Definition
A data room is a secure online space where a seller shares documents with a buyer and their advisers during due diligence. It typically holds accounts, tax returns, bank statements, customer and supplier contracts, leases, employee records and intellectual property documents. Access is controlled and usually logged, and is often granted only after an NDA and a letter of intent are signed. On smaller deals it may simply be a shared drive.
Due diligence is the investigation a buyer carries out before committing to a purchase, testing the finances, contracts, legal position and operations against what the seller has described.
Non-disclosure agreement (NDA)
A non-disclosure agreement is a contract in which a potential buyer promises to keep information about a business confidential. Sellers usually ask for one before sharing the business's name or detailed figures.
Worked example
Ferncastle Software is a fictional UK business. After heads of terms are signed, the seller opens a data room with folders for finance, customers, people, legal and technology.
The buyer's lawyer notices that the customers folder holds 40 contracts, while the information memorandum said there were 55. The buyer adds the missing 15 to the request list and asks for them before diligence goes further.
Heads of terms is the UK name for a short document recording the main commercial terms of a deal before the legal documents are drafted. It is the equivalent of a US letter of intent.
An information memorandum is a detailed sales document about a business, usually prepared by the seller's broker or adviser and shared after an NDA. It is written to present the business well, not to test it.
Why buyers care
A well-organised data room speeds up diligence and suggests a prepared seller. Gaps, slow uploads and documents that do not match earlier figures are worth noting.
Keep your own request list and track what has arrived and what is outstanding. Read everything that is uploaded, not just what you asked for. In many deals, documents placed in the data room count as disclosed against the warranties in the purchase agreement, so a problem sitting in a folder you never opened may leave you without a claim.
Ask for a complete, dated copy of the data room when the purchase agreement is signed, so there is a record of what you were shown.
Warranties are the seller's statements of fact about a business in the purchase agreement; indemnities are promises to reimburse specific losses. Together they decide who bears risks that diligence could not rule out.