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How to Structure a Virtual Data Room for M&A Transactions

    
business professionals reviewing performance chart

Filing cabinets and other paper-based processes have quickly become antiquated methods of storing and sharing information, with digital file storage now the norm. But with potential M&A buyers located halfway across the planet, how can you ensure that all parties can view the documents they need without the risk of a devastating data breach?

Virtual data rooms are secure online repositories for sharing and storing confidential files, such as documents needed for an M&A transaction. By enabling document sharing while placing appropriate restrictions on user access, VDRs facilitate the M&A due diligence process.

For maximum efficacy, VDRs need to be carefully structured and organized. In this article, we’ll discuss everything you need to know about structuring a virtual data room for M&A transactions.

How to Open the Books With Your Virtual Data Room

When you’re under the microscope in a due diligence process, virtual data rooms help you progressively “open the books,” revealing your sensitive and confidential documents to prospective buyers. This step-by-step process ensures that security remains paramount throughout the transaction.

The first step when embarking on an M&A deal is to introduce potential buyers to the opportunity. At this stage, your VDR should provide access to a short, high-level pitch for your business, without disclosing your company name or confidential information. 

Once potential buyers sign a non-disclosure agreement, you can show your cards a little more. Your VDR can store and share your company's information memorandum and financial model, with greater details about your business operations.

Companies who are still interested after viewing these documents submit their offer (known as a “letter of intent”), stating how much they’re willing to pay for your business and what the sale’s terms and conditions are. After reviewing these offers, you select the best one and enter into an exclusive due diligence period with the prospective buyer.

Once in the due diligence period, prospective buyers gain access to the full suite of files within your VDR. The buyer will review all of your supporting documents that elaborate on the information they’ve seen thus far. The documents in your virtual data room may be structured along the following lines:

  • General corporate matters

  • Financial information

  • Tax matters

  • Marketing, sales, and customers

  • Engineering and support

  • Intellectual property

  • Employment matters

  • Agreements and commitments

  • Legal, insurance, and environmental

  • Any miscellaneous documents

The Benefits of Virtual Data Rooms for M&A Transactions

Maintaining a virtual data room is a basic corporate best practice—but not all VDR users are familiar with the best way to structure and organize their documents within it. By following the basic structure above for your virtual data room, you’ll go a long way in making your M&A transactions more streamlined and efficient.

When it comes to M&A transactions, virtual data rooms are simply good housekeeping. Using a single unified virtual data room, rather than a scattered array of solutions, provides credibility in the buyer’s eyes that the rest of your house is also in order. In addition, by making it easier to securely view and share documents, virtual data rooms expedite the due diligence process and make it more likely that the M&A transaction will be a success.

Cloud storage services such as Google Drive and Dropbox are fine to stage and simulate virtual data rooms in a pinch. However, they’re not an ideal VDR solution: they lack special features such as version control, detailed audit logs, and digital signature capabilities.

During the due diligence process, using a dedicated VDR solution is highly recommended. Not only do virtual data rooms help compartmentalize your business, they also include additional features for security and access management.

Whether you’re using a virtual data room for M&A transactions, fundraising rounds, or other financial events, VDRs help ensure the security of your confidential and proprietary information throughout the process.

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