When buyers recall their past acquisitions, they might remember how unpleasant it was the last time they tried to acquire a property from an unprepared seller. The seller’s team might have been long on data, with all of the production, geological, land, and well data a buyer could want. But the deal was short on analysis, with a poorly organized data room that made buy-side due diligence difficult.

Making matters worse, that seller might not have kept up with information requests. Access to those with the answers was limited, so the potential buyer could not get the information it needed to make an informed decision.

There are two types of buyers in this scenario. The first is the buyer who walks away from the deal. Perhaps the prospect did not qualify. But without the seller providing the right information at the right time, it may be more likely that this represented a missed opportunity. The investment was not qualified before the buyer moved on.

The second type is a buyer willing to allow for a process that is costly and time-consuming, expecting to use gaps in the seller’s information to gain an advantage, demand post-closing adjustments, and ultimately acquire the property for an attractive price.

Enter the virtual data room

As a seller, it can be frustrating for a buyer to walk away from a deal when the seller has invested considerable time and effort in its sell-side due diligence. Questions arise such as, “Did the seller have the technology available to position the sale for success?” and, “Is there an easier, more efficient way to present due-diligence materials and coordinate potential buyers?”

Virtual data rooms and collaborative work spaces can solve some of these issues. A virtual data room is a secure website allowing buyers with appropriate security clearance to access due-diligence materials. Virtual data rooms expedite sell-side transactions and help sellers gain control over what information is shared and to whom. Buyers access data quickly; sellers minimize time spent on administration.

There are significant reasons why a virtual data room is preferable to the normal practice of assembling boxes of documents in a conference room or simply sending documents back and forth between parties by email.

Most significant is the fact that email is not a secure way of sending documents between parties in a transaction. Hackers are increasingly brazen in their attacks, intercepting documents in transit and allowing outsiders to view proprietary documents. Given the sensitivity of many deals, this alone is a critical reason to switch to using virtual data rooms.

Also significant is the issue of document drafts. When a document is updated, it must be updated in the physical data room or sent out to all parties through email. With a virtual data room, the document is updated once, and all parties are notified by email to review the updated document.

According to the Institute of Mergers, Acquisitions, and Alliances, virtual data rooms demonstrate concrete advantages over physical data rooms for specific types of transactions, such as larger transactions, auctions with many potential buyers, international and cross-border transactions, or transactions with limited due-diligence periods.

Virtual data rooms work best in these scenarios by allowing parallel access to the data room by multiple buyers and reducing travel-related expenses through location-independent access.

Virtual data room features

Not all virtual data rooms are created equal. These five features will streamline operations:

  • Fast upload. Staffs spend significantly less time preparing and maintaining data. Vendors should offer simple drag-and-drop functionality for multiple files directly into the browser window;
  • Uncomplicated sharing. Superior managed access is the primary differentiator between virtual data rooms and file-sharing tools like file transfer protocol. The service should have a clean interface that makes it easy to see who has access to which files and whether they can download, print, or view files. Digital rights management allows for expiration of downloaded documents. Once a downloaded file expires, it can no longer be opened on the guest user’s computer;
  • Work spaces converted to virtual data rooms. Collaboration within a data room prior to securing guest user access speeds up the process of sell-side due diligence. Data room mode prevents guest users from seeing each other and disables collaborative features including comments, document task lists, and notifications. A one-click option immediately converts the work space to a virtual data room, allowing potential buyers to quickly begin their due diligence;
  • Bank-level security. Services should provide 256-bit encryption and physical security policies. These same procedures are employed by online banking and other sensitive information services. Every communication should be sent over a secure, encrypted connection. Stored data should always be encrypted; and
  • Simple pricing plans. Charging on a per-user basis might work fine for some applications, but for virtual data rooms where sellers have little control over the size of buyer due-diligence teams, it does not make much sense. Likewise, sellers should not be charged extra for features like watermarking, custom branding, and electronic signing – features important to both small and large organizations. Services should not leave out important features for lower priced plans.

Sellers should place a high degree of confidence in virtual data room security based on complex password enforcement, encryption, individual user account tracking, and other measures that provide a hardened solution for their data security needs.