Data room

What it means

A data room is a secure repository, nowadays almost always online, in which the seller gives the buyer and its advisers access to company documents during due diligence. It holds contracts, financial statements, tax returns, employment documents, licences, litigation files and other materials.

Access is controlled: each user has their own login and permissions, such as view-only without downloads. The system logs who opened or downloaded each document and when, which later helps in disputes over what the buyer knew before signing.

Data rooms are used mainly in acquisitions, investor entries, refinancing and property sales. Before access is granted, the buyer usually signs a non-disclosure agreement, and the parties often set out key terms in a letter of intent.

How it works in practice

Preparing a data room takes weeks. The seller should sort documents into a logical structure, such as corporate, financial, tax, contracts, employees, IT and litigation, and keep a numbered index that the contract can refer to.

The buyer asks questions through the Q&A module built into the data room. The answers become part of what the buyer knew, and the share purchase agreement often refers to the data room contents in the seller's representations and warranties.

In a share deal the whole company is reviewed, including historical liabilities, while in an asset deal the focus is on the assets and contracts being transferred. This also determines which documents are worth uploading.

What to watch out for

Documents containing personal data, such as employment contracts or salaries, should be anonymised before upload or shown only to a small group of advisers. The GDPR applies during due diligence too, and competition law limits sharing sensitive business information with a competitor.

Anything the seller leaves out of the data room is hard to argue later as known to the buyer. Conversely, flooding the room with thousands of irrelevant files may look like an attempt to hide a problem, so clarity and completeness of the key documents matter.