Wondering what is a data room and when to use one?
What is the difference between a physical data room and a virtual data room?
Look no further…
This article is perfect for you!!
In this article, we will look at data rooms in detail. We will present to you what a data room is, when to use a data room, what you typically put in a data room, how a physical data room works, the benefits of a virtual data room and more. By reading this article, you will have a good understanding of data rooms in general, their purpose and the best setups you can employ today.
This article is divided as follows:
- What is a data room?
- Different data room terminology
- When to use a data room?
- What to put in a data room?
- How does a physical data room work?
- Advantages of a virtual data room
- Why is a virtual data room better than a physical one?
- Data room takeaways
Let’s get started!
If you like to read more on the topic of data rooms, you should read our articles on virtual data rooms and using a data room for M&A transactions.
1- What is a data room?
A data room is either a physical or a virtual room where a company will store and make available corporate documents, highly sensitive and confidential information or material for the purpose of a business transaction, a legal proceeding or a regulatory investigation, among other things.
Physical data room
A physical data room is a physical location established by a company to share company documents and information with another party.
The data room is an actual physical space where the interested parties will schedule time to inspect the documents housed in the physical space.
Virtual data room
A virtual data room is a secure online space where company documents and records are digitally stored, hosted and shared with interested parties.
Those who have a need-to-know access to the company information will be given specific user permissions to access the virtual data room through an Internet connection.
2- Different data room terminology
When we refer to a data room, we can use different terms and terminology.
Here is a quick list of how we refer to a data room:
- Online data room
- Virtual data room
- Due diligence data room
- Physical data room
- VDR data room
- Data room platform
- Internet-based data room
- Deal room
- Data room online
- Data room service
At the end of the day, they all mean the same thing, a data room.
Companies will typically use a virtual data room to facilitate their business transactions that’s why you’ll see more reference to virtual or online type of setup than a physical one.
3- When to use a data room?
Data room used for due diligence
Data rooms are typically used in the context of the sale of a business facilitating the due diligence process undertaken by the buyer in a deal.
The selling company will share with the buying company highly sensitive and confidential company documents, material, reports and information using the data room.
Types of deals and transactions you may need a data room
You can use a data room in any type of transactions where a lot of information and documents must be exchanged such as:
- M&A transactions
- Corporate insolvency
- Joint ventures
- Financing and fundraising activities
- License deals
- Procurement bids
- Litigation files and court proceedings
- Initial Public Offerings (IPO)
In essence, any transaction where you need to share sensitive information to different parties to complete the transaction, a data room will be useful.
4- What to put in a data room?
Generally speaking, the following documents will be shared in a data room:
- Company contracts, customer list and book of business
- Employee records and information
- Financial statements and accounting records such as audited and unaudited financial statements and accounting journals
- Corporate documents such as resolutions and by-laws
- Capital stock and securities such as shareholder list, capitalization table and optionholder list
- Title deeds and proof of ownership of assets such as real estate property, equipment and other physical assets
- Intellectual property and proof of ownership such as patents, copyrights and trademarks
- Material agreements such as a distribution agreement or joint venture agreement
- Product information such as product roadmap and backlog
- Litigation material such as lawsuits filed and those filed against the company
- Insurance related documents and coverages
- List of suppliers and manufacturers
- Permits and regulatory compliance
You can use a data room to securely host pretty much any type of document.
5- How does a physical data room work?
A physical data room is literally a data “room”
Traditionally, data rooms were literally that, a data “room”.
A physical data room is a secure room where a seller of a business will store hard copies of corporate documents and company confidential information for a buyer or relevant stakeholders to view.
Buyers, bankers, lawyers, advisors, accountants or whomever who needs to consult the company records will schedule a time in the physical data room to access, view and study the corporate documentation.
The physical data room is therefore key in exchanging key information between the seller and the buyer so the buyer can make a sound business decision to buy or walk away from the deal.
Example of use of a physical data room
Imagine a scenario where you have a merger between two multinational companies.
The target will set up a data room in one secure location and make available thousands of documents related to the business.
The buyer will then have its people and advisors fly over to where the data room is physically established so they can have a look at all the material.
This process could take literally days per stakeholder.
If you have multiple stakeholders, then each party will schedule a sufficient amount of time in the data room, sometimes for days or perhaps weeks at time, so they can go through the material.
There are a great deal of costs associated with managing a physical data room as each party will need to fly in, book their stay in a hotel and spend days studying the material.
6- Advantages of a virtual data room
Using a virtual data room can be advantageous when you are looking to share a lot of sensitive information with many parties.
Virtual data rooms are easy to manage
Virtual data rooms provide you the benefit of managing one central repository where you will host your company’s information and documents.
