Virtual Deal Rooms: 9 Considerations in Selecting the Right One

The Virtual Data Room has revolutionized the way constituents to a deal interact. Passé is the stereotypical image conjured, the scenes from Barbarians at the Gate, of buyers, sellers, bankers, and lawyers swimming in papers in sardine can rooms, spilling coffee on documents and each other as they implore the fax machine to work and smash the telephone on the desk. Fortunately this era has ended (although cell phones occasionally meet their demise against office walls), and data rooms no longer have ceilings or floors.

Although their use is commonplace, there exists a wide range of products to choose from, varying across multiple features that must be considered when making a purchase decision. Keep in mind the following nine:

1. Price

   Because data rooms are built through uploading or scanning hundreds or thousands of pages of documents, pricing is usually determined by the number of users and storage requirements. VDRs range in price for as little as $30 per month for lower storage requirements and user licenses to a per-page pricing structure that can cost between $1,000 and $25,000 total. For monthly priced VDRs, keep in mind the length of time you’ll want to maintain the data room; you may decide to keep the room open even after deal closing, as the documents may prove helpful to the transition team.

2. Security

   The ideal data room is compliant with the best, most recent Information Security Management System (ISMS) standards. Data should be encrypted properly so it cannot be tampered with or accessed by external bots or hackers. Inquire about all the security measures of the vendor’s data room, including dedicated servers, SSL technology, password storage, “read-only” formats preventing editing, forwarding or printing, and traceable watermarks on printed documents. More expensive offerings may include electronic “tokens” that provide, in addition to typical password protection, a unique access code that changes every few seconds for each authorized person possessing a token.

3. Control

   Advanced data rooms allow you to control, in real-time, the viewership and print capabilities of each deal participant. This is critical, as a seller can invite numerous people with varying degrees of information requirements into the data room, and then assign viewing privileges accordingly.

4. Analytics

   Find out whether the data room includes powerful analytics that tell you, to the page, what information a buyer reviewed and for how long. These insights can be extremely helpful for the seller and M&A sell-side advisor to know how engaged particular buyers are. The reports can also serve as unbiased legal records in the case of confidentiality or antitrust issues requiring audit.

5. Support

   Some VDRs provide 24/7 live-person support reachable via email, phone, and live chat. Depending on the urgency of the deal and your requirements, this may be a top priority for you.

6. The Cloud

   Your VDR should not require you to install software; those offers are outdated, as ideal ones are in “the cloud.” The technology should not require any downloads, applets, plug-ins or custom viewers. You should also look for a data room that works across multiple browsers (Internet Explorer, Firefox, Safari, Chrome, etc.).

7. Ease

   It’s important to know whether there is a lot of administrative set-up. Ask for a demo of the technology (many vendors have free trials as well) before committing to a particular VDR so you can assess the complexity of the tool. Some data rooms are built specifically for M&A and require less customization, while others are more generic and require more up-front tailoring for your deal.

8. Interactivity

   Prospective buyers may have questions for sellers and their M&A advisors, so inquire about whether the data room you’re considering has Question and Answer functionality. It’s more convenient to notate specific areas of interest or confusion than to type up a separate email referencing the points of concern. Doing so over the phone can also be frustrating and time-consuming.

9. Testimonials

   Many VDR providers supply testimonials from current and past customers as well as the logos of businesses that use their service. This can be helpful in assessing track records of particular vendors.

Chris Hofstad and Steve Fenlon of law firm Faegre & Benson write that, “One benefit of VDRs is the dramatically lower cost compared to traditional, physical data rooms: M&A practitioners no longer need to travel long distances to be in the company of the documents they need to access.”

The two lawyers say for sellers VDRs “keep the pressure on buyers to move quickly and reduce the risk of merger discussions leaking to competitors or the media.” And for buyers they “provide access to a huge range of information quickly and efficiently” online in a searchable and secure format.

By now VDRs are a commodity. Having one is like owning a website: innovative in 2001, standard in 2011.