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Virtual Data Rooms: Buy-Side vs. Sell-Side

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

Virtual data rooms play a central role in mergers and acquisitions that doesn’t always receive the attention it warrants.

As the M&A process has progressively moved to something which is analytical and even scientific, increased amounts of data have come into play.

This is where virtual data rooms do much of the heavy lifting. They allow buyers, sellers, and intermediaries access controlled data for deal origination, due diligence, deal closing, and target integration. 

Sometimes referred to as data rooms, VDRs, or deal rooms, virtual data rooms are private repositories held on the cloud, where files and documents pertaining to a transaction are held.

The data and documents are uploaded by the owner in advance of providing access to third parties, and usually more are added as requests arrive from potential buyers and their intermediaries.

With so much private data accessible, the owner has full discretion over who receives access.

It’s highly unlikely that the M&A industry would have grown to its current size without the adoption of virtual data rooms.

Their role in providing efficient and secure access to relevant data - even remotely - in what can often be unwieldy projects has made closing deals a much more organized state of affairs.

FirmRoom provides both buy-side data rooms and sell-side data rooms and in this article, we look at how the impact of VDRs relates to the buy-side and sell-side in M&A.

Understanding the buy-side and sell-side of the deal

In order to fully understand the role that a virtual deal room plays, it helps to first understand the different sides of an M&A transaction.

buy-side and sell-side M&A

Buy-side of the deal

A ‘buy-side’ company is one which is actively considering acquiring or merging with another company. The buy-side is the company which is looking to pay some consideration in the deal to make it happen.

The emphasis here is on accessing information about target companies (i.e. sell-side companies).

Sell-side of the deal

A ‘sell-side’ company is one which is either actively considering a sale of its assets to another company, or one which is the subject of buy-side interest. The sell-side is the company which will receive some consideration in an M&A deal to make it happen.

The emphasis here is on providing information to buy-side companies (i.e. buyers).

Setting up your data room for buy-side

Buy-side companies use virtual deal rooms to make their M&A process more structured.

The more structured their approach to M&A, the better their chances of

  • i) finding suitable targets,
  • ii) conducting accurate valuations, and
  • iii) conducting a successful due diligence process.

Virtual data rooms thus ensure that each of these processes links up to lead to value-adding transactions.

Steps to setting up your buy-side virtual data room:

1. Create a folder which outlines the goals of the strategy.

This is a fundamentally important first step that many companies overlook when setting up a buy-side due diligence VDR.

Its presence enables (and encourages) everybody involved on the buy-side team to refer back to why a transaction is being sought in the first place, and whether they’re remaining on track with those goals.

2. Create a folder with a short-list and long-list of potential companies.

Here, any information gleaned from initial discussions with potential targets can be added.

This doesn’t need to be large - a single excel sheet may suffice, depending on how many companies have been contacted, and how much contact has been maintained.

3. Create a different room for each target, and within each, a series of subfolders.

For example:

  • Emails,
  • Valuation,
  • Due diligence,
  • Transaction documents,
  • Change management,
  • etc.
data room buy side

4. Create in-depth subfolders structure, meaning in the subfolders above, due diligence should hold several of its own subfolders.

Consider, for example, subfolders such as:

  • Legal due diligence
  • Operational due diligence
  • Financial due diligence
  • HR due diligence etc
data room buy side

You can find a whole list of folders in master due diligence playbook here.

4. When this structure is in place, send it to the team involved in the acquisition process, and ask for their feedback.

It may be that they’ve got some ideas about different folders that can be added or removed. Now you are ready to invite third parties and people from the other side of the deal

data room buy side users management

Outline the importance of making the virtual data room the area in which all deal-related matters are discussed, so that the process is centralized.

Read also: How to Efficiently Conduct Buy-Side Due Diligence

Setting up your data room for sell-side

Sell-side companies use virtual deal rooms so that the companies that need to access their information can access it more efficiently.

Not all potentially interested parties should be given access to the sell-side virtual data room, but for those that do, it should portray a company that knows what it’s doing (and that it’s being transparent about its business with them).

Steps to setting up your sell-side virtual data room:

1. Create a folder that shows where the process is.

As with the buy-side document outlining a long-list and short-list of buyers, this needn’t be any more than an excel document, showing the sell-side team which companies have been contacted, expressed interest, or otherwise.

This should not be shared with potential buyers and is only for internal use.

2. Create a folder which outlines the initial work undertaken to get the sales process underway.

Typically this includes a few files, such as:

  1. A sales memorandum (the buy-side will probably already have seen this).
  2. A teaser document.
  3. A valuation of the firm (ideally conducted by a third party).

3. Begin dividing the firm’s details into separate folders (corresponding to those outlined in the buy-side section above).

These include:

  1. Legal documents (see DealRoom checklist)
  2. Operational documents (see DealRoom checklist)
  3. Financial documents (see DealRoom checklist)
  4. HR documents ( see DealRoom checklist)
sell-side playbooks

4. Provide access to your own sell-side team, asking for feedback. Some of the team may feel that extra information could be added.

5. Provide access to potential buyers that show serious interest.

Each one should sign an NDA before being provided access.

Ensure that only individual corporate emails can access the virtual data room to protect the integrity of its contents.

Read also: How to Efficiently Conduct Sell-Side Due Diligence [Checklist]

Conclusion

Whether your company is on the buy-side or the sell-side, a virtual data room can add significant value to your M&A process.

There is a reason that having these tools is now considered industry best practice. Show the other side of the transaction that you’re a serious counterparty.

