approaching the ones you selected and announcing your intentions. Depending on the sell side’s interest in the M&A deal process, they might provide more data to help you make a decision later.

How a VDR can help: Once again, use the virtual data room to gather and examine the information you find yourself or receive from the sell-side. You can also create a few separate segments of your buy side M&A data room and invite the candidates to communicate and exchange documents there.

5. Evaluate the target

The companies who agreed to open a dialogue in the previous stage will now need to provide you with sufficient financial information. Typically, you will sign an NDA to gain access to the files. In some cases, however, the seller will require an LOI (letter of intent) and a drafted purchase agreement.

  • The LOI focuses on the general terms of the deal, while a purchase agreement will go into more detail and won’t be finalized until after due diligence.

However, you shouldn’t rush and send out a generic buy side M&A letter of intent. The seller will want to see particular value and guarantees in what you are offering, for example, your plans for the target’s operations, stakeholder profit, accelerated deal processing, and comfortable taxation consequences.

How a VDR can help: Have your internal and external M&A process advisors collaborate on reviewing the sell-side information. Automated user activity reporting features will help you supervise and streamline the process. Plus, you can share the VDR links to the LOI and purchase agreement draft with the seller for review and acknowledgment signing.

6. Commence negotiations

Using all the data you have collected so far and the valuation models you built in the previous stage, start discussing the precise deal terms with the seller. Your buy side M&A team must remain straightforward and honest to establish a trustworthy relationship.

Experienced buy side M&A advisory experts can significantly simplify the back-and-forth with the sell-side by asking the right questions and ensuring professional conduct.

Historically, the sides would meet in person during the negotiation stage of the M&A deal process. However, the pandemic-induced reality and the era of digitization made remote deals a priority for many businesses. What’s more, remote M&A tools enabled much more cost-effective and faster international transactions, making trans-continental expansion much easier.

How a VDR can help: Advanced virtual data rooms can facilitate video conferences via built-in tools or integrations with existing platforms, such as Zoom. You can also use other collaborative tools such as Q&A or live chat to expedite the negotiations.

7. Conduct thorough due diligence

Perhaps the most time-consuming and effort-demanding phase of the M&A deal process is due diligence. On the buy-side, you will go through extensive amounts of data from different areas of the target’s operation. 

There are four major aspects to inspect:

  • Business. A complete overview of the sell side’s products and services, customer profiles, marketing channels, and so on. The buyer has to be sure that the seller’s current operations align with the acquisition strategy from step one.
  • Finances. The buy side M&A team will look at financial statements, investment policies, outstanding debts, asset portfolios, etc. The seller must provide all the requested details. Otherwise, the deal should not be taken further.
  • Legal matters. The buy side’s lawyers connect with the seller’s legal team to summarize all lawsuits and litigations, permits, licenses, and regulations. VDR software ensures the range of benefits for legal firms.
  • Organizational matters. Considering the target’s organization is important to the due diligence stage and the post-deal integration, we will cover this topic later in more detail. Here, look at the seller’s key employees, managers, staffing policies, and so on. 

At this point, you will need the expertise of your entire team. For example, the sell side’s HR will only share data with upper management or with the buy side’s HR. The same applies to the legal, IP, and IT teams. Essentially, most departments will examine their respective fields to offer expertise and provide input.

As previously mentioned, the M&A deal process will typically take place in the seller’s VDR. However, if the sell-side company doesn’t have a remote data room, you can suggest processing the transaction in a separate section of yours.

How a VDR can help: The best virtual data room providers will provide a detailed due diligence checklist so you can request all the necessary data without missing anything.

8. Organize financing

After due diligence is complete, the buy-side needs to be green-lighted by the experts to proceed. Both sides finalize the purchase agreement, accounting for all the insights of the previous stages.

Next, the buy side M&A representatives will assure the buyer that there are substantial finances to process the transaction.

Acquisition financing can happen in one of the following ways:

  • Cash is the most straightforward approach to M&A process financing.
  • Buy-side stock calls for additional due diligence of the acquirer performed by the seller.
  • Senior bank debt is the least expensive form of M&A financing.
  • Mezzanine debt typically demands very high rates at substantial risk levels.
  • Seller financing involves the sell-side covering a portion of the acquisition cost.
  • Earnout is a financing structure that depends on the sell side’s post-deal performance.

The financing model selection is linked to the market’s condition, the buyer’s abilities, and the seller’s preference. In many cases, the final decision will be a result of negotiations and require the expertise of investment bankers and their networks.

How a VDR can help: Virtual data rooms are secure and confidential, which is ideal for complex financial transaction monitoring and processing.

9. Close the deal

So, there you have it. Assuming you followed the steps we’ve discussed, the deal should close with no issues. As long as you remained equipped with advanced tools and utilized professional buy side M&A advisory.

How a VDR can help: First of all, keep the final draft of the purchase agreement with all the signatures for future reference. Secondly, delegate a new section of your virtual data room for post-deal integration.

Buy-side M&A post-deal integration

Although closing a deal is quite exciting, it’s only the beginning of a new phase of the whole M&A process. Now, both sides need to do everything in their power to merge the businesses successfully, start restructuring, and begin on their new course together.

Experienced virtual data room providers will typically offer post-deal guidance and provide the necessary tools for smooth integration. Keep in mind that you might need to either open a separate data room for the merged operations or reorganize your existing platforms. Ensure to check how the new improvements affect the VDR expenses and budget accordingly. 

Simplify the M&A process with a virtual data room

Modern data rooms took a great leap from their physical predecessors. The VDR M&A deal process is much quicker, more informed, and forward-looking. Your job is to select a suitable provider and utilize all possible tools and assistance when going through each deal stage.

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