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

Kison Patel
CEO and Founder of DealRoom
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 DealRoom

A typical M&A process, whether on the buy-side or the sell-side, ebbs and flows.

There are periods of relative tranquility where a deal seems like it may never happen, and periods of frantic activity, where participants require various pieces of information right away.

A well-structured M&A data room ensures that your team has all the necessities ready to act with confidence at any stage of the deal. It provides participants in the M&A process with fast access to the most up-to-date data available to ensure seamless information sharing. Acquiring a virtual data room is a highly worthwhile investment, but it’s only the first step: It then has to be organized for maximum effectiveness.

Together with an insight from FirmRoom M&A data room we look at different methodologies of organizing data rooms, but most will look something like the following:

Structuring Your Data Room for M&A transaction

  1. Draw a schematica of the virtual data room before beginning
  2. Assign access to the relevant people
  3. Create a systemized filing system
  4. Add relevant and up-to-date documents
  5. Engage continuously with the virtual data room

1. Draw a schematica of the virtual data room before beginning

It pays dividends to draw up how you envision your virtual data room should look before the M&A process begins.

This not only allows you to operate faster once the investment has been made to acquire the VDR, it will also force you to think about which documents you’ll require and who should be provided with access. 

This will usually only be a rough draft but having it means that you’re not structuring your virtual data room on the fly.

On a sheet of paper, begin drawing small squares representing the major files and underneath, write the files you’d expect to be added straight away. Having done this, you should straight away have a clearer picture of who you want to assign access to for each of the files.

Drawing a schematica of the M&A virtual data room before beginning

2. Assign access to the relevant people

It’s important to find balance when providing access to the virtual data room: In theory (and often in practice), inviting more people leads to increased transparency and higher levels of communication.

However, having too many people involved increases the risks of damaging data leaks, both inside and outside the company. As with everything else, there’s also a diminishing return to every extra person added to the group, so this is a consideration. 

Assign access to the relevant people

Here are some considerations when assigning access here:

  1. Assign limited access to buyers - you don’t want to give casual buyers access to all of the information in the virtual data room, even when they’ve signed an NDA.
  2. If you have a ‘Human Resources’ folder, showing details of people’s contracts, this cannot be shared with any teams outside of the HR Department and senior management.
  3. Restrict any pending commercial or financial transactions - it’s possible to share them with buyers, but make sure that the names of the companies involved in those transactions are hidden.

These are to mention just some of the considerations when assigning access but these and several others should be at the forefront of your thinking when creating a systemized filing system (see next section).

data room structure

3. Create a systemized filing system

Assuming you’ve drawn up a good schematica of how your virtual data room should look, this stage should flow quite quickly.

When creating different files (typically ‘finance’, ‘legal’, ‘buyers (or targets)’, etc.), an expert tip is to include a master file which includes the documents that will be required by nearly all buyers at the outset - the non-confidential teaser, the standard NDA, the pitch deck and possibly some complementary documents, such as financials in excel format.

One note of caution should be sounded here. In the last section, the issue of confidentiality was raised.

How do you separate ‘regular’ non-confidential documents from highly sensitive documents when creating a filing system?

A good way about this is to create a separate folder for highly confidential documents at the outset. Here only senior management and buyers at an advanced stage (perhaps in later stages of due diligence) should be granted access.

This would leave a typical set of files for due diligence looking something like:

  • Marketing package (NDA, information memorandum, teaser, etc)
  • Financials (financial statements, details of outstanding loans, etc)
  • Legal (Company share certificates, resolved legal cases, contracts, IP, etc)
  • HR (Employee resumes, salary and pension details, etc)
  • Private and Confidential (Pending deals, pending legal cases, industrial disputes, etc.)

To replicate our proven M&A data room structure based on our experience helping hundreds of companies with their M&A transactions, you can now try our M&A data room free for 30-days

filing system data room

4. Add (and maintain) relevant and up-to-date documents 

It’s absolutely essential that documents are updated on a regular basis. Outdated documents are often of little value to the M&A process (with the exception of some old financial statements).

Furthermore, if they’re sitting in your virtual room, not only do they clog up the systematized environment you should be trying to create, but by virtue of being there, they’re costing your company money - so regular spring-cleaning is essential. 

5. Engage continuously with the virtual data room

Sporadic usage is the plague of data rooms. Right now, thousands of otherwise value-creating virtual data rooms sit unused, holding outdated documents and users that have long since left the companies.

Engaging continuously with the data room not only avoids such value-destroying scenarios, but also allows your teams to find a structure for the data room that works well for their ongoing requirements. 

The benefits of engaging continuously with the VDR also mean that your team doesn't have to scan old emails, transfer data-heavy files, or risk data breaches - thanks to the safer environment created by most virtual data rooms.

Keeping everything ‘under one roof’ in due diligence also eliminates duplication, and ensures a much faster flowing process, avoiding the old adage used by buyers in M&A: “everything that drags gets dirty.

Summary

An effective virtual data room is worth far more than the value of its parts. However, gaining the maximum value from this tool requires bringing some structure right from the beginning. And by encouraging your teams to make continuous use of the virtual data room, the structure that works best for them will slowly begin to emerge over time.

