Due Diligence Data Room

What is a data room due diligence?

Due diligence has always been essential to successful deal-making. However, data rooms for due diligence are relatively new, making many decision-makers wonder, “Are virtual data rooms a good solution for complex business transactions?”

Data rooms for due diligence is a digital secure environment that allows storing and exchanging confidential documents, data management, communication, and processing deals.

Traditionally, it was a physical space where interested parties would gather to exchange important documents, discuss the deal’s details, and finalize their agreements. While that arrangement served its purpose, physical 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 financial transactions are conducted remotely, which, in turn, enables more effective cooperation.

Although they revolve around cloud storage, it is not the same as public-access document storing platforms. There are several reasons to opt for a dedicated online due diligence data room as a good alternative to a physical deal room or a file-sharing program.

Due diligence data rooms vs physical data rooms

As already mentioned, physical data rooms are dedicated places to store sensitive documents for due diligence. As a rule, the owners of these premises provided constant surveillance, a specific entry system, and certain regulations for working inside the space. However, the physical data room is  in all ways inferior to the virtual data room. To start with, PDRs are:

  • Expensive. Directors had to buy or rent the premises and keep them secure around the clock by hiring security guards, which entailed costs. Besides, there was an urgent need for staff to track the activity of participants while working with data, which also cost extra money. Finally, buyers devoted time and financial resources to visiting a physical data room. Although data rooms are not free, they eliminate all of the above costs making the deal cheaper for both sides of the transaction.
  • Time-consuming. Since physical data rooms contain printed documentation, it is more difficult for participants to work with it. For example, they cannot access the repository or find the required document in a few seconds, as it works with the online platform. Also, all participants can work simultaneously in data rooms, which is unacceptable on the premises.
  • Hard to track. Participants’ activities are supervised in a traditional data room, but you cannot get a list of activities. However, in digital data rooms, a data room administrator knows about each visit, its duration, viewing, editing, sharing, etc. As a result, the seller is well aware of the legality of using confidential information and the activity of the buyer or investors in real-time.

Due diligence data rooms vs physical data rooms

It is entirely possible to store and share confidential 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 companies, providing due diligence, a public-access online repository often employs less secure file protection methods. Therefore, the risk of sensitive data breaches is much higher.
  • Lack of functionality. Most data-sharing platforms exist for simple personal purposes, such as storing family photos or school projects. An established due diligence electronic data room will provide many more VDR functions to streamline the process and help make an informed decision.
  • Reputation and representation. Virtual data room for the due diligence process is very natural for reputable companies, as it expresses their dedication and vigilance. This way, using a publicly available platform might appear suspicious to potential investors or other parties and cause a roadblock during a significant M&A deal, for example.

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 companies, providing due diligence, 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 for 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.

What happens during due diligence in data rooms?

This procedure involves people from inside the company and outside of it — including bankers, accountants, consultants, lawyers, and advisers. During the transaction, each person receives access rights to documents, which the administrator determines according to the tasks assigned to the participants.

In the data rooms, everyone can study the documentation, ask questions, annotate, comment, etc. In addition, virtual data room providers offer all kinds of tools so that the parties do not get distracted by other programs for communication or working with data.

While everyone is doing various tasks, an administrator can follow each action, tracking document operations and progress.

Main Focus Areas

Virtual data room for 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 documents 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 security to primary executives.
  • Legal matters. Lawyers can 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 software.
  • 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 management, 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 advanced due diligence data rooms 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 for due diligence include:

1. Top-level security

Confidential information handling requires advanced technology and impeccable practices. And as the online due diligence process often includes plenty of sensitive documents and files, it is best to go for an online 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 review documents to which they are given access.

Best features for external security: 256-bit AES data encryption, high data center uptime, ISO 27001 certification, and security compliance with SOC 2.

Best features for internal security: Individual permission settings, download, print limitations, two-step verification, dynamic watermarking, remote shred, 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 rooms 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, versatility of file types, drag and drop file uploads, automatic folder structure, automatic data room index, 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 multiple users.

One particular aspect of access convenience is flexible platform support. If the users can view and alter the files inside the online data rooms 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 all the data on who accessed each file, pages viewed, 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.

