Due diligence has always been essential to successful deal-making. However, virtual data room due diligence is relatively new, making many decision-makers wonder, “Are data rooms a good solution for complex transactions?”
What is a data room due diligence?
A due diligence virtual data room is a digital space that allows for storing and exchanging confidential documents, communicating, and processing deals.
Traditionally, a due diligence data room was a physical space where parties would gather to exchange documents, discuss the deal’s details, and finalize their agreements. While that arrangement served its purpose, traditional data rooms were far from ideal.
Now, online due diligence is much more convenient. Virtual data rooms eliminate the need for physical presence and paperwork. Instead, all interactions and transactions are conducted remotely, which, in turn, enables more effective cooperation.
Although online data room due diligence revolves around cloud-based data storage, it is not the same as public-access document storing platforms. There are several reasons to opt for a dedicated due diligence data room.
Due diligence virtual data room vs. public-access file storage
It is entirely possible to store and exchange due diligence documents via conventional file-sharing services. However, there are some significant drawbacks compared to using a professional due diligence data room, such as:
- Questionable security. Unlike due diligence data room companies, public-access file storages often employ less secure file protection methods. Therefore, the risk of sensitive data breaches is much higher.
- Lack of functionality. Most file-sharing platforms exist for simple personal purposes, such as storing family photos or school projects. An established due diligence virtual data room will provide many more features to streamline the process and help make well-informed decisions.
- Reputation and representation. Virtual data room due diligence is very natural for reputable companies, as it expresses their dedication and vigilance. This way, using a publicly available platform might appear suspicious and cause a roadblock during a significant M&A deal, for example.
Virtual data room due diligence focus areas
Virtual data room due diligence is beneficial to most industries and company sizes. However, there are several distinct focus areas for online due diligence.
- Finances and investments. Transparent and comprehensive financial records are always a sign of integrity and a growth-oriented mindset. According to due diligence data room providers, financials usually attract the most interest throughout the deal.
- Human resources. Employee info is both highly confidential and critical to successful mergers and acquisitions. A virtual data room can help organize and safekeep data while still providing access to primary executives.
- Legal matters. Virtual data room due diligence allows lawyers to quickly access all necessary information and inform their clients on the key aspect of the company’s legal standing.
- Customer relationships. The client portfolio is the ultimate representation of how well the company is doing. In some cases, such as during healthcare segment deals, customer info is confidential and calls for a highly secure due diligence data room.
- Asset management. Here, the acquiring party will look into all possessions, exploring their size, type, environmental impact, and so on. Asset inspection often gets very technical and requires the expertise of various third parties.
Additionally, online due diligence might cover matters of intellectual property, strategic planning, management, and more. Every deal is ultimately unique and calls for different types and depths of due diligence. But the good news is that a good due diligence data room will adjust to every user’s specific needs and vision.
Advantages of data room due diligence
Modern due diligence data room companies truly understand the requirements of their clientele. For the users, this comprehension translates into a solid variety of excellent products. The benefits of virtual data room due diligence include:
1. Top-level security
Confidential data handling requires advanced technology and impeccable practices. And as online due diligence often includes plenty of sensitive documents, it is best to go for a data room that showcases pristine security.
A due diligence data room is divided into two categories: internal and external. The provider has to make sure unauthorized personnel cannot access the files. Also, it is crucial to ensure that the people who do have access to the due diligence data room are only able to view documents to which they are given access.
Best features for external security: 256-bit AES encryption, high data center uptime, ISO 27001 certification, and compliance with SOC 2.
Best features for internal security: Individual permission settings, download, print limitations, multi-factor verification, dynamic watermarking, and fence view.
2.Simple document management
As technology progresses, software solutions are bound to become more and more user-friendly. People who access the due diligence virtual data room will have different levels of computer skills, and it is essential that the process is equally convenient for everyone.
Essentially, the more straightforward document handling is, the faster the deal will progress. Cutting time off the due diligence process goes a long way to help to seal all deal types.
Best document management features: bulk uploading, format versatility, drag and drop file uploads, automatic indexing, and full-text search.
3. Usage and access convenience
The same goes for the rest of the due diligence data room features. Each function has to be intuitive and simplified. Ideally, the data room due diligence will be seamless for all users.
One particular aspect of access convenience is flexible platform support. If the users can view and alter the files inside the data room from any device and operating system, they will make decisions faster and significantly streamline the deal.
Best convenience features: Scroll-through document viewer, adaptive interface, multilingual setups, and iOS and Android apps.
4. Automated reporting
Due diligence virtual data room software can generate reports with details on all user activity. Such reports typically feature data on who accessed each file, at what time, and for how long. Ultimately this information can offer insight into how engaged different users are and present areas for improvement.
For example, during an M&A deal, the seller may notice that some of the marketing strategy documents are ignored. This would be a cue to rearrange the due diligence data room or bring the file up in a conversation with the buyer.
Best reporting features: User activity tracking, audit trailing, color coding, group overview, and activity notifications.