Implement a high-quality virtual data room for your company, and experience how it fuels better transactions from origination right through to deal closing.

firmroom data room

Virtual data rooms play a central role in mergers and acquisitions that doesn’t always receive the attention it warrants.

As the M&A process has progressively moved to something which is analytical and even scientific, increased amounts of data have come into play.

This is where virtual data rooms do much of the heavy lifting. They allow buyers, sellers, and intermediaries access controlled data for deal origination, due diligence, deal closing, and target integration. 

Sometimes referred to as data rooms, VDRs, or deal rooms, virtual data rooms are private repositories held on the cloud, where files and documents pertaining to a transaction are held.

The data and documents are uploaded by the owner in advance of providing access to third parties, and usually more are added as requests arrive from potential buyers and their intermediaries.

With so much private data accessible, the owner has full discretion over who receives access.

It’s highly unlikely that the M&A industry would have grown to its current size without the adoption of virtual data rooms.

Their role in providing efficient and secure access to relevant data - even remotely - in what can often be unwieldy projects has made closing deals a much more organized state of affairs.

FirmRoom provides both buy-side data rooms and sell-side data rooms and in this article, we look at how the impact of VDRs relates to the buy-side and sell-side in M&A.

Understanding the buy-side and sell-side of the deal

In order to fully understand the role that a virtual deal room plays, it helps to first understand the different sides of an M&A transaction.

buy-side and sell-side M&A

Buy-side of the deal

A ‘buy-side’ company is one which is actively considering acquiring or merging with another company. The buy-side is the company which is looking to pay some consideration in the deal to make it happen.

The emphasis here is on accessing information about target companies (i.e. sell-side companies).

Sell-side of the deal

A ‘sell-side’ company is one which is either actively considering a sale of its assets to another company, or one which is the subject of buy-side interest. The sell-side is the company which will receive some consideration in an M&A deal to make it happen.

The emphasis here is on providing information to buy-side companies (i.e. buyers).

Setting up your data room for buy-side

Buy-side companies use virtual deal rooms to make their M&A process more structured.

The more structured their approach to M&A, the better their chances of

  • i) finding suitable targets,
  • ii) conducting accurate valuations, and
  • iii) conducting a successful due diligence process.

Virtual data rooms thus ensure that each of these processes links up to lead to value-adding transactions.

Steps to setting up your buy-side virtual data room:

1. Create a folder which outlines the goals of the strategy.

This is a fundamentally important first step that many companies overlook when setting up a buy-side due diligence VDR.

Its presence enables (and encourages) everybody involved on the buy-side team to refer back to why a transaction is being sought in the first place, and whether they’re remaining on track with those goals.

2. Create a folder with a short-list and long-list of potential companies.

Here, any information gleaned from initial discussions with potential targets can be added.

This doesn’t need to be large - a single excel sheet may suffice, depending on how many companies have been contacted, and how much contact has been maintained.

3. Create a different room for each target, and within each, a series of subfolders.

For example:

  • Emails,
  • Valuation,
  • Due diligence,
  • Transaction documents,
  • Change management,
  • etc.
data room buy side

4. Create in-depth subfolders structure, meaning in the subfolders above, due diligence should hold several of its own subfolders.

Consider, for example, subfolders such as:

  • Legal due diligence
  • Operational due diligence
  • Financial due diligence
  • HR due diligence etc
data room buy side

You can find a whole list of folders in master due diligence playbook here.

4. When this structure is in place, send it to the team involved in the acquisition process, and ask for their feedback.

It may be that they’ve got some ideas about different folders that can be added or removed. Now you are ready to invite third parties and people from the other side of the deal

data room buy side users management

Outline the importance of making the virtual data room the area in which all deal-related matters are discussed, so that the process is centralized.

Read also: How to Efficiently Conduct Buy-Side Due Diligence

Setting up your data room for sell-side

Sell-side companies use virtual deal rooms so that the companies that need to access their information can access it more efficiently.

Not all potentially interested parties should be given access to the sell-side virtual data room, but for those that do, it should portray a company that knows what it’s doing (and that it’s being transparent about its business with them).

Steps to setting up your sell-side virtual data room:

1. Create a folder that shows where the process is.

As with the buy-side document outlining a long-list and short-list of buyers, this needn’t be any more than an excel document, showing the sell-side team which companies have been contacted, expressed interest, or otherwise.

This should not be shared with potential buyers and is only for internal use.

2. Create a folder which outlines the initial work undertaken to get the sales process underway.

Typically this includes a few files, such as:

  1. A sales memorandum (the buy-side will probably already have seen this).
  2. A teaser document.
  3. A valuation of the firm (ideally conducted by a third party).

3. Begin dividing the firm’s details into separate folders (corresponding to those outlined in the buy-side section above).

These include:

  1. Legal documents (see DealRoom checklist)
  2. Operational documents (see DealRoom checklist)
  3. Financial documents (see DealRoom checklist)
  4. HR documents ( see DealRoom checklist)
sell-side playbooks

4. Provide access to your own sell-side team, asking for feedback. Some of the team may feel that extra information could be added.

5. Provide access to potential buyers that show serious interest.

Each one should sign an NDA before being provided access.

Ensure that only individual corporate emails can access the virtual data room to protect the integrity of its contents.

Read also: How to Efficiently Conduct Sell-Side Due Diligence [Checklist]

Conclusion

Whether your company is on the buy-side or the sell-side, a virtual data room can add significant value to your M&A process.

There is a reason that having these tools is now considered industry best practice. Show the other side of the transaction that you’re a serious counterparty.

Implement a high-quality virtual data room for your company, and experience how it fuels better transactions from origination right through to deal closing.

firmroom data room

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