What is a Virtual Data Room (VDR)?

In M&A transactions, many sellers often think the hard work is over as soon as they have found the right buyer and gotten the offer of their dreams. Experienced dealmakers recognize this as the start of the hard work in the process rather than the finish line. After an agreed-upon offer, there is a full due diligence process wherein the purchaser will review the entire historical performance, tracking, and operations of the business to be bought, which in and of itself can be a monumental task even before any financial audit or legal proceedings begin. This process is typically managed to utilize a universally accessible location for files, along with a master checklist of which items are where to assist in making the process more fluid.

Once a letter of intent, an indication of interest, or an offer letter has been signed and general deal terms have been agreed upon, the next steps are “opening up” a virtual data room and beginning the due diligence process in earnest. Up to this point in the dealmaking process, sellers and buyers will typically exchange a few years of income statements and balance sheets, a confidential information memorandum (CIM) providing a brief overview of the business, and potentially some specialized documents such as an updated work-in-progress (WIP) or AR/AP aging reports.

During the due diligence process, hundreds more documents need to be exchanged, including full historical financials, cash flow reports, employee histories, handbooks, articles of organization and incorporation, contracts, and much more. The agreed-upon place for simplified upload, sharing, and organization of these myriad documents is the virtual data room.
Virtual data rooms provide an important centralized, secured location for documents that will likely be of a very sensitive nature, including tax and salary information for employees and shareholders, customer and supplier contract terms, as well as any recent legal proceedings. Due to the highly sensitive nature of all data exchanged over the course of due diligence, it is generally preferable that a seller or seller’s representative manage documents, security settings, and access capabilities to ensure that only the right parties have access to the right information. There are other advantages for sell-side management of data rooms, including the ability to manage multiple buyers for deals that are not exclusive, as well as the ability to retain archived information and re-upload it in the unfortunate event a buyer chooses to back out of a deal and another willing participant take their place. As many experienced dealmakers will tell you, different challenges come up over the course of every deal, and the ability to maintain and manipulate your own confidential information is key to charting and maintaining as smooth a course as possible when the unexpected inevitably occurs.

A final thought to virtual data rooms regards legal protection. In the event that any party disagrees later regarding the delivery or timing of documents or other performance over the course of a deal, particularly for exclusive deals, a virtual data room can provide exact upload times, locations, and access history as required. Maintaining a third-party source providing factual information of document delivery throughout the process can assist in avoiding “he said, she said” conversations, save time in resolving matters of disclosure and performance and ultimately save all parties involved money in the form of billable hours for an attorney.

In summation, virtual data rooms are an invaluable tool in the dealmaking process and are standard for nearly all deal sizes. The 21st century has made dealmaking immensely easier by making much of the due diligence paperwork virtual and highly secure, resulting in faster closings and more ideal outcomes. Businesses bought and sold without a data room, virtual or otherwise, run the risk of losing or exposing sensitive information to the wrong parties or simply delaying desired results with disorganization and inability to access documentation promptly. A protected, navigable, and organized virtual data room, in tandem with an up-to-date running checklist, will more often than not end up paying for itself over the course of due diligence.

Author
Christopher Davidson
Transaction Support Associate
Benchmark International

T: +1 817 692 1443
E: cdavidson@benchmarkintl.com

Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com

Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com

Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com

ABOUT BENCHMARK INTERNATIONAL:

Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $9.4 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the Global M&A Network as well as the #1 Sell-side Exclusive M&A Advisor in the World by Pitchbook’s Global League Tables.

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