5. Transparent and effective communication
As live conversations stepped into the background, digital communication channels have risen to the occasion. While some continue to disagree that virtual deal-making can replace the power of a handshake, many companies have adjusted and embraced the new model.
The more that can be done inside the due diligence virtual data room, the better. That includes exchanging messages and conducting video and audio calls. The communication tools should be as intuitive and practical as all other due diligence data room features.
Best communication features: Zoom integration, interactive Q&A, and sectional expert assignment.
How to use a due diligence data room?
Once you’re set on the idea to process the deal via a due diligence data room, you’ll face a process that presents a few challenges. Follow the next steps to simplify this task.
1. Find a due diligence data room provider
The most effort-consuming part of setting up a due diligence data room is finding the most suitable provider for your project’s needs. The data room companies vary in:
- Pricing models
- Function sets
- Use-case categories
Although making the decision based on price is everyone’s first instinct, the cost should actually be the final factor to consider. Instead, focus on the specific value each provider has to offer to your company’s deal-making vision.
The good news is that after you find a due diligence data room with a proactive support team and advanced feature set, the rest of the steps are very easy.
2. Choose a suitable plan
Due diligence virtual data room providers charge differently. The best solution is to go with the software that provides services on a flat-fee basis. This way, you have enough freedom to manage the files, interact with other users, and take your project through all the stages.
Choose the plan in accordance with the amount of data you’re looking to store and the size of your deal. Typically, the more people and data involved, the higher the price.
3. Get a due diligence checklist
Ask your provider for a due diligence documents list to gather all the necessary files in advance and build a logical data room structure. Of course, as the deal progresses, you will add, remove, and amend the files. But starting with a pre-designed document flow is always beneficial.
4. Structure the due diligence data room
Use the due diligence checklist to draft an outline of your due diligence data room. Then, make necessary changes according to the unique nature of the deal and your company’s style.
5. Upload the files
Once all folders and subfolders are ready, transfer your files. Pay attention to document naming and the order of documents in each folder.
6. Invite the users
Set up user permission for every deal party individually or by group, and send out invitations to the due diligence virtual data room. Use a user impersonation feature to ensure everyone will be able to access the necessary info and double-check the security of high-profile documents.
7. Update due diligence documents as needed
Your due diligence virtual data room is ready to go. Now, your main task is to focus on the deal and keep the data room in check in terms of document and permission updates.
Are due diligence checklists free?
Let’s circle back to the due diligence checklist concept. Such lists are usually included as part of your provider’s service and should list the documents required for due diligence. It’s important to keep in mind that checklists templates aren’t universal, so not perfect for all companies and deals.
Here are the key criteria you need to keep in mind when choosing a data room provider:
Companies from specific industries might require special certificates.
Make sure the data room offers all the functions you want to have.
The costs should fit your budget. The price usually depends on how advanced a data room is and on the popularity of a provider.
The best vendors make their software suitable for all devices, but you still should check this criterion.
Look for both professional and customer reviews to be aware of all pitfalls.
You will want to include documents that are specific to your project as well as follow the buyer’s requests. The due diligence documents list should serve as a guideline for the data room set up, not as the foundation of the overall deal flow.
An M&A due diligence checklist will usually feature the following sections:
|Legal||Business enabling permits, licenses, and certifications|
|Human Resources||Employee agreements, hiring strategy, onboarding packages|
|Sales and Marketing||Marketing strategy, sales channel summary, risk analysis|
|Financials||Projections, operating budgets, insurance coverage summary|
|Taxes||Recent tax audits, tax policies, recent tax returns|
|Intellectual Property||Patent and trademark summaries, IP restrictions|
|Information Technology||Resources summary, strategy, maintenance cost summaries|
|Environmental||Investigations, policy enforcement, and loss summaries|
|Health and Safety||Safety audit summaries, accident policies, incident summary|
Top 3 due diligence data room providers
Based on the due diligence data room specifics and advantages we’ve discussed today, there are a few leading providers offering the best services for effective due diligence. Here are the summaries of what they’ve got to offer:
iDeals Solutions provides due diligence data room software to all-sized companies from various industries. They offer a flat-fee pricing model with an option to create a custom plan for large enterprises.
With a strong customer support team, versatile feature set and platform adaptability, high-grade security practices, and data center facilities on every continent, iDeals is the ideal solution for M&A due diligence and more.
DataSite due diligence data room is the most recognized name on the market as their parent company Merrill has several decades of expertise. DataSite peaks above average in terms of pricing as they cater primarily to large financial companies.
DataSite is an excellent solution for handling online due diligence for large-scale mergers and acquisitions. However, their deployment and feature set options lack versatility as compared to competitors.
Citrix might not be the most efficient option for data room due diligence. However, it’s still in the running due to its budget-friendly pricing model. Small companies with short-term due diligence projects will definitely benefit from the simplistic interface and minimalistic feature set.
Citrix operates mainly as a digital workspace provider, with the due diligence virtual data room only available for US residents.