Due diligence checklist. What you need to include in your data room.

A virtual data room (VDR) is a surefire way to smoothly conduct the due diligence process.

Virtual data rooms grant businesses an opportunity to securely store and share confidential documents using cloud storage, so third parties can’t access them.

Data room services significantly facilitate the due diligence process, enabling companies’ owners to close deals with potential investors faster and more efficiently.

To streamline documents’ organization for the due diligence process, companies usually either prepare a due diligence checklist or use a default template offered by their virtual data room service provider.

Let’s cover when businesses need a checklist and what it should include.

When do companies need due diligence checklists?

Any company with clear due diligence goals will need a checklist for a smooth virtual data room organization.

Below are the most common cases for using a due diligence checklist: 

  • Legal due diligence. This is when a potential buyer investigates whether a sell-side or a target company is involved in any legal disputes or has any risky liabilities. All the legal documents are reviewed.
  • Operational due diligence. This type of due diligence is for checking the manufacturing process, distribution, or supply chain of the company to prevent any capital risks.
  • Commercial due diligence. A company undergoes commercial due diligence when it needs to identify its position in the industry and outline its potential growth opportunities.
  • Tax due diligence. This type of due diligence usually occurs when a buying company wants to identify the current and potential tax liabilities of a target company.
  • Financial due diligence. This is the most common type of due diligence. The goal is to analyze the financial performance of a target company by reviewing its financial documents, such as audited financial statements and balance sheets.
data room checklist

What documents should you include in your due diligence data room checklist?

Naturally, depending on the due diligence goals, the content of the due diligence checklist will differ as well. 

Below is a universal yet comprehensive list of diligence documents to include in a virtual data room. 

Cap table

The cap table is the first document any investor would need to review.

A capitalization table (cap table) is a table or spreadsheet with information about the company’s equity capitalization. In other words, it shows who currently owns the company, what share of the company they own, and includes any historical documents on the previous fundraising rounds.

That’s why a cap table is especially important for startups to include in a virtual data room.  

Financial documents

Financial documents must-to-include in a virtual data room, no matter the due diligence goal. If your business is seeking future investment or is considering mergers and acquisitions opportunities, make sure to add at least these due diligence documents:

  • Copies of unaudited financial statements
  • Copies of audited financial statements (for at least the last three years)
  • Financial evaluations from external sources
  • Profit and loss statements
  • Cash flow projections
  • Pro forma statements for the next year
  • Balance sheets
  • Information on previous fundraising transactions

Legal documents

This category includes general information about the business, its owners, all the legal aspects of previous transactions, etc. 

These are some of the most common documents required for an effective due diligence data room checklist:

  • Articles of incorporation
  • Loan agreements
  • List of jurisdictions where a target company is licensed 
  • Status of any and all legal cases
  • Distributor agreements
  • Vendor agreements
  • Information about certifications and compliance a target company corresponds to
  • Organizational chart showing the corporate structure, including all the subsidiaries
  • Agreements relating to the past, current, and future mergers and acquisitions rounds

Human resources (HR) documents

This is when a virtual data room is especially important for a secure due diligence process.

A successful investment round is almost impossible without a complete investigation of the employees’ organization. Furthermore, considering the fact that it also includes sensitive personal information, top-notch security is vital. 

Below are a few examples of HR-related documents to include in a due diligence data room:

  • Employment agreements
  • Health and safety policies
  • Details about training programs
  • Benefits policies
  • Employee resumes
  • Details of employees’ positions and wages
  • Policies regarding sick days, overtimes, and paid holidays
  • Appraisal policies

Intellectual property documents

This information is critical to add to the data room for businesses that seek mergers and acquisitions opportunities.

Intellectual property documents usually include all the information about the target company’s intangible assets.

These are a few examples of intellectual property information a due diligence data room should contain:

  • Schedule of owned proprietary technology (software, systems, and databases)
  • Trademarks, brand names, slogans, logos, etc.
  • Copyrights
  • Domain names
  • Product documentation and manuals for the target company’s software 
  • Patents

Asset documents

This category of the data room checklist typically includes information on the company’s capital assets, like real property, equipment, and machinery.

Potential buyers will want to know about the company’s possessions, size, type, impact on any environmental investigations, etc.

Below are some of the documents that should be included in virtual data rooms:

  • Maintenance procedures and expenditures
  • Table of fixed assets for the last year with the acquirement date and original cost
  • Purchase agreements

Taxes

Information about taxes is important to include in virtual data rooms for almost any type of due diligence because it’s always a priority for potential investors to investigate.

These are the documents that your data room due diligence should contain:

  • Tax returns for the last two years
  • Schedule of completed tax audits for the last five years
  • List of jurisdictions where a target company pays taxes and files tax returns
  • Information on tax policies

Why is a virtual data room essential for due diligence?

A virtual data room streamlines and organizes the due diligence process, making it more efficient and, thus, less stressful.

As a rule, all data rooms are user-friendly. It means that all parties involved in the due diligence process have no troubles with data room navigation and management, which significantly accelerates the decision-making process. Moreover, vendors offer dedicated tools such as automatic indexing, which make deal management much more efficient.

Another advantage of virtual data rooms for due diligence is their 24/7 online availability. Physical presence for reviewing marketing plans, financial statements, and other corporate documentation isn’t obligatory anymore. Thus, the due diligence process speeds up, which, in turn, accelerates the deal closure as well.

However, the key reason for using a data room for due diligence is the high level of safety it provides. It’s crucial for businesses to keep their sensitive information and contracts confidential and protected, and it’s easy to do with the security features data rooms provide. 

To sum up

A data room due diligence checklist is essential if you want to facilitate a deal. It helps to organize all company’s documentation and speeds up due diligence. 

The content of the data room checklist depends on your individual goals. By relying on the universal recommendations given above, you can create your own checklist. However, you can also ask your VDR provider to assist you with a more detailed data room checklist. 

If you have not decided on a virtual data room provider yet, opt for the list of top vendors on our main page.

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