The Importance of a Virtual Data Room Index and Folder Structure

With any business, keeping great records and staying organized is essential for success.

Thanks to virtual data rooms like FirmRoom, teams now have an easier way to store and access organized data. With a virtual data room index, you can have every document you need neatly organized and just a click away.

A virtual data room index includes all the files and documents inside the room. Within the data room index is the folder structure that determines how the files and documents are organized.

This article covers how to set up a folder structure and data room index.

Data room index example

This is an example of what a data room index inside our virtual data room, FirmRoom. Notice how each of the folders are organized and include subfolders.

Why use indexing while organizing documents during due diligence

During due diligence, copious amounts of information and paperwork is collected. This process is faster and more efficient in a virtual data room compared to if it would be if done with an actual paper trail.

While it is faster to use a virtual data room, it can take longer than necessary if you don’t properly index your documents. 

Indexing your documents when you upload them is simple to do, thanks to a data room technology that automatically does it for you. And you can rearrange the index if needed.

By correctly indexing your documents you make them searchable. This allows for users to find the documents much faster later in the process. 

Similar to a public library system, by organizing books by genre, author, or numerical order, you can easily find exactly what you want by searching for it.

By taking the time to organize your documents in your VDR, you can find the documents you want any time that you may need them.

How virtual data rooms organize your documents

Inside a virtual data room, there are many things happening at once. With different users all doing the different tasks that they’ve been delegated to do, and all of the documents that come along with it, it can get hectic. 

A good virtual data room will allow administrators to organize, control and track documents throughout the entire process from start to finish. (read "How to Choose the Best Virtual Data Room")

Different features may include:

• Control the security level of the document, only allowing those with the right security level to access them.
• Tracking to see which users are viewing, downloading, and uploading specific documents and which ones are being used for the longest amount of time.  
• Allow members to see other groups, hide members from each other, invite new members, etc.
• Set and edit the data index
• Rename files and folders
• Set requests as low, medium or high priority
• Create custom request statuses

Besides the benefits of these security Virtual Data Room features helping to keep documents safe, this information can also help with M&A deals.

The company can view what the seller is looking at and gain better knowledge and insight on what they are interested in. This can help them to close a deal faster and more efficiently as well.

Some data room best practices

1. Ensure security - Data room security is number 1;  therefore, ensuring your data room boasts the top of the line security is critical. Security also includes periodically checking permission settings.
2. Select a VDR that is intuitive - A VDR that is easy to set up and navigate and allows for ease when adding users is paramount since due diligence is already time consuming -  users will not have extra time and energy to learn a clunky, overly nuanced system. 
3. Maintain document organization (especially during due diligence) - It bears repeating: keeping the VDR clean and easy to navigate is key. This includes appropriate document naming and indexing. ‍
4. Examine what team members are looking at/working on - Reviewing what users are looking at and working on can yield powerful insights, such as where concerns and possible red flags lie; it is also critical to review what is not being looked at and to understand the implications that could stem from that.

Making a folder structure requires an understanding of the company.

It helps to know the business model, industry and structure of the company to better set the structure in a way that makes sense and is efficient for everyone.

Here is an example of a virtual data room folder structure:

Due diligence data room checklist

DealRoom has worked with hundreds of companies in their due diligence process.

This has given us unique insight into what’s required and when. Our system allows users to access the most comprehensive resources available for companies conducting due diligence, that include exhaustive due diligence checklists.

A sample of this checklist follows below. For a full breakdown, see here.

1. Legal

• Organizational chart showing the corporate structure of the Target and all subsidiaries and affiliates.
• List of all jurisdictions in which Target and its subsidiaries and affiliates are licensed to do business.
• Summary of all related party transactions entered into in the past 3 years, including the key terms thereof and review/approval procedures applicable thereto.

2. Commercial

• List of the top 25 customers for each of the past 3 years, including revenue.
• List of all material customers that have ceased doing business with Target in the past 12 months.
• List of all material sales channel partners for each of the past 3 years.

3. Financial

• Copies of audited financial statements and each subsidiary and affiliates.
• Copies of unaudited financial statements.
• Detailed description of any off-balance sheet/statement of financial position items, liabilities or obligations of any nature.

4. Human Resources

• Copies of all employment agreements and indicate those affected by the transaction.
• To the extent not already provided, copies of all agreements relating to any compensation arrangements between the Target and any third party.
• Copies of all confidentiality, non-competition, nondisclosure, non-solicitation, intellectual property, or similar agreements. 

