Sell a Business: Security and Confidentiality
To sell a business – or a division of a business – requires sharing and disclosing, securely and confidentially, a great deal of proprietary information. There is generally a significant amount of important and confidential data that must be exchanged between the buyer and the seller and their respective advisors. Email is a sufficient method of document transfer for the average person or general, non-confidential business documents, but to protect confidential information and maintain a business’ competitive advantage, email is not likely to offer much security.
In the past, mergers and acquisitions transactions often used a designated physical “data room”, generally in a legal or accounting environment. This room housed all the information that needed to be reviewed by the acquiring parties and their advisors and lenders during the due diligence process. Access was strictly controlled and supervised. The ability for any of that information to leave the room – in any form other than mental notes – was extremely limited.
But physical data rooms are very inefficient. If, for instance, a Florida company was being marketed as a potential acquisition, potential buyers would have to travel, possibly great distances, to review the documentation and proprietary information. Between airfare, lodging and meals, transaction expenses would increase, possibly significantly. And the team sent to evaluate the target business would be away from the office. In addition, if the business brokers or M&A advisor has multiple potential buyers, only one could access the data at a time. In some transactions, this alone could eat up a week or more. As well, scheduling access to the data would have to be done so that no two buyers became aware that the other was a potential bidder. All of this would significantly draw out the time needed to complete the transaction to no one’s benefit.
The solution to this dilemma is the virtual data room.
Virtual Data Rooms
A virtual data room is a web-based platform with numerous security features to protect against unauthorized access where documents are stored. A business or a business’ advisor uploads the appropriate documents and access to such documents is tightly controlled. Virtual data rooms are similar to the cloud storage programs offered by Apple, Google, Amazon Web Services and others though virtual data rooms are more intricate and complex.
A virtual data room – sometimes called a VDR or deal room – is an online repository of information that is used for the storing and controlled distribution of documents. In many cases, a virtual data room is used to facilitate the due diligence process during an M&A transaction, loan syndication, or private equity and venture capital transactions. For reasons of cost, efficiency and security, virtual data rooms have widely replaced the more traditional physical data room.
A virtual data room is essentially an extranet , a controlled private network that a company can use to store confidential and proprietary information that must be accessible but only to certain partners, vendors and suppliers or an authorized set of customers. In the case of an acquisition, the company hoping to be acquired or its representative would set up a virtual data room and upload the necessary and relative information to the VDR to which the bidders and their advisers are given access via the internet.
An extranet is essentially a website with limited controlled access, using a secure log-on supplied by the host, which can be disabled at any time if a bidder withdraws. Much of the information available in the VDR is confidential and restrictions are applied to the viewer’s ability to release any of this info to third parties (by means of forwarding, copying or printing). Protecting this confidential data can be accomplshed using digital rights management.
In the process of a merger or acquisition the virtual data room is set up as part of the central repository of data relating to the businesses being acquired or sold. The virtual data room enables the interested parties to view information relating to the business in a controlled environment where confidentiality can be preserved. A virtual data room is designed to have the same advantages as a conventional data room (controlling access, viewing, copying and printing, etc.) with fewer disadvantages. Due to their increased efficiency, many business brokers and M&A advisors have begun to recommend that their clients – on both the sell and buy sides of a transaction – use virtual data rooms instead of physical ones.
While they are similar in a basic sense, VDRs offer much more security and encryption for sensitive documents as well as many unique features that may vary depending on the provider you choose. With the continuing sophistication of online hacks, a virtual data room could be the most important decision you make with regard to the confidential information that must be made available when a business is being marketed.
Sell a Business but Secure Your Data
Document security is vital when it comes to buying or selling a business. If you’re in the market to sell, you want to ensure that all the important information about your financials, your history, your competitive advantage and proprietary data is available to the buyers during the due diligence process. For this step to run smoothly, features such as customizable document permissions and watermarks are useful for maintaining the safety of private information. You may also want the ability to decide which users can access and view the data and for how long.
There are generic versions of virtual data rooms that offer the basics but it might be worthwhile to take some time to research some of the more professional, higher end offerings to see what options are out there so you can decide which are most important to you. If you are using a business broker or advisor – and you SHOULD be – your advisor may already be familiar with one or more VDR hosts. Whether or not that’s the case, let the advisor know which of the VDRs seem most suitable to your needs.
If you’re an advisor, your goal during the M&A process would be to close a deal as quickly as possible and with the fewest number of hitches along the way. This is where a good VDR would come into play, especially when trying to maintain the momentum of a deal. To keep the deal progressing smoothly, the introduction of a virtual data room provider may be a key factor in getting the deal to “done”.
We have a list of more than 40 virtual data room hosts with reviews, links to websites and prices, whether free trials are available (usually, they are) and different plan levels. If you’d like to explore that list, let me know where to send it and it’ll be on its way.
If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!