Several months ago I wrote about the subject of assembling a data room; this present article deals with the subject of operating a data room once it is assembled and will discuss: (a) data room rules; (b) answering questions posed during the data room process; and (c) the importance of the data room in subsequent negotiations.

While traditionally data rooms involved physical documents, a modern trend is to have all or part of the data room in virtual (electronic) format. Virtual data rooms will be the subject of a future article.

    (a)    Data Room Rules

Every well-run data room should have a written set of rules governing its operation, addressing issues such as:

Who may attend the data room, the registration procedure, and the hours of opening
The time period available for each investor in the data room (this is usually a finite period of several days, which are specified)

• Which documents may be copied or not copied or accessed through the virtual (electronic) data room
• Which member of the company and/or its financial advisor will be present in the data room at all times when an investor or its advisors are in the data room
• The terms of the prohibition of scanning equipment, cameras, etc.
• Rules are usually established for destroying any data gathered in the data room at a subsequent date, if the bidder does not invest in the company
• The rules for asking questions or requesting additional documents or information.  (Typically, where there are multiple bidders participating in the data room, the rules will specify that where one party asks any question, both the question and its answer will be circulated to all bidders)
• Breach of data room rules may terminate a bidder’s participation in a transaction.

The registration procedure should generally involve each person entering the data room signing a copy of the data room rules.


    (b)    Answering Questions Posed During the Data Room Process

There is usually a form provided for questions, or additional document requests.  For the company organizing the data room and its advisors, providing answers to the questions can be one of the toughest aspects of the data room process, as there may be dozens or hundreds of questions, which must all be answered comprehensively in the course of a matter of days. The company and its advisors should be very familiar with the company’s affairs so that they are prepared to answer questions promptly and fully.

Answers to questions should be vetted and approved by the management, company owners, and relevant advisors, and it is generally good practice to have all answers also reviewed by both legal counsel and financial advisors


    (c)    The Importance of the Data Room in Subsequent Negotiations

Where investors do not receive the breadth, depth or quality of information expected from the data room, they have a number of responses:

• They may withdraw altogether from the bidding process
• They may reduce the value they are prepared to pay for the company
• They may augment the representations and warranties that they expect from the sellers or from the company

In fact, there may also be a combination of the second and third responses. None of the options are particularly good, which is why it generally pays to provide full disclosure during the data room process.

In booming markets, or for an extremely attractive company, investors during a competitive process are often willing to be less rigorous in their data room requirements; my experience is that in times of recession, or where the company is less attractive, investors are usually more demanding, and require fuller data room disclosure.


In conclusion, operating an excellent data room is a prerequisite for a successful transaction. It is usually the most intensive part of the transaction, as it requires the full-time presence of the company and its advisors in the data room, not to mention the extensive effort involved in answering questions. Often there are concurrent processes going on, such as site visits by investors and management presentations to investors.

Many company owners simply do not realize the importance of the data room. One of my transactions once stalled for four months as my client refused to put together a data room, saying that if the investor requests information, he would be prepared to provide the information on an ad hoc basis.  

It is much better to anticipate the information that will be needed and provide it to the investors in a data room. Not only will that enhance the credibility of the process, and the investors’ assessment of management – it will often help reduce the enormous amount of work that the question and answer process involves.

One of the crucial phases of selling a business occurs when the seller, usually supported by advisors, establishes a data room to permit one or more investors to perform detailed due diligence. Depending on the size and complexity of the company being sold, a data room may contain thousands or even hundreds of thousands of documents, including all relevant client, supplier, employee, financing, and other contracts, as well as title documents, board minutes, and many other documents. Indeed, any document that could have an impact on the value of the company should be in the data room.

As the establishment of a data room requires an enormous amount of work on the part of sellers and advisors, and often involves the disclosure of highly confidential information, most sellers insist that, as a pre-requisite to providing access to a data room, investors should have placed a non-binding offer, perhaps even signed a term sheet, acceptable to the sellers. The data room then provides the detailed evidence that then permits the investor(s) to provide a binding offer within days or weeks of the closure of the data room.

A data room may be in physical form (e.g. literally a room full of data) or the seller and its advisors may opt for a virtual data room, which means that investors may access documents via the internet. Sometimes the parties opt for a combination of virtual and physical data rooms, with the most confidential documents only appearing in the physical data room.

In a physical data room, a representative of the seller is usually present at all times to ensure that only authorized personnel from the investors are in attendance, that no one is making unauthorized copies or scans of information, and to coordinate legitimate information requests. A data room is often governed by rules set by the sellers, which investors must sign or acknowledge in order to gain access.

Because of the cost of running a data room and the need to observe time lines, each investor is usually given limited access to a data room, usually measured in days. For the seller of a business, the preparation and running of a data room is typically the most intensive phase of selling a business, given that in most sale processes management presentations and site visits are also usually concurrent with the opening of the data room. The complexity of managing this process is further augmented where there are multiple investors to be coordinated.

During the data room process, the seller and its advisors must typically be prepared to answer questions and provide supplementary information to investors. Answers are typically expected within one or two days, failing which investors may ask for an extension of the period during which the data room is open.

At the time of negotiating the sale and purchase agreement, investors will usually ask for a representation and warranty that the data room was complete, and that all of the documents in the data room represent a true and complete reflection of the state of affairs of the company. It is therefore vital that the seller and its advisors ensure the completeness and accuracy of documents in the data room. We are aware of one situation, for example, where a seller (whether deliberately or inadvertently) withheld a document from a data room, resulting in millions of euros of potential liability.

As we can see then, the quality of a data room, and how the process is managed, can make or break a sale process, as well as dramatically affect valuation, as investors often use shortcomings in the data room to drive down price. It is important that no one person become a bottleneck in the process, but that the seller establish a multidisciplinary team covering each major area (sales and marketing, legal, production, finance, taxation, etc.)

In a nutshell, there are just three words of advice when it comes to data rooms: preparation, preparation, and preparation.