A Data Room is simply put, a repository of all the information you need to assemble that will be required for potential buyers of your business to review as part of the due diligence process. In the old days traditional data rooms were, quite literally, a physical space in which all the physical folders of confidential documents were kept.

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Typically a junior investment banker was given the unenviable task of sitting in the data room for weeks on end as a parade of potential buyers were given access to review the physical documents, making sure nothing was removed from the room.

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Today, virtual data rooms are typically used thereby eliminating the need for an expensive physical location. A number of providers offer platforms called VDRs ("Virtual Data Rooms') to manage the process much more efficiently and powerfully.

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Virtual Data Rooms allow the information to be securely shared while also allowing the seller to monitor and manage the who, what, when and where of information access. Examples of Virtual Data Room providers include IntraLinks, Datasite and Ansarada. If a less robust (and costly) alternative is desired, Google Drive, DropBox or other services can be employed.

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Why are Virtual Data Rooms important?

Virtual Data Rooms facilitate the completion of M&A transactions. By seamlessly allowing large amounts of sensitive documents to be shared, virtual due diligence data rooms allow companies to offer file sharing in a controlled and efficient manner.

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Virtual Data Rooms offer valuable tools to provide storage and keep this sensitive information accessible yet confidential and secure. They help organizations avoid risk and provide the necessary tools to share information.

There are several other advantages, including:

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• Keeping information well organized;

• Maintaining data security;

• Offering a system of record to track those who access the information.

• Providing tools to help users navigate large quantities of data

 

Without a virtual data room in place, potential investors or companies that have an interest in an acquisition would be forced to spend a lot of time and money to visit a physical data room.

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How do I create a Data Room?

• Identify your needs and budget;

• Decide on a platform/provider - depending on the platform you will have varying levels of controls and permissions to establish;

• Create an organizational structure for the content - ie categorize and index the contents in the most appropriate file structure (see below);

• Upload the documents/information you wish to share;

• Review and redact any information that you do not want users to have immediate access to;

• Invite or otherwise provide access to users as needed; and

• Update and revise as additional information is requested/becomes available that is relevant to the diligence process

 

How should I organize the Data Room contents?

There are a number of ways in which to organize a virtual data room and the nature of the business will help inform the organizational structure for the documents that a buyer wishes to share with potential acquirers. Best practices to keep in mind are to mimic the manner in which a potential buyers would effectively want to review and understand the details of your business' operations.

 

A potential Data Room Index structure might look something like this:

1. Basic Corporate Documents

   • Certificate of Incorporation

   • Corporate Bylaws

   • Shareholder minutes

   • Etc

2. Capital Stock and Other Securities

   • Shareholder list

   • Cap Table

   • Stock purchase agreements

   • Etc

3. Financial and Tax Matters

   • Historical Financial statements

   • Projections/Operating Plans

   • Tax Returns

   • Etc

4. Property and Assets

   • List of real property owned

   • List of property leased

   • Real property mortgages and loan documents

   • Etc

5. Intellectual Property

   • List of Patents

   • List of Copyrights

   • List of Trademarks/Servicemarks

   • Etc

6. Material Agreements

   • Summary of Material Agreements

   • Employment Agreements

   • Material Sales Agreements

   • Etc

7. Customers, Sales and Marketing

   • List of top customers and key metrics

   • Sales projections and assumptions

   • Marketing materials and Sales litereature

   • Etc

8. Suppliers and Manufacturers

   • List of key suppliers

   • Supplier agreements

   • Manufacturing agreements

   • Etc

9. Regulatory Matters

   • Government Permits

   • Government licenses

   • Regulatory notices

   • Etc

10. Litigation and Disputes

    • Summary of any ongoing litigation or arbitration matters

    • Documents relating to any threatened litigation, arbitration or governmental action

    • Copies of past settlement agreements

    • Etc

11. Insurance

    • Summary of all insurance policies

    • Insurance claims pending

    • Description of any self insurance programs

    • Etc

12. HR/Employees

    • List of emplopyees by title/salary/date of hire, etc

    • Orgnizational chart

    • Benefit plan summary

    • Etc

 

Who has Access to the Data Room?

You will need to provide access to the data room materials to relevant individuals at the potential buyers. Depending on the nature of the buyer you may decide to hold back access to certain materials either for a period of time or permanently. For example, if a potential buyer is also a direct competitor of yours, you may withhold certain highly confidential data around customers, pricing, technology, etc.

 

As the diligence process progresses, you may need to share access with additional individuals. This may include employees of the company itself or advisors (eg, Legal Team or Investment Bankers).

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When do I assemble the Data Room?

Use of the Data Room is centered around the due diligence process. The due diligence process will commence once a potential buyer has been vetted and determined to be a viable/likely buyer. That determination may come once the potential buyer has submitted a term sheet or preliminary letter of interest (an "LOI").

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Therefore, you will want to have the Data Room prepared in advance of that stage of the sale process so that your transaction process is not slowed down. Practically speaking, that means that you should start assembling the data room well in advance of requesting a term sheet or preliminary LOI.

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Who will Use the Data Room?

The seller and/or their advisors (Investment Bankers and Lawyers) will manage the Data Room so that the confidential information can be used by the diligence team of the potential buyer to help evaluate the transaction.

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On the Buyer's side, this can include both employees of the buyer (finance, legal, operations, marketing, HR, sales) as well as advisors to the interested parties (outside legal teams, investment bankers, tax and accounting, etc).

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What are some of the features to look for in a Data Room?

Depending upon needs and budget, there are a host of potentially relevant features:

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• Security: ISO 27001 and/or SOC2 compliant

• Advanced Permissions: Ability to set varying levels of access to the contents of the virtual data room

• Backup: Cloud solution preferably across more than one location

• Redaction: Ability to hide selective sensitive documents such as trade secrets and disclose later

• Automatic Categorization: To assist with organizing the documents and other confidential business information data in the most logically appropriate places

• Watermarking: To help protect against unauthorized sharing and/or copying of sensitive information

• Analytics: Various capabilities to track the transaction's due diligence progress

• Automatic Translation: Complicated transactions may involve documents in multiple languages requiring translation

• Q&A Process: Dedicated functionality to allow the submission and answer of questions

 

How much do Data Rooms cost?

The costs of a data room will depend upon whether you choose to use a dedicated data room provider such as IntraLinks or DataSite or a more generalized solution such as Google Drive or DropBox.

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Costs will also depend upon quantity of data/documents in the Data Room (# or Size), how long the data room will be in use; the number of users, security and other features, and support levels you want to have. Depending upon the selection, the cost can range from Free to several thousand dollars.