What is a Virtual Data Room?
So what is a Virtual Data Room (sometimes called a VDR)? Quite simply, it is a secure, online repository of information that is used to store and distribute important and confidential files and documents.
Think of it as a “Dropbox for business” that can be completely customised to allow the access to the transfer of information but only through secure “access permissioning” to the documents.
In consumer markets, Dropbox, Box, OneDrive and iCloud are all examples of Virtual Data Rooms. However, these applications have been optimised for the average consumer who has a different workflow than professionals using data rooms in the context of buying and selling businesses or those involved with capital markets. In these cases, Virtual Data Rooms are used in any situation that requires sharing substantial confidential information across interested parties. Some examples include:
- Share Sales
Solicitors, legal advisors, brokers, financial advisors and other third parties need access to company information, projections and other legal documents. Given the amount of information and the number of people involved, email just isn’t practical for security reasons.
- Asset sales
Sometimes companies wish to sell specific assets they own such as plant & machinery or a building or factory. Again, given the amount of information involved, Virtual Data Rooms offer a very practical solution to sharing information with potential buyers and of course, the legal people involved with the transaction.
- Investment Reporting
Often, companies have a large group of investors they must actively report to on a monthly or quarterly basis. Data rooms are used to store the periodic reports which can be accessed confidentially by investors.
In short, Virtual Data Rooms offer extremely detailed auditing and permission-based management that are not available to people sending files over by email. They also make it easy for interested parties to access all historical information in a chronological timescale, as and when uploaded.
Why are virtual data rooms used?
The process of acquiring a company can be long and complex process, requiring many third parties to work together. Virtual Data Rooms allow third parties to easily co-ordinate, share information and ensure that information only be made available to authorised third parties. However, time and money can be saved with exceptionally fast, easy to use functions, such as file/folder drag & drop, click to preview, email attachment uploading etc.
For example, if you were buying a multi million-pound company, a substantial amount of information would be needed. There could be thousands of documents that cover employees, patents, ongoing litigation, financials, lease agreements, technical specs, etc. All of this information is pertinent to the buyer conducting due diligence, prior to purchasing the company. Sharing this information physically, by hard copy is inefficient (there could be tens or hundreds of thousands of pages), sending over email is highly impractical and sending over a USB drive is insecure, as no one would know who accessed the information. Thus, the Virtual Data Room is ideal.
It is often asked why companies or business institutions do not simply use a free data room service like Dropbox, Box, OneDrive, etc. Whilst some do, there are a few reasons why most savvy business owners don’t: first of all, most of the large investment banks, who serve as the advisors to the companies raising capital or acquiring, are not allowed to use these free data room services for security purposes. Second, these consumer facing applications are optimised around consumer/personal use and lack key workflows that would otherwise allow business owners etc to grant appropriate permission to access confidential information.
Who uses virtual data rooms?
The process of structuring a security or managing a merger or acquisition can be long and complex, requiring up to a dozen or more third parties to co-ordinate efforts and contribute their analysis over a period of weeks or months.
When selling a business, Virtual Data Rooms are typically set up by the sell-side business (who upload much of the information posted in a data room) or one of the main Solicitors involved with the transaction. Once posted, the information can be securely accessed by various stakeholders including potential acquirers, investors accountants, lawyers and third party due diligence providers.
How much do they cost?
Considering the costs involved when buying or selling a business, the use of a Virtual Data Room really is (surprisingly) very low. In fact, they are extremely cost effective, when you consider the amount of time saved, convenience and peace of mind where security is concerned. For further information, please complete the form below and we’ll put you in touch with our specialist Virtual Data Room provider: