Aug 09 ‘23
20 min read
Due diligence is the process of checking all important facts and financial information, as well as all the data mentioned throughout the M&A deal or investment process. Prior to a transaction closing, due diligence is conducted to ensure that the buyer knows exactly what they’re buying.
Due diligence aims to equip the buyer with all the information they need to make the right decision. If the due diligence team finds any issues, they will have to decide whether to abandon the deal or modify it. But if everything looks okay, the buyer and seller can proceed with the transaction.
However, 40% of deals still suffer from inadequate due diligence that doesn’t allow companies to capture truly transformational value, according to McKinsey.
To help with this task, companies need a proper and secure solution — a virtual data room. In this article, we cover everything you need to know about virtual data room due diligence and how it can help with the process.
Check the best data rooms for due diligence
iDeals
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Dealroom
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Citrix
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Box
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
Intralinks
- Access controls
- Built-in viewer
- Full-text search
- Auto-indexing
- Customizable branding
- Advanced Q&A
- In-app live chat support 24/7
- 30-second chat response time
What is a due diligence data room?
A due diligence data room is a secure cloud storage space where many parties in M&A agreements may share necessary documents and sensitive data. It allows for the storage and exchange of key commercial, legal, and financial papers that can be displayed to potential investors for review and analysis before the start of a partnership.
Following the seller’s permission and signing of the NDA, investors and potential buyers can simply access due diligence data rooms. In comparison to a standard data room, an innovative and up-to-date choice is flexible, economical, and helpful.
The administrator can grant access to the essential documents to several authorized users, and each user’s degree of access is controlled by the administrator. The data in the virtual data room may be uploaded and downloaded by the administrator.
- Extra reading: Learn how to write a due diligence report in our dedicated article.
Applications of due diligence virtual data rooms
Let’s now take a look at where exactly due diligence file-sharing services of VDRs are used. Below is the list of the main industries and use cases:
- M&A. This is the most obvious sector where data rooms are used since due diligence is an integral part of every M&A transaction. M&A professionals use virtual data rooms both on the sell- and buy-side to streamline document analysis and collaboration in due diligence.
- Real estate transactions. Real estate professionals often use VDRs for property sales or financing, since VDR services allow for securely sharing property documents, vendor contracts, leases, permits, or environmental reports with buyers and lenders.
- Legal due diligence. In law, the security of the client’s data is of paramount importance. That’s why law specialists often opt for data rooms when sharing case files, depositions, discovery documents, and other legal materials with clients, co-counsels, or opposing parties during litigation proceedings.
- Investment banking. Due diligence is also an integral part of capital raising and IPO preparation. Investment bankers use VDRs to securely share financial statements, pitch decks, business plans, financial records, and corporate governance documents with potential investors or underwriters and regulatory authorities.
- Private equity and venture capital. Due diligence data rooms are also often used for investment due diligence or portfolio management. With their help, private equity firms and venture capitalists can review financial statements, investment memos, market research, and other confidential documents when evaluating potential investment opportunities.
Why use online data rooms for due diligence: top 4 reasons
Virtual data room software provides a secure environment for multiple parties to store and distribute required documents and information.
Ensuring high-level data protection, a diligence virtual data room facilitates smooth communications and secure document sharing between the seller side and buyer side. The right people gain easy access to relevant data and can share reports and progress without worrying about data breaches.
The due diligence process involves multiple people working on a myriad of confidential documents and sensitive data from the start of business transactions to their post-merger integration. Without proper precautions, this phase of the M&A can seriously compromise data security.
With that in mind, let’s define the top 4 reasons why M&A professionals use the virtual data room cloud solution during due diligence.
1. Protect their data and intellectual property
The virtual deal room puts you in control of your data at all times. Through the use of permission-based user roles, you may specifically manage user access and who can view the data you submit. For increased security, you may quickly watermark all papers with a timestamp, name, and e-mail address.
Additionally, most online data room due diligence vendors make users sign a non-disclosure agreement before entering the deal room, so you can rest easy knowing that your confidential information is safe.
What’s more, most modern VDR providers ensure that user data is protected by at least 256-bit encryption with 2048-bit keys when transferred and at rest. To ensure even more data protection and confidentiality, data rooms comply with present data privacy laws and regulations, such as HIPAA or GDPR.
2. Maximize the deal success
The deal room also makes it simple to build an auction-like atmosphere that drives deals, providing you with visibility into data room activities via audit trail reporting and allowing you to have a better picture of who is actually interested in your transaction based on their behaviors on the platform. This is really beneficial for sellers.
What’s more, data rooms offer various collaboration services that allow for real-time collaboration of the deal parties. This, in turn, can significantly accelerate the decision-making, since the buy-side and sell-side can discuss all the issues timely and proactively. Some of the collaboration VDR services include Q&A sections, comments, notes, and in-built chatting.
