Due diligence runs long not because the buyer reads slowly but because the documents are incomplete. A data room built before the process starts, with an index, consistent naming and a note on what is missing and why, cuts weeks off the review and takes away the buyer’s most convenient argument for reducing the price.
What a data room is for
A data room is an organised set of company documents made available to a buyer for the duration of due diligence. In practice it is always virtual now: a repository with access control, per-user permissions and a log of who opened what.
That log matters to you as well. It shows what the buyer is actually interested in, and that is often the first signal of where a question about price is about to appear.
A virtual data room versus a shared drive
A virtual data room, VDR for short, is a platform built for sharing documents in a transaction. From the outside it looks like a folder tree in a browser, and that is where the resemblance to a shared drive ends.
The difference sits in four things an ordinary drive does not give you:
- Permissions at the level of a single document. The buyer’s tax adviser sees the tax folder, not the customer agreements. You can also grant view only, with no download and no printing.
- Watermarking applied on the fly. The name and address of whoever opened the page, printed on every page. It is the cheapest known protection against your contracts circulating outside the process.
- A log you can export. Who, when, which document and for how long. At the end of the process you are left with a file rather than a recollection.
- A numbered Q&A module. Questions carry a number, an owner on your side and a deadline. Without it the correspondence scatters across three people’s inboxes.
There is a fifth thing few owners think about before a transaction and which matters a great deal after it: the record of what was disclosed. The sale agreement will usually contain a clause stating that information disclosed in the data room excludes a claim under the representations and warranties. At that point a complete data room stops being a matter of convenience and becomes a limit on your liability after completion. The exported log is the evidence of exactly what the buyer received, and when.
When an ordinary drive will do. On a small transaction, with one buyer and no sensitive commercial data, a folder behind a link can be enough. What you pay for it is the absence of a record: you do not know what was opened, and you have nothing to point to if somebody later says they never saw it.
What to look at when choosing one. The pricing model, because they vary: a flat fee per project, a charge per page, per gigabyte or per user, and the last of those can surprise you when the buyer’s team is large. Where the servers sit and how the platform handles GDPR. Set-up time, counted in hours rather than days. And finally how easy it is for the buyer: if getting in requires installing a plugin, some advisers will simply ask for the files by email and the whole point of the control disappears.
On a mid-sized transaction the cost of a VDR is a fraction of what you will pay your advisers, and a great deal less than a single price adjustment negotiated because the review dragged on.
Why the review drags on
Almost never because of one missing document. It drags because of the rhythm: the buyer asks a question, waits five days for an answer, receives a scan instead of the agreement, asks a follow-up, waits another five days. Thirty of those loops is six weeks that were not in the timetable.
The second source of delay is documents nobody has looked at in years: lease addenda, shareholder resolutions, agreements with family members, data processing consents. Hunting for them under time pressure costs far more than collecting them in advance.
How to structure it
Numbered folders, one level of nesting wherever possible, file names to a single pattern: folder number, subject, date, version. The standard breakdown every buyer’s adviser expects:
- 01 Corporate. Articles, register extracts, resolutions, ownership structure, shareholder agreements.
- 02 Financial. Three full years of accounts, current periods, accounting policy, budget against actuals.
- 03 Tax. Returns, rulings, correspondence with the authorities, related party settlements.
- 04 Commercial. Agreements with the largest customers and suppliers, price lists, termination terms.
- 05 Employment. Headcount structure, key contracts, internal policies, bonus commitments.
- 06 Assets and property. Title documents, leases, finance leases, fixed assets.
- 07 IP and systems. Trade marks, licences, IT supplier agreements, rights to code.
- 08 Legal and disputes. Proceedings, claims, insurance, regulatory compliance.
Four things that genuinely shorten the review
An index from day one. A single sheet: number, document name, status, date uploaded. The buyer sees what is there instead of asking.
A note on gaps. A short list of documents that do not exist, with one sentence of explanation each. A gap declared up front is information. A gap discovered by the buyer is a red flag.
One person owning Q&A. All questions through one channel, numbered, with a response deadline. Scattered conversations with three people in the company produce three different versions of the same answer.
Your own review first. Vendor due diligence, or at least an internal pass over the same areas the buyer will examine. Those areas are set out in the red flags checklist.
What not to do
Do not upload everything you have and hope the buyer finds their way. Too many documents lengthen the review just as effectively as too few, and they expose things nobody asked about.
Do not release sensitive commercial data, named customer lists with prices, in the first round. That belongs to a later stage, after a narrower NDA, and sometimes only to on-site inspection.
Do not amend documents after the fact. Any version dated differently from the original will be found, and it will cost more than the problem it was meant to cover.
When to start
Ideally alongside work on the information memorandum, which means before the first buyer appears. Assembling a complete set takes three to six weeks for a company with a simple structure, and longer where a group of companies or real estate is involved.
That time has to be spent either way. The difference is whether you spend it calmly before the process, or during exclusivity, when every week of delay works as an argument for the buyer.
See also
- Data room, due diligence and vendor due diligence in the glossary
- Red flags: twelve areas every buyer examines
- Teaser and information memorandum, the documents that come earlier
- Frequently asked questions about selling a company
About the author
Łukasz Brzyski runs Brzyski & Partners Management Consulting. He advises on the sale and purchase of companies valued between PLN 10 and 50 million, and sold two companies he co-founded before he started advising others. More about the author