Investing in the purchase of a business is a risky undertaking. Therefore, it is extremely important to have a group of advisers by your side who will support a potential Investor at every stage of the planned transaction. They will help to maximize the chances of efficient and accurate capital allocation and assess the opportunities and threats related to the decision being considered.
Transactional processes have evolved tremendously over the years. They are currently held with the help of a multitude of professional advisers, and the individual stages can be carried out in a digitized and dematerialized form. Medium-to-large processes rarely take place without the involvement of a professional Virtual Data Room. VDR is much more than a documentation repository for individual parties to a transaction or for advisors carrying out buy side or sell side due diligence.
VDR is a tool that, in a specific way, manages the transaction process. It is there where the parties to the transaction communicate with each other. We only realize how important the VDR’s role is when it is missing in the processes we participate in. Therefore, every advisor to the seller without exception, knowing this general truth, urges the selling party to invest in a professional VDR.
What will you find in this article?
Transaction stages using Virtual Data Room
It is important to remember that VDR is present at every stage of the transaction process, although of course it plays different roles in particular stages, the weight of which is not the same. At the initial stage, it is a place of communication between the Seller and the Buyer, thanks to which important transaction documents are exchanged between the parties, i.e. a non-binding offer, a letter of intent, an information memorandum or a preliminary version of SPA documentation.
At the stage when a potential Investor is initially invited to the process and gets the green light to conduct the preliminary due diligence or exclusive due diligence, VDR performs the function of information exchange between the auditors and the Target (subject of the transaction). At this stage, VDR plays a very important role because all communication takes place through it.
What does “all communication” mean? At the very beginning, VDR often lists the documents, data and information needed to start due diligence. Then, all materials needed for due diligence are transferred via the VDR. Questions that arise as part of the analysis on the basis of the materials provided also follow this path, as well as the answers to the questions asked. A professional VDR therefore manages all communication as part of due diligence. Additionally, a professional VDR has a number of functionalities that are important for the entire process as well as for each of its stages separately.
Personalization of the Virtual Data Room system
Professional VDR allows users to customize its appearance and interface to their individual needs. Appropriate adjustment of the VDR structure to the project requirements helps to effectively manage the entire work. Also, appropriate organization of the VDR architecture allows the investor, the seller and their advisors to regularly monitor the progress of work and control the flow of documents as part of the process.
Most professional VDRs have the ability to monitor the inflow of information and documents chronologically, which significantly speeds up the work of subsequent transaction stages. Additionally, it should be remembered that the VDR as a repository of documents made available and disclosed as part of due diligence is archived and its content constitutes an attachment to the investment agreement (SPA).
Full confidentiality of documents
When deciding to use a professional VDR, we can be sure that virtual documents made available to the investor and transaction advisers as part of the process are stored on servers with a number of professional security measures. Data and related communication encryption, two-step logging, independent infrastructure, hosting centers and security management procedures certified by ISO 27 001 and ISO 9 001 standards mean that the level of security of information stored in VDR is practically identical to that offered by commercial banks.
Access to the Information deposited in the VDR is limited only and exclusively to persons who receive appropriate authorizations granted by the system administrator. The fact that the data supervisor is an external and independent supplier increases the comfort of work of the investor and advisory teams. Only users as agreed by the parties involved in the transaction work, can log into the VDR.
Confidentiality applies not only to data stored on the server, but also to all communication that takes place between the investor, the transaction advisors, and the acquired entity. The user-friendly and safe-to-use communication channel built into the VDR ensures that the information transferred as part of the transaction will not fall into the wrong hands.
Wide availability of the system while maintaining security
Remote access to the tool via an internet connection enables authorized users to log into the VDR from any place and time convenient for each of them. This has become even more important in times of the next waves of the COVID-19 pandemic, when an increasing number of business entities decide to work hybrid or completely remotely. However, the benefits of this go even further, as they enable the involvement of international teams, located in different countries and time zones, in the due diligence work.
The independence of the data administrator significantly increases the credibility of the information that is made available through the VDR. The point here is to eliminate the risk of manipulating data related to the entity put up for sale to zero. This argument is particularly important for a potential investor and for advisers supporting him in the assessment of investment risk. All activities on the server of each VDR user are registered and properly logged in the register. Each modification of any document is recorded and possible to track down later. Change logs on the server can be made available at any time at the request of any of the parties involved in the due diligence work.
Another factor increases the reliability of the data stored on the VDR. After the project has been completed, the administrator is able to quickly and safely freeze all accesses and permissions. Information from the server can be archived, secured within a few minutes and, if the parties so wish, made available to them on an external storage medium. The economic and legal practice shows that copies of VDR data saved on external storage media are often an attachment to the sale-purchase agreement of the analyzed enterprise.
VDR and personal data protection
The last, very important benefit of using a professional VDR in a transaction is the compliance of information management procedures with legal security requirements for the protection of personal data, which are almost always subject to due diligence.
A professional VDR provider will ensure preparation of a complete and transparent contract for the processing of personal data for all parties. This agreement will clearly and transparently identify persons and entities gaining access to the data, and identify and list the rights and obligations of individual parties. It will also inform about what specific activities the data stored on the server will be subjected to and for what purpose. Furthermore, it will also list all entities whose services the administrator may support. The provider of the VDR tool is also obliged to keep a register of personal data processing activities and regularly verify that the activities performed on the data made available through the VDR do not exceed the scope defined in the register.
Another important aspect is the monitoring of the risk of data security breach. A professional provider of the VDR service performs it on a continuous basis, and the data security management procedures used (e.g. ISO 27 001) ensure its compliance with the requirements of the GDPR. The last argument that should be raised in the context of personal data protection are the clearly defined and strictly applied data retention periods on the provider’s servers, about which the administrator is obliged to inform each of the parties. After the expiry of such a period, the VDR provider permanently and securely deletes all data that has been made available to it.
Participation in the transaction work of the VDR provider increases the comfort of work of all parties involved. Transaction advisors gain a tool that supports them in managing their work. The seller can be sure that the assessment of the position and potential of the assets they sell is reliable and credible. The investor, in turn, will have no doubts that the assessment has been prepared on the basis of data free from distortion or manipulation.
Katarzyna Buda has over a dozen years of experience in the field of finance and accounting. She participated in audits and reviews of financial statements as well as internal audits. Currently, Katarzyna participates in projects in the field of business, financial and transaction consulting.