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Using Data Room for M&A: Best Practices & Structure (for 2023)

Kison Patel
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of M&A Science and FirmRoom

Using data rooms during M&A can be extremely beneficial at keeping teams organized during each deal phase, providing instantly updated information to be shared with all parties and participants. 

What is a Data Room for M&A? 

An M&A data room is a cloud storage center for sensitive documents with the capacity for sharing information between parties involved in transactions. Data rooms are often the most useful during the due diligence process and are designed to meet security compliance while facilitating the secure sharing of data.

FirmRoom has been designed for the M&A industry, which gives us the expertise to offer you valuable insights on the matter of data rooms in M&A.

How to Pick Your M&A Data Room? 

Not all VDRs are built the same, and not all VDRs meet public company standards. You can learn how to pick a secure data room here.

In general, some features to consider when choosing VDRs are the following: 

  • Pricing structure (i.e. per-page, per-user, flat-rate, etc.) 
  • Allotted amount of users and admins, unless using a flat-rate pricing structure
  • Storage capacity, unless using a flat-rate pricing structure
  • Security and encryption methods
  • FINRA and ISO compliance 
  • Simply and easy navigation 
  • Ease of use for internal and external users 

Meanwhile all VDRs should have the following features: 

  • Upload and storage of documents/files
  • Ability to invite authorized users to the data room
  • User activity tracking
  • Restricted access to view or download data and documents based on level of authorization
  • Restricted viewing of users in the data room
  • File watermarking for additional security

VDRs specifically designed for M&A often have the following features: 

  • Clickwrap NDA forms 
  • VDR branding 
  • Built-in question and answers (Q&A)
  • Features allowing file redaction and/or updating
  • Temporary downloads and ability to reverse visibility privileges as needed 

How to Structure Your Data Room for M&A Transactions?  

Ensuring that the data room is structured properly for deals makes M&A processes run more effectively and efficiently. 

1. Create a visual representation of your data room.

Not only will this make setup of the VDR easier, but taking the time to plan before will expedite the process of determining which documents should be included, who should have access, and how the structure will work best before learning the interface and making changes via the VDR.

2. Determine who will be given access

Ensuring that all of the necessary parties are involved for effective communication and deal transparency is important, but it is also important to ensure that data leaks are avoided by only including those who need the information. For example, buyers should be assigned limited access; contracts within the HR action should not be shared outside of the HR Department; and information regarding pending transactions should not be shared. 

Determine who will be given access

3. Create a data room index

Using a data room index assists in staying organized during the due diligence process, due to the countless paperwork and information involved.

data room index

By typing in a keyword or name, documents should be able to be easily found. In doing this, it is important to separate non-confidential documents from sensitive documents.

Create a separate folder for highly confidential documents when initially creating the folder structure. 

A typical structure could look something like: 

  • Marketing (i.e. NDA, information, teaser)
  • Financials (i.e. financial statements, loan details)
  • Legal (i.e. share certificates, legal cases, contracts, IP) 
  • HR (i.e. resumes, salary, pension) 
  • Confidential (i.e. pending deals, legal cases, disputes)

4. Upload documents

Keep documents up to date, to ensure that space is not taken up in the VDR and only pertinent information is stored in the room for each deal.

upload documents to the data room

This will require systematic, continuous maintenance, and ensures that the data room structure remains consistent and useful for the requirements of the transaction at hand. 

Before Inviting Outside Users: 

  1. Add administrators. At least two separate individuals, including a lawyer handling the transaction and another team member necessary to the deal or bound by an NDA, should be assigned as the data room’s administrators. Administrators can include trusted members of the firm, individuals actively involved in the transaction, individuals who are knowledgeable regarding the use of a VDR, or individuals who are authorized to see all of the information regarding the deal and receive correspondence. 
  2. Set up your NDA. Include a copy of the existing NDA, or a clickwrap form of the NDA, that is configured to appear when a user logs into the VDR for the first time so that they must accept the terms before they are able to view any information. This should be an agreement that applies to all users of the data room. Each NDA signed should be kept in a separate folder with restricted access. Amendments to this NDA should be made as needed. 
  3. Brand your VDR. Add a logo and customize the colors to reflect the brand. This is also where you determine the project name.
  4. Customize your watermarks. Watermarks should include the user’s name, the project name, and the time the document was opened. 
  5. Delete any unnecessary content. This includes training materials after they are understood by all parties. These are not relevant to the transaction process, and can take up necessary storage space. Before doing so, review the document retention policies of the firm so that documents necessary for compliance are not discarded prematurely. 
  6. Populate the VDR. Upload all folders and files into the VDR, with the order and naming structure outlined in the data index. 
  7. Create a folder structure and delegate uploads. Decide who will be handling the majority of information uploading, and allow authorization of those users. Make sure to follow the outline of the data room provided in the data index and decided by the creators of the data room to ensure organization and cohesiveness. 
  8. Ensure both you and the client is ready to proceed. Go over use of the VDR, the terms of the NDA and other agreements, and make sure that all parties are on the same page going forward with the transaction using this document storage system.

After Inviting Outside Users: 

  1. Sync the data room with a local folder, with restricted access on both ends of the sync. 
  2. Determine the level of access for each party to be added. 
  3. Set access permission levels for each user. 
  4. Send out invitations for those who will be included in the transaction. 
  5. Review activity reports frequently to determine which folders and files are being accessed to determine what information is the most relevant and what may need more attention. 

Maintaining the Data Room

Regular maintenance of the VDR ensures that the content in the M&A data room is relevant to the transaction, making navigation easier.

If your data room charges your team per-page, you will have to be very conscious about keeping your storage costs low, instead of focusing on what's best for your deal.

In 2023, using a data room with a flat-rate pricing should be the only option, as per-page pricing in modern M&A leads to astronomical overcharges.

per-page pricing in modern M&A leads to astronomical overcharges.

20 years ago virtual data room (VDR) providers came to the office, scanned documents then uploaded them to costly servers. It made sense to charge per page back then.

While maintaining your room, decide who the administrators are early on to ensure that there is no delay in maintenance. Regular data room maintenance also ensures that those who have access to the data room are authorized and have been added or removed by an administrator, so that confidential information can be kept secure.

Access should be disabled as soon as users are no longer actively participating in the transaction. 

Administrators should also be assigned to keep content in the room up to date and allowed upload permissions as needed. If non-administrators need to upload documents to the data room, this should be accounted for as well. 

Further, if the platform has Q&A, an administrator should be assigned to make sure that questions are answered in a timely manner. 

Closing the Data Room 

When the transaction is complete, it is then time to close the data room. 

  1. Deactivate all groups and users to prevent further access to confidential information. 
  2. Create an encrypted backup of all data, so that if details of the transaction must be referred to, they are accessible by the authorized party. 
  3. Delete data from the VDR, unless it will be needed again in the near future. 
  4. Close the room and restrict all access. 

How FirmRoom can Help 

FirmRoom was specifically designed with the complexities of M&A security in mind, created by industry experts specifically for M&A workflows.

FirmRoom offers flat-rate pricing, is compliant with public company standards, and provides data rooms in accordance with all M&A and security regulations.

Our interface is easy-to-use and provides built-in support based on 15+ years of experience with major financial institutions to help perfect your M&A data room process and allow you to close deals up to 40% faster.

With FirmRoom, transactions are made faster & easier than ever before, while meeting every security standard that a company could possibly need.

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