What is a Data Room?

Jan 28, 2010 - by Firmex

A traditional data room is a secure room where hard copies of corporate documents are kept for confidential review.  Data rooms were primarily used for the sale of businesses.  Prospective buyers would schedule time in the “data room” to perform comprehensive due diligence on the business or assets they were potentially buying.  The buyer had to travel (often fly) to the secure location. Then the buyer spends long-hours and often days sifting through thousands of documents.  If there were more than one buyer, then each buyer would have to schedule certain days for “data room” or secure deal room access.

Two Main Disadvantages of Physical Data Rooms:

1. Travel and inconvenient access means fewer potential bidders
2. Travel and scheduling logistics create a longer frame for completing the deal and therefore extends the risk that could be scuttled.

Virtual data rooms eliminate the time-consuming inconvenience of physical data rooms.  Buyers can have their diligence teams in London look at a small acquisition in San Francisco without having to spend days traveling.  Sellers can market and engage a wider audience. Many online deal rooms offer unlimited subscription packages for multiple sales or offerings. This broader variety of document intensive processes can be managed more efficiently online.  These processes include private equity fund raising, smaller M&A transactions, corporate finance, insolvency, joint ventures, bidding on large outsourcing deals, bio-tech licensing transactions, sharing litigation files. Hundreds of law firms and investment banks now license their own virtual data room technology to rapidly bring mandates to market and get deals done efficiently and with less risk.

Main Advantages of Virtual Data Rooms

1. Convenient and highly secure access to the offering and due diligence information over the Internet can engage a broader group of bidders.
2. Less traveling and scheduling visits shortens time line and reduces the risk for completing the transaction.
3. Low cost technology creates a broader variety of uses including: private equity fund raising, smaller M&A transactions, corporate finance, insolvency, joint ventures, bidding on large outsourcing deals, bio-tech licensing transactions, sharing litigation files.
4. Financial and Legal advisors now license their unlimited use virtual data room technology as a best practice to be more effective in “running deals” and getting them closed.

References:

Data Room - Wikipedia Definition