A data room is a secure location used during the due diligence process in an acquisition. Prospective buyers will want to access a wide range of company information during due diligence, and a data room enables this information – much of which is confidential and sensitive – to be made available. Typical documents in a data room include financial records, legal documents, contracts, business plans, intellectual property information, and HR data. Some sensitive data may be redacted, e.g., names and addresses of clients.

The documents are typically tagged in using an hierarchical structure, grouping documents from the various topics together.

Physical Data Rooms

Historically, data rooms were physical spaces, usually at the company’s offices or their accountants/advisors. The contents of the data room is controlled and tracked, as is access to the room. The due diligence team would generally have access to review information, but not take copies or take the information from the room. If there are multiple parties undertaking due diligence at the same time, multiple rooms may be needed to maintain the confidentiality of the parties undertaking due diligence.

Virtual Data Rooms

It is now more common for the data room to be a secure online system. This can be as simple as a shared DropBox or OneDrive folder, through to very elaborate and secure platforms that control access and activity to the data. These more elaborate systems tend to be provided by larger accounting firms and specialist M&A advisory firms.

Shared folders can be secured through file encryption, secure logins, and file permissions. In most cases, however, once the reviewing party has access to the document, it is able to be copied and printed. Updated version of documents can be a nuisance to track.

When undertaking due diligence, the reviewer wants to be able to track the documents they have reviewed, and attest that a particular version of a document is the one reviewed. In a physical data room, this might be achieved by stamping and signing each page. An electronic data room needs to allow for a similar tracking capability. This can be as simple as a tracking spreadsheet, or can be a feature of the data room system.

Online data rooms make it much easier for multiple parties to be reviewing the data simultaneously. Each party has their own instance of the data, with separate tracking. A key benefit in this situation is that additional data or updated versions of documents can be made available to all parties at the same time, so the risk that one or more parties missed out is eliminated.

In some cases, the reviewing parties may have access to replicated copies of the firm’s core transaction data, enabling direct query access.

Online data room systems can offer high levels of reporting granularity, providing the vendor with useful insights into the aspects a reviewing party appears most interested, and who (by username) access which documents.

While high-end data room platforms are very functional and can significantly streamline the due diligence process for the vendor, they can also be very expensive. The accountant or advisory firm making the platform available will oncharge their costs to their client (the vendor). For smaller transactions, the cost of licensing and operating a digital data room can be prohibitive.

Next Generation Data Rooms

The next generation of data room systems will see the addition of AI capabilities and possibly the use of blockchain technology to track the information provided. I have seen a rudimentary AI data room where all of the data room documents are securely loaded into the model, and the reviewer can ‘chat’ with the data set. This type of functionality will add a lot of depth to the reviewer’s job, and likely trigger a very competitive fight between the providers of the data room software systems. Expect to see a lot of additional features as a result.

I have also seen video walkthroughs of remote facilities included. The use of video as a record is likely to grow. Online and social media presence is also of interest to buyers, who like to see social media activity explicitly liked to campaign plans.

Creating and maintaining a data room can be a complex task, requiring specialised software and expertise. They are a critical component in M&A transactions, however, as they facilitate transparency and efficiency for the buyers while ensuring the confidentiality of sensitive information for the vendor.