3. Expedite the entire process
Due diligence and deal-making may be time-consuming, but the capabilities of a data room can help speed things up. To begin with, the virtual data room is user-friendly, and even those who are entirely new to using it often require no training or explanation. This saves time for both parties.
Not to add, from start to finish, setting up your virtual deal room takes less than 15 minutes. After that, you’ll be ready to begin.
To ensure an even more streamlined VDR experience, modern vendors offer outstanding customer services, with training and customer support ready to address all inquiries 24/7 and via several channels: email, chat, and phone.
4. Save the company’s valuable resources
A traditional data room may come with a large price tag and hidden costs, while a virtual data room lets you know exactly what you’re getting into. Typically, you only have to pay one fixed charge, which covers limitless storage and users at your discretion. There are no surprises here.
What’s more, most vendors are ready to discuss your subscription type based on your company’s unique needs.
Features of VDRs essential for due diligence
So, what are the crucial features for a data room to have to be suitable for streamlined and efficient due diligence? We’ve briefly listed them in this table.
| Category | Features |
| Data security |
🔸 Dynamic watermarking |
| Data management |
🔸 Drag-n-drop and bulk uploads |
| Ease of use |
🔸 Single Sign-On |
| Collaboration |
🔸 Q&A sections |
| Access security |
🔸 Granular access permissions |
| Customization |
🔸 White-labeling |
Criteria to consider when choosing a virtual data room for due diligence
Not all virtual data rooms are created equal. You need to pay close attention to the must-have features for a successful due diligence process. Below, we describe what to pay attention to.
Security
To prevent data breaches, choose a due diligence data room that provides advanced data security and digital rights management. It must ensure document protection with features like 256-bit encryption, remote shredding, automatic watermarking, restricted viewing mode, secure spreadsheet viewing, detailed access policies, and antivirus protection.
Full access control is a must. It’s critical to be able to allocate access based on job titles and duties. If not, confidential information can be read by those who have no connection to it. That isn’t always the case, and it might have unfavorable outcomes.
The data room should provide a unique permission profile to users that enable access only to specific files and folders. It should also track user activities and provide audit logs.
Based on our experience, for instance, users often choose Ansarada and iDeals when seeking extra security for their data.
Security compliance
But how do you make sure the diligence data room providers are as safe as they claim to be? Allow the presence of the international third-party certification program to do the talking. Choose a virtual data room that’s ISO27001 certified, SSAE 16 certified, HIPAA certified, and SOC2 compliant. They should also conform to international standards, such as the OWASP and Microsoft Secure Development Lifecycle.
Of course, the industry and location your company operates in also matter. For instance, if you work with European clients’ data, you should look for VDR providers that are GDPR-compliant, such as Drooms, for example.
Ease of use
Make it easy for users of varying professional backgrounds and technological know-how to use the data room for due diligence. The virtual data room should provide an intuitive interface that ensures anyone can use it and easily access needed files without requiring intensive training.
The data room must be accessible from all devices. It also shouldn’t require plug-ins or fancy software and must be compatible with Windows, macOS, Android, and iOS. Moreover, it must have a responsive user interface that works seamlessly on mobile devices.
Based on our observations of real user feedback on the G2 platform, excellent user experience is what clients often choose iDeals data room for.
Multilingual support
Your due diligence team may involve people of different nationalities. Make sure your virtual data room has the necessary multilingual features to accommodate users from varying ethnic and geographical backgrounds. This is especially crucial for cross-border M&A deals, and thus, a data room for M&A will be essential.
Usually, modern VDR vendor due diligence providers make sure that they offer support at least in several languages. For instance, you can consider such vendors as Datasite, iDeals, or Ansarada.
Integrated Q&A and chat
The due diligence process involves complex transactions that may raise many questions. Make the exchange easy by choosing a virtual data room that provides an efficient way to post questions and provide answers. The data room for due diligence should also enable secure chats for seamless communication.
Among the VDR providers that offer such functionality are Firmex, Ansarada, and Venue.
Free demo
One of the best ways to ensure that you’re using the best due diligence data room for your needs is to use it. You may want to give the platform a try before committing to it, and a free demo lets you do just that.
When choosing a perfect virtual data room provider, you can make a choice between the top data rooms we have thoroughly selected through various criteria.
For instance, some vendors that offer a free trial for new prospects are Firmex, Intralinks, and iDeals.
Selection Help for Due Diligence
How to use a due diligence data room?
Importing a pre-made request template is the simplest way to get started with a due diligence data room. The data room and folder structure are automatically supplied and structured when you already have a premade template.
Users can then start fulfilling requests by dragging and dropping the needed files onto the platform. They may also delegate work duties, chat with other users, and invite new people into the room.
To get started with a data room, follow these steps:
- Find the most suitable due diligence data room provider. Finding the best data room provider for your project’s needs among dozens of data room vendors is the most time-consuming aspect of setting up a due diligence data room. The price structures, functionality, and use-case categories of virtual data room providers differ. Although everyone’s initial reaction is to make a selection based on pricing, it should really be the last aspect to consider. Instead, concentrate on the unique value each provider may bring to your company’s deal-making strategy.