A typical M&A process, whether on the buy-side or the sell-side, ebbs and flows.

There are periods of relative tranquility where a deal seems like it may never happen, and periods of frantic activity, where participants require various pieces of information right away.

A well-structured M&A data room ensures that your team has all the necessities ready to act with confidence at any stage of the deal. It provides participants in the M&A process with fast access to the most up-to-date data available to ensure seamless information sharing. Acquiring a virtual data room is a highly worthwhile investment, but it’s only the first step: It then has to be organized for maximum effectiveness.

Together with an insight from FirmRoom M&A data room we look at different methodologies of organizing data rooms, but most will look something like the following:

Structuring Your Data Room for M&A transaction

  1. Draw a schematica of the virtual data room before beginning
  2. Assign access to the relevant people
  3. Create a systemized filing system
  4. Add relevant and up-to-date documents
  5. Engage continuously with the virtual data room

1. Draw a schematica of the virtual data room before beginning

It pays dividends to draw up how you envision your virtual data room should look before the M&A process begins.

This not only allows you to operate faster once the investment has been made to acquire the VDR, it will also force you to think about which documents you’ll require and who should be provided with access. 

This will usually only be a rough draft but having it means that you’re not structuring your virtual data room on the fly.

On a sheet of paper, begin drawing small squares representing the major files and underneath, write the files you’d expect to be added straight away. Having done this, you should straight away have a clearer picture of who you want to assign access to for each of the files.

Drawing a schematica of the M&A virtual data room before beginning

2. Assign access to the relevant people

It’s important to find balance when providing access to the virtual data room: In theory (and often in practice), inviting more people leads to increased transparency and higher levels of communication.

However, having too many people involved increases the risks of damaging data leaks, both inside and outside the company. As with everything else, there’s also a diminishing return to every extra person added to the group, so this is a consideration. 

Assign access to the relevant people

Here are some considerations when assigning access here:

  1. Assign limited access to buyers - you don’t want to give casual buyers access to all of the information in the virtual data room, even when they’ve signed an NDA.
  2. If you have a ‘Human Resources’ folder, showing details of people’s contracts, this cannot be shared with any teams outside of the HR Department and senior management.
  3. Restrict any pending commercial or financial transactions - it’s possible to share them with buyers, but make sure that the names of the companies involved in those transactions are hidden.

These are to mention just some of the considerations when assigning access but these and several others should be at the forefront of your thinking when creating a systemized filing system (see next section).

data room structure

3. Create a systemized filing system

Assuming you’ve drawn up a good schematica of how your virtual data room should look, this stage should flow quite quickly.

When creating different files (typically ‘finance’, ‘legal’, ‘buyers (or targets)’, etc.), an expert tip is to include a master file which includes the documents that will be required by nearly all buyers at the outset - the non-confidential teaser, the standard NDA, the pitch deck and possibly some complementary documents, such as financials in excel format.

One note of caution should be sounded here. In the last section, the issue of confidentiality was raised.

How do you separate ‘regular’ non-confidential documents from highly sensitive documents when creating a filing system?

A good way about this is to create a separate folder for highly confidential documents at the outset. Here only senior management and buyers at an advanced stage (perhaps in later stages of due diligence) should be granted access.

This would leave a typical set of files for due diligence looking something like:

  • Marketing package (NDA, information memorandum, teaser, etc)
  • Financials (financial statements, details of outstanding loans, etc)
  • Legal (Company share certificates, resolved legal cases, contracts, IP, etc)
  • HR (Employee resumes, salary and pension details, etc)
  • Private and Confidential (Pending deals, pending legal cases, industrial disputes, etc.)

To replicate our proven M&A data room structure based on our experience helping hundreds of companies with their M&A transactions, you can now try our M&A data room free for 30-days

filing system data room

4. Add (and maintain) relevant and up-to-date documents 

It’s absolutely essential that documents are updated on a regular basis. Outdated documents are often of little value to the M&A process (with the exception of some old financial statements).

Furthermore, if they’re sitting in your virtual room, not only do they clog up the systematized environment you should be trying to create, but by virtue of being there, they’re costing your company money - so regular spring-cleaning is essential. 

5. Engage continuously with the virtual data room

Sporadic usage is the plague of data rooms. Right now, thousands of otherwise value-creating virtual data rooms sit unused, holding outdated documents and users that have long since left the companies.

Engaging continuously with the data room not only avoids such value-destroying scenarios, but also allows your teams to find a structure for the data room that works well for their ongoing requirements. 

The benefits of engaging continuously with the VDR also mean that your team doesn't have to scan old emails, transfer data-heavy files, or risk data breaches - thanks to the safer environment created by most virtual data rooms.

Keeping everything ‘under one roof’ in due diligence also eliminates duplication, and ensures a much faster flowing process, avoiding the old adage used by buyers in M&A: “everything that drags gets dirty.

Summary

An effective virtual data room is worth far more than the value of its parts. However, gaining the maximum value from this tool requires bringing some structure right from the beginning. And by encouraging your teams to make continuous use of the virtual data room, the structure that works best for them will slowly begin to emerge over time.

Boost your M&A practice by replicating our proven M&A data room structure and try it free for 14 days. No credit card required.

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