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 important 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:

due diligence checklist

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 for due diligence include:

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:

LegalBusiness enabling permits, licenses, and certifications
Human ResourcesEmployee agreements, hiring strategy, onboarding packages
Sales and MarketingMarketing strategy, sales channel summary, risk analysis
FinancialsProjections, operating budgets, insurance coverage summary
TaxesRecent tax audits, tax policies, recent tax returns
Intellectual PropertyPatent and trademark summaries, IP restrictions
Information TechnologyResources summary, strategy, maintenance cost summaries
EnvironmentalInvestigations, policy enforcement, and loss summaries
Health and SafetySafety audit summaries, accident policies, incident summary

Example of data room due diligence checklist

Below is an example of the kind of checklist data rooms will usually provide you with. Bear in mind this is simply an outline — the unique aspects of your deal will dictate what goes in your checklist.

Corporate Information

  • Articles of incorporation and legal documents
  • Records of ownership – often in the form of a Cap Table
  • Shareholder certificates
  • Previous funding round records and liquidity events
  • Minutes from previous board meetings

Financial Information

  • A comprehensive record of company financials and future projections
  • Tax history, previous audit statements and any third-party financial evaluations
  • Product/Service information
  • Product and/or service information, from historical prototypes to future roadmaps
  • Future business plans, including marketing strategies etc.
  • Current sales strategy and pipeline, including existing customers MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue)

Intellectual property and other legal documents

  • Any significant third-party agreements and partnerships
  • Documentation of any capital assets the company holds, including long-term leases etc.
  • Any intellectual assets such as IP, patents, trademarks and ongoing R&D investments.
  • Any licenses and permits needed for operating legally, as well as official correspondence with any regulators relevant to the business.
  • Litigation and dispute resolution history

Human Resources

  • An overview of the key team, including employment contracts
  • Employee benefits and compensation plans
  • Human resources policies and practices

Operational and risk information

  • Insurance policies and coverage information
  • Market research and competitive analysis
  • Customer and supplier agreements
  • Operational procedures and manuals
  • IT infrastructure and data security policies
  • Environmental and social responsibility policies and reports
  • Your business continuity plan

How to use a data room for due diligence?

  1. Setting up and using a data room is a fairly straightforward process. 
  2. Select your virtual data room provider and start a free trial. 
  3. Set up your folder and sub-folder structure according to your checklist. If your provider offers downloadable templates, you can use one to pre-populate the data room with the different checklist sections.
  4. Set user permissions for the various folders and send out invites to key members of your team.
  5. Upload the required documents to each section and assign upload tasks to other members so they can help you with the process.
  6. Before sending out invites to the other party or parties in a deal, send out an invite to yourself, using another email. This way you can know how other users will see and interact with the data room. 
  7. If necessary, correct access permissions based on the previous step.
  8. Send out invites to all the other users/interested parties. 
  9. Your virtual data room is all set! You can start sharing information and interacting with other users.

Why are well-prepared virtual data rooms important?

A well-prepared data room for due diligence is critical to the effectiveness and duration of due diligence. If the VDR platform contains up-to-date structured data, a buyer can review documents quickly and smoothly. Otherwise, sellers have to start fulfilling requests for additional information slowing down the process. So, make sure the data is relevant and complete to avoid delays or other negative consequences:

  • The longer the procedure takes, the higher the likelihood of the transaction becoming public. And this, in turn, causes unrest among customers, employees, and suppliers.
  • If there is a delay, a seller is usually asked to provide additional financial statements. If they refer to a specific time, then the delay makes it necessary to provide other reports (current updates on trade, for example). Thus, a seller compares these records with the earlier forecast, which is not always to a seller’s benefit.
  • Finally, there is the risk of unforeseen circumstances that affect due diligence. In short, the longer the transaction takes, the greater the likelihood of force majeure clauses. For example, it can be the loss of a key client, a crisis, natural disasters, etc.

What are the pitfalls and mistakes in due diligence?

