Several months ago my syndicated column was on the subject of assembling a data room; this present article deals with the subject of operating a data room once it is assembled.
The issues are data room rules; answering questions posed during the data room process; and 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

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 adviser 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.

Answering questions posed during the data room process
There is usually a form provided for questions, or additional document requests. 

For the company organising the data room and its advisers, 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 advisers 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 advisers and it is generally good practice to have all answers also reviewed by both legal counsel and financial advisers.

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 advisers 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.

Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on Mergers & Acquisitions. He is the author of "Unlocking your Company’s Value", available at www.lesnemethy.com