A Data room may be a physical room or a virtual room and are used for a number of reasons – including data storage, document exchanges, financial transactions, file sharing, and legal transactions. Often, data rooms are used for the sale of a business or when raising capital for a business, and provide a secure location to house highly sensitive documents regarding the business’s past, present, and future operations.
Physical Data Room
A physical data room is a secure location where hard copies of corporate documents are stored for confidential review. Generally, prospective buyers will schedule time in the data room to review and analyze these documents in an effort to decide if the purchase of the business or related assets is desirable.
A down side of a physical data room exists in the case of multiple prospective buyers, lenders or investors. Each will need to separately schedule review time in the secure data room, often traveling to do so. All prospective parties will spend hours, even days, sorting through thousands of documents.
Because physical data rooms require prospective buyers to be on-site at the secure data room location, the pool of possible buyers is often much smaller than would otherwise be the case if the data room were virtual. Additionally, the effort it takes to schedule time in a data room, travel to it, and review the documents it contains, can result in a longer time frame for completing a purchase, and could possibly result in a lost deal.
Virtual Data Room
Virtual data rooms have become increasingly popular as a result of the inconvenience associated with a physical data room. Documents are stored in an electronic format, on a secure central server, and are easily accessed online by authorized parties.
Virtual data rooms eliminate the need for prospective parties to travel to a secure location for data review, saving valuable time, money, and resources. Using virtual data rooms, sellers are able to market their company to a global audience, gaining the attention of a much wider group of bidders. Likewise, prospective parties are able to review possible acquisitions at their convenience in a much more efficient manner, improving the chances of a smooth and timely transaction.
Along with allowing prospective buyers to review due diligence documents, these secure online data rooms offer a place for deals and transactions to be managed online, including fundraising, corporate finance, joint ventures, licensing agreements, sharing litigation files, M&A transactions, and much more. Partners, clients, buyers, attorneys, accountants, and other authorized parties can review documents relevant to the transaction on a secure website.
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
Latest posts by Holly Magister, CPA, CFP
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