Around 40,000 mergers and acquisitions take place around the world each year. During them, new potential investors should be able to review the company’s financial documents that are the subject of the business agreement. However, the company’s name or other identifying information should be kept confidential to avoid speculation.
Typically, investment banks facilitate this type of transaction by assisting companies in setting up transactions, arranging documents correctly, and inviting potential investors who may be interested.
This is what virtual data room solutions are used for. They are used only to exchange and collaborate on financial documents. The transaction is made, signed, and completed outside the virtual data room.
What is a Virtual Data Room?
To answer what a virtual data room is, we must first understand what a traditional data room is.
Before the Internet, files were stored in data rooms that needed additional expenses such as room rental, large amounts of paper, staffing, etc. There were also costs for professionals who wanted to use such rooms to review financial documents.
A traditional data room is a physical and secure place where files and documentation are stored. It is often located in a salesman’s or lawyer’s office. All teams agree on this location for safe checking and viewing of documents.
The popularity came of data room services with the spread of the Internet when businesses realized that VDRs have many advantages over physical data rooms. These include security of data management, cost-effectiveness, and round-the-clock availability of data from any device and anywhere in the world.
A virtual data room is a cloud-based solution specifically designed to securely store and share sensitive business information. VDRs are a potential of interest to any company engaged in the secure management of its records.
A data room is used when there is a need for strict confidentiality of information, with the ability to share it with many users. It is used by board members of large enterprises to collaborate in a secure environment.
Who Uses Virtual Data Rooms and Why?
Any company that wants to securely store and share important documents and files can use virtual data rooms.
Individuals and companies involved in tenders, mergers, acquisitions, and venture capital raising use electronic data rooms to put all their data and files in one secure place.
Data rooms offer special features such as advanced permissions, Q&A tools, notes, and bookmarks, as well as two-factor authentication and watermarking.
VDRs are commonly used in transactions and various financial transactions. The users of this software are usually the people making the transactions. They are typically corporations and investors.
Among the industries most used by dataroom software:
- The technology sector is an industry characterized by rapid innovation and growth. New companies are constantly being created, merged, and acquisitions.
- Life science. The life sciences industry, which typically consists of biotechnology, medical devices, and pharmaceutical companies, has a lot of intellectual property that needs to be protected.
- Law firms. Law firms need to share confidential information securely with clients, employees, and other stakeholders.
How does a Virtual Data Room Differ from Dropbox and other File-Sharing Solutions?
File sharing solutions such as Box and Dropbox are a great, cost-effective way to share information. While file-sharing providers tend to focus on the convenience of file sharing and file protection during the initial data transfer, VDRs offer long-term protection against data modification, processing, and loss and have many built-in features.
Conventional file-sharing and cloud-based services are not explicitly designed for transacting, which means they do not offer essential features such as Q&A and ad hoc reporting.
An important differentiator is InfoSec and general digital security, encryption, and protection with an entire audit trail. The features vary depending on which virtual data room provider you choose and which plan you pay for. Here are some features you may find helpful:
- Data encryption;
- Audit trail and activity tracking;
- Digital rights management;
- Access control;
- Internet document browser (in the browser);
- Bulk download, drag and drop;
- How much storage space you need;
- Usage functions appropriate to your use case;
- External threat protection.
How to Choose a Data Room Provider?
The choice of data room provider depends on the type of transaction and business process. Consider ease of use, security features, and collaboration features when choosing a service provider.
When it comes to data room software, look for user-friendly features such as a clean user interface, drag-and-drop tools, mass uploading, automatic logging, and web access. Also, look for ease of implementation of all measures and team collaboration.
Key security features to choosing data room service include data encryption, audit trails, dynamic watermarks, two-factor authentication, secure boot, SAS certificates, access levels, real-time backups, and configured user permissions.
Find a pricing structure that makes sense for your company. Consider whether there are additional charges for specific vendor offerings, such as more storage space, projects, security, watermarking features, or users.
Look beyond the monthly bill for the product and find out what the total cost of the room is. Also, find out the running costs if you want to keep the data room after the first contract expires.
The best approach to optimize selecting the appropriate software for the virtual data room is to compare the available vendors and see what they offer.
How Can a Virtual Room be Used for Due Diligence?
Mergers and acquisitions (M&A) and their management is the most common application of VDRs. Data rooms provide a place for the due diligence required when closing a transaction.
From a business perspective, due diligence is the research and analysis of a company or organization conducted in preparation for a business transaction, for example, a potential buyer evaluates the target company and its assets.
As part of due diligence, stakeholders carefully review documents before an M&A takes place. Therefore, potential stakeholders must have quick and easy access to records and a transparent review of company data at this stage.
If possible, start a free trial of the service.
Many virtual data rooms have curator templates for their clients. Check what is available and decide whether it is suitable for your data room and needs proper vetting.
Go to this website to look at the market leaders in virtual data rooms and read their reviews.