Virtual Data Room (VDR): Definition, Uses, and Alternatives

What Is a Virtual Data Room?

A virtual data room (VDR), also known as a deal room, is a secure online repository for document storage and distribution. It is typically utilized during the due diligence process preceding a merger or acquisition to review, share, and disclose company documentation.

Key Takeaways

  • Virtual Data Rooms, or VDRs, exist as a secure way to store documents that multiple people need access to simultaneously.
  • VDRs are commonly used by businesses when they are merging, working on a project, or other joint venture that requires access to shared data.
  • VDRs are considered more secure than physical documents as there is no risk of loss during transit or being destroyed accidentally.
  • Generally, actions like copying, printing, and forwarding are disabled in VDRs.

Understanding Virtual Data Rooms

Virtual data rooms have increasingly replaced physical data rooms traditionally used to disclose and share documents. With the globalization of business and increased scrutiny to reduce costs, virtual data rooms are an attractive alternative to physical data rooms. Virtual data rooms are widely accessible, immediately available, and more secure.

As security concerns grow and incidents with breaches increase, VDR providers are developing more sophisticated and reliable databases. Initial public offerings (IPOs), auditing operations, and partnerships or other businesses that must work jointly and share information will use virtual data rooms.

Uses of Virtual Data Rooms

Mergers and acquisitions (M&A) procedures are the most common use of VDRs. These repositories provide a place for the due diligence needed during the finalization of the deal. These business transactions involve large amounts of documents, many of which are confidential and contain sensitive information. Using a VDR is a safe and reliable way for all interested parties to review and exchange documents as they engage in negotiations.

Businesses often work with one another to produce and manufacture products during the construction of a building and to offer services. Forming and maintaining these business relationships requires contracts and the frequent transmission of data. Virtual data rooms provide for the storage of these contracts and make readily available documents needed for the continuance of business partnerships. As an example, changes made to the blueprints of a structure by an engineer are immediately available to all contractors involved in the project.

Auditing company practices, compliance, and accounts is a common practice in all businesses. This process is frequently a problem as workers must interact with external regulators and adjusters. Also, today many companies have offices in remote locations and around the globe in various time zones.

The use of a virtual data room allows attorneys, accountants, internal and external regulators, and other interested parties to have a centralized point of access. Providing a central system reduces errors and time. Also, it provides for communication transparency. Depending on the type of audit, the level of access, and authority varies.

Offering an initial public offering (IPO) is a daunting task requiring an inconceivable amount of paperwork. Like audits, transparency is essential. Companies must create, exchange, retain, and manage large volumes of documents. Because of the nature of the transaction, most users will have restricted access, such as "view only." The ability to copy, forward, or print may be prohibited.

Alternative to a VDR

Although virtual data rooms offer many benefits, they are not suitable for every industry. For example, some governments may elect to continue using physical data rooms for highly confidential exchanges of information. The damage from potential cyber-attacks and data breaches exceeds the benefits offered by virtual data rooms. The results of such events could be cataclysmic if threatening parties accessed classified information. In those instances, the use of a VDR will not be a consideration.