5. Intellectual Property

• Copies of all agreements under which the Target is granted the right to use IP owned by a third party.
• Copies of all agreements under which a third party is granted the right to use IP owned by the Target.
• Summary of any past or current instances where any third party actually or allegedly infringed on the Target's IP or where the Target actually or allegedly infringed on a third party's IP.

6. Information Technology

• Details of any current and planned IT initiatives/key projects.
• Summary of the Target's policies and practices regarding the purchase and maintenance of software.
• Summary of all key IT resources. 

7. Environmental, Health & Safety

• Summary of all environmental investigations, citations, or notices of violation received from any environmental regulatory agency.
• Summary of all litigation in which the Target has been involved in the last ten 10 years.
• Description of any past or on-going remediation efforts relating to environmental matters.

8. Tax

• Summary of the results of all tax audits conducted in the past 5 years, including the resolution of any findings.
• Summary of all property taxes paid by the Target in the past 5 years.
• Copies of all material communications and agreements between the Target and any taxing authority for the preceding 5 years. 

How should you organize a data room folder structure?

To organize a data room folder structure, consider how your team likes documents and files to flow together.

• Top-level folders
• Start with a main category or topic, create a folder, ideally ones that can define the steps of the business transactions.
• Have a few different “main folders” that vaguely cover each and every document within it is a great way to separate the information. 
• Limit the number of top tier folders helps to make everything easier for scannability and keeps everything looking neat and well-organized.
• Subfolders
• Become a little more specific, choose subfolders to go within each of the top tier folders.
• These subfolders will help to better organize the topic.
• Inside each subfolder can be more subfolders that follow the same naming and storage structures. 

When all is said and done, you can have dozens of folders containing different information, but because they were all neatly organized within their folders and indexed appropriately, they will be easy to find at a moment's notice.

After you’ve figured out which top tier categories work best for your company and the business transaction at hand, you can organize the subfolders and topics underneath.

For example, under the finance folder, you can have:

• Banking Documents
• Taxes
• Acquisitions
• Financials and Models
• Financings
• Insurance Information

Download sample virtual data room index template

About due diligence index

Some virtual data rooms have a downloadable index PDF that live links the entire room, including all files, folders, and documents. 

With the M&A data room index in place, you will have a successful due diligence index ready to help you throughout your business transactions.

You can now easily find any tax records or past quarterly statements that may be relevant to your deal because they are so well organized in your index.

While there is no single way to organize a data room, keeping it as simple and organized as possible could be the best answer to helping everything to run more smoothly.

The fewer questions people have to ask to find the proper paperwork, the faster the deals can close and the better things can work out.

Bonus: How to organize your data room for due diligence

1. Create groups,  add users, and set permissions - The administrators must ensure all stakeholders of the due diligence process are added to the data room and placed in the appropriate groups  (this includes stakeholders on the buy-side, the sell-side, as well as their lawyers and bankers). Permission settings for each group must also be established to maintain security. These permissions usually include options such as “view,” “download,” “download original,” and “edit.” It goes perhaps without saying that establishing the correct permission settings ensures valuable information does not fall into the wrong hands, which can be very costly for a variety of reasons, not the least of which is killing the deal entirely; this permission protocol also establishes a trust and confidence among those operating in the data room. 

2. Prepare documents and files - Preparing the due diligence documents for your virtual data room includes anticipating which documents will be requested and which will allow you to get a bit ahead of the massive amounts of requests that will be coming your way. It also means digitizing physical files, most likely by scanning them. You will want to guarantee you have the latest versions of these files and documents, as well verifying they are named properly since they will be shared with those outside of your company; a name that might make sense to you, might not make sense to someone outside of your team. 
   

3. Add documents and files to the data room - When you add documents to the data room, it is important to set and view permission settings for each one. Here, be sure you are also not uploading duplicates as you want to keep the data room clean and tidy. 
   

4. Categorize documents and files - You want to be sure documents are easy to locate; this means knowing your due diligence audience (mainly lawyers, bankers, financial consultants, etc.). Once you know what these individuals will be looking for, you will want to verify important documents are not buried in sub-folders. Common due diligence document categories include: financial information, company information, product information, legalities, customer information, intellectual property, physical assets, and environmental health and safety information. 
5. ‍Check organization - To ensure your virtual data room for due diligence is truly convenient and well-organized perform organizational checks. An organized virtual data room for due diligence ultimately saves time, money, and frustration. One way to perform these organizational checks is to have team members not directly involved in the due diligence process added to the VDR; then have them search for specific documents - the ease with which they can do this will be telling.

Read More

Why You Should Use a VDR for Legal Due Diligence

Due Diligence Checklists & Templates