A data room is built by the seller, for the sale. It holds what the company chooses to share, organized the way the company wants it read. That is not a criticism. It is what a data room is for. But it means the most useful questions often start somewhere else.
The two records
Every company has two records. The first is internal: financials, contracts, board minutes, the management presentation. The second is external: what courts, registries, regulators, lenders and the market have recorded about the company, its owners and the entities around it.
The internal record is curated. The external record is not. It is often incomplete and sometimes wrong, but it is written by people other than the seller, which is exactly why it is worth reading.
Where the external record adds information
- Entities. State registries show subsidiaries, dissolved entities and name changes. A company can be contracting through an entity that is no longer in good standing.
- Liens and credit. UCC filings show secured debt, including liens that were paid off but never released.
- Intellectual property. Trademark and patent records show what is registered, what has lapsed and who owns it.
- Ownership and counterparties. Beneficial owners, officers and key counterparties can be screened against sanctions and watchlists.
- The market. Public data on the industry lets you test claims about market size, growth and share.
Using both
The external record does not replace the data room. It gives you a way to check it. When the two agree, you have more confidence. When they do not, you have a specific question to ask, with the source attached.
That second case is where diligence earns its keep. Bain's research found that almost 60% of executives attributed failed deals to diligence that missed critical issues. Read our summary.
Read the seller's record. Then read everyone else's. The questions worth asking usually sit in the gap between them.