You will have full control over what documents are made available in the data room.
You can make more documents available in real-time or perhaps remove access to documents when a particular task is completed.
The documents uploaded into the data room can be indexed and searched using a search function simplifying the review process of the shared material by the viewing parties, including yourself.
Virtual data rooms are cost effective
Compared to the traditional physical data room setup, virtual data rooms are highly cost effective.
In fact, a buyer can have its due diligence internal and external teams located in different countries access the data room from their locations without having to travel to a physical data room as it used to be done in the past.
Accelerate your due diligence process
With the use of a virtual data room, you can accelerate your due diligence process as multiple people can access the data room at once without having to schedule a time in the data room.
There are virtual data rooms available in the market where you can handle several deals at the same time using your data room.
Virtual data rooms are secure and allow you to track document viewing activity
You can set up your virtual data room in such a way to allow access to specific documents to specific people.
This way you can monitor who has accessed what document, when, for how long and track any activity in the data room.
Virtual data room accessed through the Internet
The virtual data room is accessed through the Internet using a secured connection.
With Internet access, the relevant stakeholders can therefore easily access the data room with their unique username and password.
7- Why is a virtual data room better than a physical one?
There are several reasons why a virtual data room is better than a physical data room.
Virtual data rooms are less costly to set up
Virtual data rooms are less costly to set up compared to physical data rooms.
You can purchase an online subscription to a virtual data room through a virtual data room vendor.
There may be either no setup fee or minimal fees to setup your virtual data room.
On the other hand, with a physical data room, you’ll need to actually rent a secure physical location and pay for a 24/7 security guard to ensure your data room remains safe at all times.
This can quickly get very expensive.
Virtual data rooms are less costly for potential buyers
A virtual data room is less costly for the buyers or interested parties to access.
Typically, the interested party will be issued a username and password and will be given an online access link.
The buyer can therefore access the data room from any location or country.
Multiple stakeholders in different regions can access the data room without having to fly over to a physical location.
This makes the access to the data room less costly for the potential buyer.
Virtual rooms are easy to access from anywhere in the world
An important differentiator between a virtual data room and a physical one is that multiple stakeholders in different countries can access the documents hosted in a virtual data room at any point in time.
This global accessibility is highly beneficial when a buyer has its key personnel and decision makers spread across the world.
The key personnel, legal advisors and any other relevant party can access the data room without having to travel or lose precious time in the due diligence process.
With the ease of access to the documents in a virtual data room, the due diligence process can be completed at a much greater speed than through the traditional physical data room.
Virtual data rooms can help preserve documents securely
By storing your corporate documents in a secure cloud environment, you will ensure that you securely preserve your documents for as long as they are needed.
In a physical data room, your documents will be subject to normal wear and tear, exposed to risks of natural disasters or fire, or potentially theft.
After you are done, you need to make sure that you retrieve all your documents and ensure you archive them adequately.
With a virtual data room, your documents will be preserved for as long as it is necessary.
With the state-of-the-art backup processes, redundancies and encryption systems, your documents will be preserved securely for as long as you need it.
Once you are done, you can simply transfer your data onto your company’s servers and delete what was on the servers of your virtual data service provider.
You can have them provide you with certification that the data has been deleted.
Virtual data rooms allow you to keep a log and history of document views
A virtual data room provides you with reporting and analytics on who has viewed a document, what document was viewed, was it downloaded, for how long was the document viewed and more.
You can also disable certain functions such as printing functions or saving and downloading functions.
A virtual data room gives you granular control on who is authorized to access a document and provides you with a log and history of how your documents were viewed.
A physical data room does not compare.
With a physical data room, you’ll have someone take down information such as who accessed the physical room, at what time and left the room at what time.
That’s about it!
8- Data room takeaways
A data room is a safe place, either physical or online, where you can make sensitive documents available to someone or many people.
Data rooms, particularly virtual data rooms, are used by companies every day to facilitate business transactions such as a mergers and acquisition transaction, share information in the context of a regulatory investigation or to form complex business alliances, partnerships and joint ventures.
Check out our article on virtual data rooms giving you all the information you need to better understand that setup and make a purchase decision.
By their very nature, virtual data room benefits outweigh those benefits offered by a physical data room.
If you are looking to share corporate documents or highly sensitive and confidential material, you are better off sharing them through a virtual data room platform.
You can quickly purchase a subscription to a virtual data room through a reputable virtual data room service provider and you’ll be up and running in no time.
We hope this article was helpful in presenting to you what a virtual data room is.
Did you ever use a virtual data room in the past? How was your experience? We would love to hear from you. Drop us a comment!