The due diligence process for an M&A transaction can be very cumbersome for all parties involved. The usage of a data room is one of the most valuable ways to mitigate the headaches that arise from the motions of due diligence. There are generally two types of data rooms: physical and virtual. The former is not the most practical in most larger scale transactions with moving parts in varying geographies. Thus, you will almost always see the usage of a virtual data room (VDR) in an M&A transaction. These VDRs provide organization and security for sellers, buyers, and advisors.
Organization is probably the most easily identifiable benefit that VDRs provide. They provide a repository for all documents pertaining to the transaction. From a Phase 1 Environmental Site Assessment to the 2016 YE Income Statement to the buyer’s first draft of an Asset Purchase Agreement, it will reside in the data room. VDRs essentially eliminate the need to transmit documents through e-mail. When there are 10+ individuals across parties needing to review documents, e-mail transmission is not practical in terms of time or organization. Relying on e-mail may result in an organizational catastrophe, and many documents may quite simply be too large for e-mail transmission. Though it may be difficult to quantify in dollars, VDRs are undoubtedly a cost saver, particularly for sellers. Many intermediaries such as Benchmark International use and administrate VDRs for their sellers at no additional cost, whereas many transaction advisors focusing on the legal or financial aspects of a deal are likely to charge additional fees for the usage and administration of a VDR.
Security is a highly underrated and less thought of benefit to using a VDR. E-mail isn’t the best vehicle to transmit sensitive employee information, tax data, or any other sensitive diligence documents. While we all will use e-mail frequently to communicate over the course of diligence, it should be a last resort for the transmission of sensitive data. One e-mail in the wrong hands could easily derail not just the transaction, but the going concern of the business. Professional VDRs are also more secure than free or low-cost cloud hosted repositories such as Dropbox, Google Drive, and OneDrive. These repositories are excellent for personal use or small B2B transmissions, but they don’t provide anywhere close to the same level of security as a VDR. VDR data centers provide physical security (people and cameras), backup servers and generators, and top of the line digital security by way of multi-layered firewalls and 256-bit encryption. Another security benefit of a VDR is the ability to layer. Layers or levels allow administrators to dictate which individuals or parties have visibility to certain documents. It’s quite possible that certain information will not be accessible until diligence milestones are met. Layering the data room helps provide accountability, but most importantly: security.
There are countless other benefits, but these are some of the most crucial that impact all parties involved in an M&A transaction. Benchmark International, through its vendor, provides a tailored VDR experience and service to all of its clients to help facilitate seamless due diligence processes and successful deal closings.
Billy Van Buren
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Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $5B across 30 industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 13 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.