How to Conduct Effective Due Diligence Using a Virtual Data Room?

Make the due diligence process easy and secure while cutting costs with a due diligence virtual data room.

Valuable for business. Convenient for people.

Data rooms are usually used for due diligence – a critical step in the mergers and acquisitions process that enables a buyer to understand the target company’s operations, finances, legal obligations, and potential risks.

Due diligence allows the buyer to identify the existing issues and discrepancies that may intact the deal’s value or viability and negotiate the terms accordingly. It’s also performed for a stock purchase, asset acquisition, joint venture, initial public offering (IPO), licensing agreement, and other types of transactions. With virtual data rooms, due diligence becomes fast and effortless. All you need to do is provide multiple parties with access to online storage with due diligence documents.

What is a due diligence data room?

Due diligence data room is software designed to support the process of due diligence through a highly secure and certified cloud platform. 

The due diligence process is an investigation conducted by a potential buyer to assess the legal, financial, and operational aspects of a target company before completing a business transaction, and virtual data room services are aimed to simplify that process.

Simply put, data room software guarantees a reliably protected and secured online repository. Here you can store, share, and download sensitive documents without worrying about data security since you can effectively control access to all essential documents. Moreover, virtual data room solutions are suitable for government use implying strict security compliance and access management.

With the help of due diligence data room software, you can perform all kinds of due diligence tasks. All you need is to check if your provider allows you to perform the necessary type of due diligence. The most popular types of due diligence include:

• Administrative — analyzing the company’s administrative and organizational structure, processes, and policies.
• Asset — evaluating the target company’s assets.
• Environmental — assessing the target company’s environmental risks and liabilities.
• Financial — analyzing profit and loss statements, accounting records, and other important documents to assess the financial health of a target organization.
• Human resources — evaluating the workforce effectiveness through human resources policies, procedures, and practices.
• Legal — reviewing legal compliance, contracts, and agreements to assess legal risks that may impact the acquisition.
• M&A — investigation of a target company’s operations, financials, and legal obligations to assess its value.
• Management — evaluating the target company’s leadership team, management structure, and business strategies.
• Intellectual property — evaluating the target company’s intellectual property assets, including patents, trademarks, copyrights, and trade secrets.
• Technology — assessing the target company’s technological infrastructure, systems, processes, and technology advances to define potential risks and opportunities related to IT and cybersecurity.

Whatever type of due diligence you face, it will be easier and smoother with a due diligence data room.

The best virtual data rooms for due diligence

Let’s compare top virtual data room providers in terms of what functionality and services they offer to users.

Why do businesses use a virtual data room for due diligence?

The virtual data room provides a high level of security, optimizes the process of operations with documents, and gives complete control over the processes. However, this is not a full list of the solution’s benefits.

1. It’s safe, fast, and cost-effective. VDR complies with international safety standards, such as ISO, HIPAA, GDPR, and FINRA.
2. It makes the whole process clear. The virtual data room administrator can monitor user activity, due diligence progress, and see a complete workflow picture.

3. It keeps your transactions secure. Any due diligence virtual data room with security compliance with Payment Card Industry Data Security Standard (PCI DSS) allows users to keep safe financial transactions.
4. It protects your business and personal data. Multiple parties can securely access corporate sensitive data thanks to granular user permissions, watermarking, data encryption, and two-factor authentication.
5. It allows remote access to data. As software with online access, virtual data rooms are available from any device from your account. And on top of that, mobile app access security is as reliable as from the desktop.
6. It’s easy to use. It has a standard modern software interface, which simplifies usage via drag and drop upload, automatic folder structure, and data room index that streamlines document management and helps in document search. Diligence teams can conveniently navigate through the data room folder structure and extract required documents in seconds.

7. It’s modern. Physical data rooms have become cumbersome and unreliable. In the modern world, technology advances allow spending less time on routine and focus more on fulfilling strategic goals and decision-making. A due diligence virtual data room utilizes the latest technologies to process diligence requests quickly and efficiently. There is no need to arrange physical space to share confidential documents and spend on travels like in traditional data rooms. 

8. It reduces human error. Confidential documents can’t be shared without permission or to be missent to a random addressee. Virtual data room providers offer activity logs that track all actions with confidential information stored in a data room. Granular access permissions help create a secure environment for document review and processing.

Alt: User permissions management in due diligence data rooms

9. It gives you 24/7 technical support. No need to hire an IT specialist. Modern data room providers help solve the problem even if you can’t explain the trouble with technical terminology. Online, from any device.

How to choose a virtual data room for due diligence?

To choose the proper due diligence data room for your business needs, follow a few simple steps:

1. Set the budget first

It is necessary for better understanding your financial project boundaries. Even if you know how much money can be spent on due diligence with a virtual data room, an agreed-upon budget will help avoid mistakes and reduce overspending.

2. Figure out the type of due diligence that has to be performed

Use the most suitable due diligence data room, depending on the type of due diligence you need.

3. Find the data room provider that covers all your needs

Answer the following questions before making a decision:

1. Does the data room fit the company’s budget?
2. Does the data rooms provide a free trial?
3. How much technical support is available to clients?

Check if the virtual data room ensures following the security standards you comply with.

