A data room is a secure space used for storing documents and sharing information, often used in corporate transactions such as fundraising and mergers and acquisitions to assist with the extensive due diligence investigation of your business that will be done by the investor(s) or buyer.
Establishing a robust data room ahead of an M&A transaction is like laying down the foundation for a sturdy house. Beyond being a repository for information, a data room assumes a critical role in safeguarding sensitive data and orchestrating a controlled flow of information. It's not just about storing information, it's also about keeping your secrets safe and making sure only the right people get access.
There are two types of data rooms, physical data rooms and virtual data rooms (VDR). Physical data rooms are now fairly rare and VDRs are used by the vast majority of businesses in order to save time and costs.
Below, we discuss the importance of setting up a data room and what should be included.
Contents:
- What role do data rooms play in due diligence processes?
- What should be included in a data room?
- How do data rooms ensure secure document management?
- Potential problems when setting up your data room
- How can businesses maximise the benefits of using data rooms?
- How do data rooms protect sensitive information?
- How to set up a data room
- Next Steps
What role do data rooms play in due diligence processes?
Data rooms are an essential part of due diligence processes as they enable potential buyers and investors to securely access large amounts of highly confidential information.
There are other ways to share information and documentation such as drop boxes, emails and spreadsheets but these methods are not as secure, can be messy to organise and use and usually struggle to cope with large volumes of data.
What should be included in a data room?
An index of documents is typically uploaded in the data room in order to organise and search information about the target business. This information usually covers the following areas:
- corporate structure and constitution
- key staff and employees
- material contracts
- IT services
- real estate
- intellectual property licences and regulatory permissions
- financial and accounting information and details of any disputes
How do data rooms ensure secure document management?
VDRs are typically accessed using a secure user ID with password but more advanced security features such as multi-factor authentication, encryption of data, watermarking and access permissions are now standard features. Tracking and audit trails of user activity in the VDR is another way to monitor compliance and security.
Potential problems when setting up your data room
- Security measures: it is critical to keep antivirus software and firewalls updated to ensure the security of the data room.
- User training: to help users navigate the features of the data room and use it securely.
- Bad choice of provider: can lead to inadequate security measures and limited functionality.
- Incomplete or missing documents: such as corporate registers, contracts and minutes or resolutions.
- Disaster recovery and back-up plans: are essential to recover documents and reinstate services quickly.
How can businesses maximise the benefits of using data rooms?
VDRs can be used by businesses for other purposes apart from due diligence processes. They can be used to store and share information relating to regulatory compliance and internal audits, to help demonstrate compliance in a quick and easy way and avoid unnecessary complications and fines. They can also be used for training purposes to share updates with employees and monitor completion of training programmes.
How do data rooms protect sensitive information?
Compliance with industry standards such as SOC 2 and ISO 27001 and regulations such as GDPR will be important to give you peace of mind. Sensitive information can be protected in VDRs in a number of ways including:
- redacting highly confidential and/or sensitive information
- summarising key contracts or employee information
- anonymising and aggregating employee, customer and supplier data
- holding back key documents until a later stage of the due diligence process
- watermarking documents to prevent copying
- restricting user access to ‘view only’ permissions to stop data leaving the data room
- supervision of the data room by a representative of the seller or their solicitors to monitor access and activity.
How to set up a data room
The seller (the company undergoing acquisition) will establish a data room to securely house and oversee confidential data, including financial statements, legal agreements, intellectual property details, employee records, and pertinent documentation.
Before setting up a data room, it’s important to have a tight and robust Non-Disclosure Agreement (NDA) in place. An NDA will make sure that those that are seriously considering investing in or buying your business cannot leak any information.
You also need to be careful about what you reveal in your data room. While being transparent is important, you should hold back on certain assets, like the identities of your key clients/customers and the intricate details of your intellectual property. This approach serves two purposes: it protects your competitive advantage and reduces the risk of premature disclosure or exploitation. Therefore, the effectiveness of the data room lies not only in its ability to share information but also in its capacity to strategically conceal critical assets, ensuring the success of your sale or investment.
Considering the above points, it’s always best to have your lawyers set up your data room to take the heavy lifting off you.
Next Steps
Setting up a data room may appear simple at the outset but as you have seen there are a lot of important issues to consider. A well-organised and user-friendly data room will not only make life easier for all parties involved but can also accelerate the fundraising or M&A process by impressing investors and smoothing out the due diligence process.
If you have any questions or concerns about setting up a data room, please get in touch with our corporate experts who will be happy to help. Call us on 0800 698 1700 or fill out the short enquiry form below and a member of our team will be in contact.
