Due diligence is a crucial aspect of any merger and acquisition (M&A) process. It involves a thorough examination of a company’s financial and relevant records by a potential buyer. These records can include HR files, contracts with senior executives, agreements with investors, customer contracts, and ESG data, among others. The volume of documentation involved in due diligence can often be extensive, stretching to thousands of pages.
To protect commercially sensitive information and maintain control over access, companies traditionally used physical data rooms. These secure rooms stored all the documents required for the due diligence process and were made available to potential buyers. The data rooms were typically located on the seller’s premises or in the offices of law or accounting firms. Potential buyers would send their teams to review the documents, having entered into strict non-disclosure agreements (NDAs).
However, with the advent of digital technology, physical data rooms are no longer necessary. Instead, virtual data rooms (VDRs) have become the norm for M&A transactions of any significance. VDRs are secure digital repositories that store all the sensitive company information and documents required for due diligence. This allows for remote due diligence without the need for physical travel or the cumbersome process of gathering and storing physical records.
VDRs enable M&A due diligence to be conducted in a structured, efficient, and collaborative manner. Parties involved in the transaction, such as potential investors, buyers, legal and financial advisors, as well as the sellers and other stakeholders, can access and analyze the relevant information on the deal. Sellers can also conduct their own due diligence and share the results in the VDR to expedite the transaction process.
Confidentiality is a paramount concern when using VDRs. Sellers must ensure that sensitive data remains confidential within the VDR. VDRs offer strong controls and management capabilities, allowing owners to restrict access, downloading, editing, and altering of documents. User activity within the VDR is also tracked at all times, ensuring accountability.
Business owners have the ability to be selective about the information they include in the VDR. While all parties sign NDAs, there may still be certain material deemed too sensitive to share. For example, key customer contracts with pricing and margin details can be redacted until the deal reaches an exclusive stage with a buyer or even later.
Using a VDR simplifies these arrangements and measures. It significantly speeds up the due diligence process by eliminating the need for manual document inspection. There is no one-size-fits-all template for a VDR, and business owners must consider the specific circumstances of the proposed sale process before deciding on the approach to take. A well-populated data room provides the necessary information for evaluating the opportunity efficiently.
M&A advisors have knowledge of multiple VDR providers and can guide sellers in choosing the right one for their transaction. Factors such as cost, data sensitivity, deal structure, and target market (local or international) play a role in selecting the appropriate VDR. Sellers should always discuss their transaction objectives with their M&A advisor before proceeding with setting up a VDR.