Due diligence is a crucial step in any mergers and acquisitions (M&A) deal. Investors or buyers investigate the company’s information to better understand what they’re acquiring or merging with.
Yet, more often than not, due diligence isn’t as effective as it should be. Research shows that deal success remains low, with only 15% of companies reporting on market share growth — the main M&A goal.
Due diligence virtual data room (also known as due diligence VDR or DD data room) helps companies make the assessment more effective and the deal time shorter. This guide will cover the benefits of using a due diligence data room and provide some practical tips on choosing the right provider and preparing data rooms for due diligence.
What is online due diligence?
Due diligence is an audit conducted by a buyer to assess the actual value of their potential investment. As the world becomes more digital, performing due diligence online is an increasingly common practice.
Due diligence specialists, third-party consultants, buyers, and sellers all face mountains of information, including legal and financial documents, corporate records, and trade secrets. No wonder it can take months to complete the assessment.
The shift toward online due diligence can result in faster and more organized audits, improving chances for a successful deal. On the other hand, it brings new concerns, like the security of data stored online and its vulnerability to hacker attacks. This is when virtual data rooms come to the forefront.
Why to use virtual data rooms for due diligence?
A virtual data room is not the only service you can choose for your due diligence process. There are many other options on the market, including cloud storage and file-sharing services, such as Google Drive, Dropbox, or OneDrive. Yet, none of these solutions is specifically designed for due diligence in the same way a virtual data room is.
Along with streamlining and automating the process, a due diligence VDR provides a heavier layer of security for confidential company data, which is the primary concern for all parties.
Here are the main benefits companies unlock with virtual data room due diligence.
A data room for due diligence is designed with security in mind, so most providers meet the strictest standards now available, including:
- Privacy Shield Compliance
- ISO 9001 / 27001
- SOC 1 and 2
- Industry-specific standards such as HIPAA for healthcare
Along with regulation compliance, data rooms have security features for ensuring an extra level of due diligence file sharing. These features include:
- Complete access control that allows you to set permissions for every user or group
- Ability to assign different view permissions, such as barred view for preventing screen captures or hidden Excel formulas
- Access restrictions based on the session duration or IP addresses
- Dynamic watermarking that puts the user’s email, access date, and time on the file they open
- Remote data lock or erasure, even for downloaded files
With these features, virtual data rooms prevent unauthorized users from viewing or copying your files and decrease the risk of a data breach.
Easier document management
The VDR due diligence process requires tons of data that needs to be perfectly organized. While some of it may already be digital, others need to be digitized and uploaded. A virtual data room curbs management woes with the following features:
- Drag-and-drop upload and multiformat support. Initiate the bulk upload of hundreds of files in different formats within seconds.
- Automated indexing and numbering. Once your files are inside, the data room will automatically organize and list them according to your designated order.
- Navigation tools. Advanced in-text search and filtering help you and your investors quickly find the required documents.
- Remote access. Authorized users will be able to work with your documents from any device and location. Most data rooms have mobile, web, and desktop apps for even better accessibility.
A due diligence VDR makes documentation more organized and, as a result, more transparent. At the same time, automation tools will allow you to focus on more valuable tasks instead of dealing with routine.
Enhanced user interactions
Data rooms have outgrown their initial functionality of data repositories. Today, a data room is also a platform for collaborative work. Your partners need to ask questions, leave comments, or request additional information from you. Instead of dealing with dozens of emails that can remain unopened for weeks, you can communicate inside a data room that ensures everyone sees the necessary information on time.
Here are a few features that help streamline user interactions:
- Real-time updates. Whenever a partner sends you a question, or you upload a new file, the platform will automatically notify related users about the changes. You don’t need to keep track of the version history — technology will do it for you.
- Questions and requests management. Authorized users can request what they need from other users, set due dates, add comments or questions, and attach additional files. And yes, it’s all accessible within the platform.
- User activity tracking. Stay on schedule and check the process status by monitoring what your colleagues or your partner’s team are working on. Check their log times, the files they open, and the time they spend reviewing documents.
With dozens of specialists checking documents, due diligence may take months and sometimes even years to complete. With a data room, you can speed up the process by organizing documents and cooperating more effectively.
While a data room may sound like a magic wand for your online due diligence, you won’t get the most out of it until it’s set up correctly. To avoid mistakes and prepare yourself for the future, let’s have a closer look.
How to prepare data room software for due diligence?
With so many documents and specialists engaged, the due diligence process can be hectic — even with a data room in the place. If you want to make it flawless and avoid mess, here are some tips on preparing your due diligence room more effectively.
1. Get the due diligence checklist
Depending on your project, you may be requested to provide different document types, so start by drawing up a list of what you need. Some data room providers offer checklists for different due diligence scenarios. Use them to save time and get more familiar with what to prepare until your due diligence specialist compiles a more comprehensive list.