4. Check the safety level of the VDR you liked

Look for technical aspects that help your VDR due diligence provide the necessary level of safety. Pay attention to:

• Document management features
• Data encryption and watermarking
• User management features
• Activity monitoring options
• Testimonials of other clients
• Overviews on the review sites

5. Check if the chosen data rooms provide enough storage space

Calculate the current amount of all the data you need, and then add some extra space to account for data you’ll add in the future.

For small businesses or quick deals, 1 to 5 GB of storage should be enough. For larger business transactions, many data rooms offer unlimited data storage.

6. Test the VDR you liked with a free trial

Best data rooms offer free trials to let users test all the software capabilities before purchase. When testing your potential solutions, pay attention to:

• Technical support. How fast do they reply to you? Was your problem solved?
• Interface. Is your online data room clear and comfortable?
• Security measures. Do they comply with your requirements?

7. Learn all of the VDR’s features

Sometimes the chosen solution results in poor user experience just because you don’t know all the software’s features well. To get the best of it, watch some tutorials to understand the software fully. 

How to prepare VDR for due diligence?

It usually takes little to no time to prepare virtual data rooms. In addition, customers can benefit from the provider’s support for this.

1. Detail the virtual data room due diligence software. Rely on a security level, cloud storage space, and types of due diligence that can be performed.
2. Prepare the data room due diligence checklist. Use a standard template to simplify this task.
3. Check the VDR due diligence structure. It was created to cut your organization’s work.
4. Upload documents and files into the electronic data room. Check if documents have proper names.
5. Invite multiple users and configure user access levels. It will differ for founders, directors, clients, investors, and other parties. Using your virtual data room capabilities, you can maintain control of each user’s activity.
6. Agree and assign due diligence tasks, priorities, and timelines. Check if specialists have access to information and actions needed for their work.
7. Perform due diligence process. Share and view financial documents, sign papers, and confirm audits via due diligence software.
8. Prepare all necessary data. Digitize the required documents and upload the files into the virtual data room software. Then organize files within folders and subfolders to create a convenient and simple system for due diligence review. With automatic index numbering it would be easier to structure the folders appropriately.
9. Assign user groups with appropriate access levels and invite all employees, partners, potential investors, and other third-parties that have diligence requests.
10. Agree and  assign task roles, priorities, and timelines. The data room proposes a range of features for communication between the parties.

Due diligence checklist

Since the due diligence data room checklist is one of the key and decisive steps in the procedure, some virtual data rooms include it. They help you structure the data room software and organize VDR folders. Here is a sample list of important documents you should collect for due diligence:

1. Corporate documents: certificate of incorporation, bylaws, shareholder agreements, board of directors, material contracts and agreements, organizational charts, personnel records, etc.
2. Financial documents: audited financial statements for the past three to five years, tax returns and filings, budgets, projections, financial forecasts, accounts payable and receivable, and claims.
3. Legal documents: litigation and dispute records, intellectual property registrations and agreements, regulatory filings, and permits, environmental assessments and reports.
4. Operational documents: production and inventory records, sales and marketing materials, customer and supplier contracts, IT system documentation, security, and data protection policies.
5. Other documents: valuation reports, customer and employee surveys, industry reports, and market analysis.

How to structure a due diligence data room?

Why is a properly structured data room important for due diligence success? A logically structured virtual data room simplifies and accelerates the due diligence process.

The visibility of the required confidential information makes legal due diligence or any other type much more convenient. To structure the due diligence data room properly, follow these recommendations:

• Categorize all your documents before creating a table of contents.
• Use the same organizing structure as your company uses.
• Use the library folder system as a template.
• Check if all the needed specialists have access to the documents or folders.
• Use labels to name each document to locate it easier.
• Check if every new document has a proper label and location.
• Create main folders for larger topics and subfolders for smaller bits of data.
• Try to consolidate small folders.
• Test your document organization with the help of the team member who didn’t participate in the organization process.

Conclusion

Modern data room solutions simplify the process of secure document sharing and review, keeping  your due diligence legal according to your industry regulations. These recommendations will help you choose suitable due diligence data room providers for your business:

• Set the budget
• Find a data room provider that fulfills all your needs in terms of features and support
• Make sure the chosen data room offers all the features you need
• Ensure the required security features and enough storage space is available
• Test a data room’s free trial
• Review testimonials and customer reviews

By choosing appropriate data room software , you significantly reduce time and cost of due diligence, increasing the chances for successful deal completion at the same time.

FAQ

1. What are the benefits of a due diligence virtual data room?

A virtual data room can increase the speed and efficiency of due diligence, reduce the risk of data breaches, and provide greater access control over confidential information.

2. How to choose the right virtual data room for the due diligence process?

When choosing a VDR, consider security features, ease of use, customization options, pricing, and customer reviews.

3. Who typically uses a due diligence data room?

Virtual data rooms are commonly used by businesses, investors, and legal professionals involved in mergers and acquisitions, fundraising, and other types of due diligence.

4. What types of documents can be stored in virtual data rooms?

Documents like financial statements, contracts, intellectual property information, and other confidential business records are typically stored in VDRs for due diligence purposes.

5. How is confidentiality maintained in a virtual data room?

Confidentiality in a data room is maintained through various security options, such as data encryption, two-factor authentication, watermarks, and granular access controls that limit who can view, download, or edit certain documents.