- Choose a suitable plan. The best option is to choose software that charges a set cost for its services. You’ll have more flexibility to manage files, engage with other people, and complete all phases of your project this way. Choose a plan based on the quantity of data you want to save in the data room and the size of your transaction. The greater the number of individuals and data involved, the higher the cost. To learn more about what types of subscriptions and pricing plans exist in the virtual data room market, explore our dedicated article.
- Start a free trial and get the data room due diligence checklist. Request a due diligence data room checklist from your provider so that you may gather all of the relevant information ahead of time and create a logical data room layout. You will add, remove, and change the files within the data room as the deal progresses. However, it’s usually a good idea to start with a pre-designed document flow.
- Make sure the automatic folder structure is correct and easy to understand. Make an outline for your due diligence data room using the due diligence checklist. Then, depending on the specific nature of your company’s style, make the required alterations. Typically, a good data room file structure consists of logically organized folders and subfolders with clear and specific titles. This makes finding the required data or files a breeze.
- Begin by uploading documents. Transfer your data to data room software once all folders and subfolders are ready. Pay close attention to the name of documents and the sequence in which they appear in each folder.
- Add users, and assign task roles, due dates, and priority. Set permissions for each deal party to control access, and send out invites for multiple users to the due diligence virtual data room. Use a user impersonation feature to ensure that everyone has access to the information they need and to double-check the security of sensitive documents.
7 benefits of using virtual data rooms for due diligence instead of physical data rooms
Many companies that are using due diligence data room notice improvement in overall productivity resulting in better deal outcomes.
Let’s define the main benefits a reliable virtual data room offers:
1. Data security
When comparing a physical data room to the virtual one, you’ll notice a significant difference in the level of security. Human and mechanical faults are not allowed in online data rooms. Furthermore, internet solutions allow the organization to regulate who has access to the due diligence virtual data room and its confidential data during the diligence process.
To ensure that the crucial papers you submit are completely protected, virtual data room providers use extremely high-security technologies, including data encryption and activity tracking. It is difficult for other parties to print, copy, or change certain documents without your approval.
2. Accessibility
The online due diligence data room is a user-friendly choice that makes managing your business easier. You don’t have to go to the office to sign some paperwork or see the transaction information.
Virtual data room services are available at any time 24/7. The data room includes excellent file management tools, such as drag-and-drop file upload, which speeds up the uploading process. There are other features that make document management more efficient, including a built-in file reader, in-document search, and indexing.
3. Simple document management
As technology advances, software solutions will inevitably become more user-friendly. People using the due diligence virtual data room will have varying degrees of computer experience, therefore the procedure must be as simple as possible for everyone.
Essentially, the easier it is to handle documents, the faster the purchase will move ahead. Cutting time out of due diligence aids in the closing of all sorts of deals.
4. Service price
Some people assume that due diligence data rooms are only available to large organizations.
Customers, on the other hand, pay less for this service than they would for physical storage. As a result, another benefit of adopting the platform is the cost. The organization and the provider debate the needed set of functions and the pricing.
5. Flexibility
Aside from the mentioned characteristics, the vast majority of virtual data room service providers will also give helpful record activity, and a variety of other features, all of which will add to the ease of data service users.
In the virtual data rooms, you may keep track of all team members’ logging on and off activities. You may also observe how long visitors spent viewing a page and which content received the most attention. You may also use tracking features to better organize activities and monitor project progress.
6. Full document and activity control
For investors, there is a lower risk. Constant access to papers is an unavoidable aspect of effective collaboration. The essential data may be viewed by the investor at any time. As a result, one of the primary goals of data room due diligence is to reduce risk and ensure safe collaboration based on mutual trust and understanding.
Organizations continue to use file-sharing services. They’re utilized for one-time transactions as well as on a regular basis. The following material gives a quick overview of data rooms and explains why the new software is dominating the market.
7. Transparent and effective communication
Digital communication channels have risen to the occasion while live discussions faded into the background. While others argue that virtual deal-making will never be able to replace the power of a handshake, many businesses have adjusted and welcomed the new paradigm.
The more that can be done inside the virtual data room for due diligence, the better. This includes sending and receiving messages as well as making video and audio calls. The communication tools should be as simple and straightforward as the rest of the data room’s capabilities.
Summing up
Due diligence virtual data rooms offered by leading providers are completely automated and require no human intervention to operate. The data room, which is completely safe and secure, will allow you to store, examine, and exchange essential information with potential investors most beneficially and effectively possible.
By implementing a virtual data room into the due diligence process, dealmakers enhance the chances of closing deals faster and more successfully.
Visit the main page to compare and choose one of the top data room providers for due diligence deals.