2. Collect and scan files
With a due diligence list, you can start compiling electronic documents and digitizing hard copies. Opt for a black-and-white scan with 200 DPI resolution, which is usually enough for VDR due diligence. Also, make sure to choose the smallest file size whenever possible — it will save you time during upload.
3. Think of a clear naming system
The main rule when naming your files is to be consistent and straightforward. What seems obvious to you and your team may make no sense to your partners and hired third-party specialists. So put yourself in their shoes and think of names that will be clear from their perspective.
4. Create an effective data room index
A data room’s index function is similar to a book’s table of contents. The index shows the structure of all uploaded files in your data room and is essential for streamlining user navigation and ensuring document transparency. In other words, the better you organize the files’ structure, the faster your due diligence will progress.
Make your index logical and understandable for all involved parties. Decide your main categories, such as legal, financial, or operational documents. Then split each one into subcategories (and sub-subcategories if needed). For example, you may have subcategories like agreements, regulatory issues, and litigations in the legal documentation category.
5. Upload the files
With scanned, named, and organized files at hand, you may proceed with the upload. Create a data room project name and drag the files to the workspace. Upload speed will highly depend on your due diligence VDR’s functionality, so make sure that the provider offers you the following features:
- Drag and drop bulk upload with multiformat support
- Integrations with other services (in case you need to upload files from a corporate database, shared folders, desktop, and others)
- Navigation tools (text search and filters)
- Automated index numbering, and so on
6. Set access permissions
For starters, freeze your index by restricting who can change and delete folders and subfolders. It will save you headaches later.
Once you freeze the index, choose the groups (or individual users if your due diligence room allows this option) and decide on their access levels. For example, third-party consultants will be restricted to viewing only, while members of your group will be able to view, edit, and download what they need.
7. Conduct due diligence
After you’ve set user permissions, you can start conducting due diligence. This involves fulfilling requests and uploading additional documents, answering questions, and monitoring user activity to check the buyer’s interests or manage your own employees.
By adequately preparing your virtual data room for online due diligence, you can avoid bottlenecks and save much time throughout the process. Yet, it will make no sense if you work with a provider who is either unreliable or can’t offer you sufficient data room functionality.
Let’s explore in more detail what factors to consider when choosing whom to partner with.
How to choose data room provider for due diligence?
When choosing the right VDR vendors for due diligence, security should be your top priority. Due diligence file sharing involves confidential data such as customer information, financial transactions, or trade secrets, so security is crucial to avoid data breaches.
Depending on your industry, you may need your provider to adhere to specific security protocols and virtual data room rules, so opt for providers experienced in your field. For example:
- Investment banks usually require their providers to comply with SEC and FINRA security standards, PCI DSS Level 1, FIPS 140-2, and MTCS Level 3, along with common data security regulations like GDPR and ISO 9001 / 27001.
- In the biotech industry, data rooms should be HIPAA-compliant to ensure that personal health records and intellectual property related to drug trials and manufacturing remain secure.
Along with stricter regulation compliance, such providers can offer you due diligence data room services with specific functionality. For example, tons of seismic data and well logs are transferred during due diligence in the energy industry, so your data room should support such file formats.
Luckily, today, as online due diligence becomes commonplace, you can find a reliable data room provider experienced in your industry and due diligence type, so let’s have a closer look.
What types of due diligence can be performed in a virtual data room?
Virtual data room software with an unlimited number of users and files can improve due diligence, thanks to its rich functionality and security.
Here is the lowdown on nine due diligence types suitable for data rooms:
- Financial (accounting). It’s probably the first type that comes to mind when talking about due diligence. The process evaluates the overall financial stability by auditing related records, statements, company forecasts, and inventory schedules.
- Legal. Legal due diligence specialists determine whether a company is reliable or has legal issues by checking a company’s contracts, meeting minutes, and corporate documents.
- Human Resources. This due diligence assesses a company’s structure, relationships with employees, including vacancies, compensations, contracts, and disputes.
- Operational. Due diligence examines possible risks associated with a company’s operations and manufacturing process, including assets, facilities, technologies, etc.
- Environmental. As the name suggests, this due diligence evaluates whether a company complies with environmental regulations and what possible penalties it may incur.
- Business. Due diligence allows companies to foresee and evaluate the deal’s impact, risks, and prospects for the company’s position on the market and customers.
- IT. IT due diligence determines whether IT spendings match the company’s size and objectives.
- Strategic fit. Due diligence allows companies to confirm that their goals and objectives match.
- Self-assessment. Before proceeding with the deal, a company may assess its own goals, as well as the possible benefits and risks of the transaction.
Whatever your type, you can take advantage of secure data rooms and speed up your deal.
The bottom line
With a due diligence virtual data room, you can effectively manage large volumes of company data while ensuring maximum security. By offering you numerous data structuring, communication, and analytics features, top-notch data rooms help you gain more confidence in the deal’s success, especially if you set them right at the very beginning of your due diligence journey.
Make sure you work with a reliable provider experienced in your field to get the most from your data room.