Knowledge of potential risks and omissions, combined with an advanced tool, increases the chance of completing due diligence smoothly avoiding the following mistakes:

  • Non-digitized documents. If you still have paper corporate records, scan and place them on the virtual platform. In this way, you will provide confidential data with greater security and protect access to it. Moreover, if certain documents are needed during due diligence and are not in the data rooms, this will cause a delay.
  • Outdated, unsigned, incompatible documents. A seller must carefully check all relevant data for relevance, compatibility, and signature. Otherwise, such omissions can cause delays or, in the worst case, transaction failure.
  • Incorrect access permissions. For the correct flow of the document review process, the parties need appropriate access levels in virtual data rooms. Therefore, an administrator should evaluate each person’s role and, based on it, assign task roles participants need. In short, you need to make sure that the participant has precisely the access required to complete the tasks.
  • Data overload. This aspect is just as important as the lack of data, as too many irrelevant documents slow down the process. Conversely, minimizing the number of files can save time and make the procedure faster.

How to choose the best data room for due diligence?

Unlike traditional file-sharing services, virtual data rooms differ significantly in terms of the level of security and feature set. Therefore, potential users should check some aspects when choosing a reliable cloud solution for a successful transaction:

  1. Security mechanisms. A responsible provider should have multiple data centers, meet high standards of privacy protection, and have enough copies of data in case of emergency. Moreover, a vendor has to guard data centers 24/7 and use strict biometric controls.
  2. Access management. To maintain control of virtual data rooms, administrators need quality tools to control access to the data. Therefore, the vendor you choose should offer features for granular access, an effortless inviting, and removing users during the transaction. With the best virtual data rooms, you can automate deleting users by setting a limited access period for a particular user.
  3. A number of users and rooms. The due diligence process usually involves large volumes of data and participants. Therefore, it is unlikely that a solution with limited capabilities will suit you. In addition, if there is a need to request new users or rooms, a provider charges a fee for this. So, give preference to a product that does not limit you.
  4. Advanced tools. The basis of any reliable platform is secure online hosting, end-to-end encryption, and user access controls. However, today the data room provider offers much more, for example, digital rights management. In this way, you can limit the ability to create copies, download, and print for prospective investors or others.

    Other options include customizable watermarks, bulk upload, etc. As for bulk upload, it is best if there is integration with Dropbox, Google Drive, or other cloud solutions. Regarding watermarks, make sure you can add them to many documents simultaneously.
  5. Ease of use. Since the due diligence process takes a lot of effort and time, an online tool should simplify all stages of the procedure. For example, a virtual data room should be available 24/7, work without additional plugins, and be intuitive even for beginners. Besides, this is a tremendous advantage for cooperation with investors and potential bidders who prefer to work in a safe and convenient environment.
  6. Affordability. Data room software is a dedicated and secure business solution, so it can’t be cheaper than platforms like Dropbox. But, on the other hand, the data room cost should match the quality. So use the free trial to ensure you get cost-effectiveness and whether you are ready to invest in the virtual data room tools and security. Besides, data room providers offer a free demo to demonstrate the tool to potential customers.

What are the misconceptions about data rooms?

To experience the full benefits of virtual data rooms for due diligence, you need to challenge some misconceptions about the software:

  • Data room software is more expensive than traditional data rooms. Think about the costs for physical data storage, archiving, printing, renting, administrative fees, and employee salaries. Then compare it all to the price of a digital solution. It doesn’t require all of these expenses, but it offers a safer environment and other benefits.
  • It is better to use free technologies rather than a virtual data room. Undoubtedly, there are high-quality free platforms for sharing and storing data. However, these services do not guarantee a high level of data privacy protection. Therefore, by saving on software, a company may risk a lot. Data rooms, in turn, are designed for business, so compliance with security standards and unique mechanisms for access control exclude leaks, hacker attacks, etc.
  • All data rooms are the same. Indeed, most data rooms offer basic functionality and content protection. However, there are significant differences in ease of use, compatibility with operating systems, security compliance, availability of artificial intelligence, etc.

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 a cost-effective due diligence process.. Here are the summaries of what they’ve got to offer your company:

  1. iDeals

    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.

  1. DataSite

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 online data room for handling due diligence processes for large-scale mergers and acquisitions. However, their deployment and feature set options lack versatility as compared to competitors.

  1. Citrix

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.

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