A data room or virtual data room (VDR) is an established tool in larger M&A transactions and financing arrangements, but the use of a data room can also provide numerous benefits for smaller-scale transactions. This guest blog explains the opportunities and added value that using data rooms can provide to small and medium-sized enterprises.
In M&As and financing rounds, the main purpose of a data room is to collate all of the due diligence material in one place, which both the seller and the buyer have access. Large M&A transactions typically involve several thousand documents, and even in small transactions, the material can contain several hundred documents, so the need for systematic and organized document management is clear.
Important documents pertaining to the target company, such as contracts, personnel information, financial statements, and other financial information, as well as information about the company’s operations, are collected in the data room. This provides the buyer with an opportunity to familiarize itself with the target company in a systematic manner. A virtual data room facilitates and speeds up the M&A process as it removes the need for the examination and storage of physical documentation.
The seller can use a data room to disclose information about their company in a secure and confidential manner. In smaller companies, M&A material is often delivered by email, which can sometimes remain in email folders and pose an information security risk. In addition, the use of email always involves the risk of sending the message to the wrong recipient.
In a virtual data room, there is a possibility to restrict the buyer’s representatives’ access to documents depending on which phase of the M&A process you are in with the potential buyer.
In a typical SME transaction, the amount of information provided to the buyer increases as the sale process progresses, and along the way, some potential buyers are eliminated. This means that it is essential to be able to manage the information that has been shared.
A data room also provides the seller and their advisors with the opportunity to monitor who has visited the data room, what material the buyer’s representative has examined, and how many times they have accessed it.
This information helps to provide the seller with a better overview of how much material has been examined. The log data is especially useful for the seller in circumstances where several potential buyers are accessing the material, as the data can often provide an idea of whether your negotiating partner is seriously invested in examining the due diligence material.
Using a data room makes it easier to document and confirm the material that has been examined during the M&A process. After M&As and financing rounds in SMEs, in particular, parties may encounter disputes as to whether the buyer was aware of certain matters relating to the target company.
These problems are highlighted in smaller M&As as due diligence reports are often limited or omitted entirely. A data room makes it significantly easier to document and record the matters that the target company buyer or financier would have been aware of based on the due diligence material.
A modern, virtual data room offers small and medium-sized enterprises a cost-effective solution to conduct their due diligence management.
A virtual data room also helps the buyer to carry out their due diligence as the material can be reviewed on their own computer, and it is possible to find information in the documents using the search function. Adding documents and other material to the data room is simple and makes it faster to manage the material.
The benefits of a data room are evident even in smaller M&As. Based on experience, the costs of a data room repay themselves in the form of a swift sale process and by significantly lowering the possibility of disputes.
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Mikko K. Leino
M.Sc. (Econ), LLM
Mikko K. Leino is an SME advisor in mergers and acquisitions at Tulosjärjestelyt Partners Oy. During his career, he has been involved in over 70 SME transactions.
The company offers a comprehensive service for SMEs, including the use of a virtual data room and due diligence consulting. Tulosjärjestelyt Partners Oy collaborates with ContractZen on the digital solution.