Deal Virtual Data Rooms Best Practices

While various virtual data rooms on the market differ in scope, complexity and price, in the most simplified form a virtual data room is nothing more than a cloud-based repository for housing all the most confidential and pertinent files relative to one’s business. It’s like a personal journal of things relating to customer, contracts, financial statements, suppliers, marketing, sales, legal and any other specifics of the business. A virtual data room (VDR) is an online repository for housing all the most confidential files relative to your business.

In essence, the data room will house everything a buyer would need to engage in extensive target due diligence on your company. Security is therefore paramount and perhaps the most important component of all data room features.

The data room can serve as a point of reference for various pieces within your own organization including marketing, sales and operations. The data room becomes most advantageous when the company is put up for sale to the highest bidder or during other capital transactions.

Companies with complex operations can benefit by preempting due diligence years before it becomes necessary. The VDR also serves as an internal reference for shareholders and management relative to specific aspects of the business and its operations which can be helpful in both accountability and operational efficiency—especially if tied to project management software or a CRM.

The Case of the Unsolicited Offer

In many cases, a seller may not have considered selling the company until a compelling yet unsolicited offer comes along. While I always advise against going for the first unsolicited offer, the first offer can work as a baseline stocking horse for other bids. And if an unsolicited offer spurs a quick “go-to-market” for the business, there is likely to be a greater scramble on the part of the seller, intermediary, accountant and attorney as the entire deal team prepares the business for a full broad M&A auction.

An already-populated VDR allows for a quick and rapid go-to-market, saving significant time and money from nearly every angle on the deal. The time to start populating a virtual data room is now. It prepares owners for any and all types of capital transactions that may occur as the business progresses. It drastically shortens the time required for all external advisors, including investment bankers, when it comes to prepare a pitchbook or offering documents and it can immediately streamline both preliminary and general due diligence.

Keep it Clean

It is certainly wise to begin populating a virtual data room early and often, but if care is not taken in best practices for file types, duplicates, nomenclature and naming structures, the folders, hierarchy and files can become a complete cluster pretty quickly. Having a solid operating procedure for knowing what goes in the VDR, where it goes and how it is named is key to ensuring the data room does not eventually end in complete chaos.

Data rooms are like the deals themselves. They should be started early and updated frequently. Ideally, any company that is intent on selling—even in the next five years—should begin by populating a virtual data room as early as possible.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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