09, June 2024

VDR Due Diligence Advantages and User Tips

Due diligence involves a thorough assessment of a business or asset before entering a transaction, such as an acquisition or partnership. This process includes evaluating financial performance, legal compliance, operational efficiency, and strategic prospects to identify risks, growth opportunities, and potential issues. This procedure helps buyers get the full picture so they can make smart choices, enabling effective negotiation of terms.

With the physical data rooms almost entirely in the past, the due diligence process handling is accelerating at unforeseen speeds. Let’s take a closer look at due diligence virtual data room technology basics and find the most optimal ways to apply them to your project.

What is a due diligence data room?

Regardless of the deal type, due diligence is typically a time-consuming process that involves numerous people and important documents. Previously, the only solution for such procedures was a traditional data room – a physical space that contained the company’s documentation and accommodated the necessary experts.

There were several significant issues surrounding physical data handling:

Difficulties with retrieving the required documents fast
Higher risk of security breaches
Traveling and scheduling inconveniences

Data room software addresses all the above challenges at once. Virtual data room developers created online platforms that secure critical financial documents and allow transaction contributors to communicate with each other more conveniently.

A due diligence data room became synonymous with faster and more streamlined deal processing. By utilizing specialized instruments and enabling smarter workflows, you can navigate the decision-making process efficiently and achieve the necessary milestones on the way to a successful closure sooner.

Virtual data room’s role in due diligence

A cloud-storage data room offers benefits at any stage of the deal, from initiation to post-merger integration. But most users still associate it with due diligence. This connection is based on the fact that VDRs significantly improve how you manage important documents, control access to specific files, and communicate with prospective investors and their representatives.

While a physical deal room simply stores documents, its digital successor offers tools for interacting with data through editing, analysis, and engagement optimization. As a result, the deal handlers are more equipped to make the right move at critical moments and find a mutually-beneficial solution using insights.

Types of due diligence

VDRs help to store and share corporate documentation for the due diligence process within a larger project. Such projects include mergers and acquisitions, corporate restructuring, IPO filing, board management, and more.

Below are examples of various due diligence types that typically occur in most business transactions.

Financial due diligence

A due diligence data room allows its administrators to maintain control over external and internal financial transactions, keep records, and navigate accounting and taxation. If the company undergoes a merger or any other transition, these documents will be reviewed by investment bankers, advisors, accountants, and other third-party experts assisting the practice.

Environmental due diligence

A data room can also contain documents that describe the company’s environmental impact, licenses and precautions that go along with their operation, etc. This category of sensitive data is accessed by regulatory inspectors to evaluate the risks and ensure the necessary compliance.

HR due diligence

Human resources operate with immense amounts of confidential data, such as employee contact information, contracts, and performance evaluations. A due diligence VDR enables organizing the documents and ensuring they don’t get into the wrong hands while being reviewed during an acquisition, for example.

Commercial due diligence

Commercial or market due diligence is a strategic review process that allows assessing the company’s current and potential positioning. At this stage, the data room will contain documents like customer base analysis, sales volumes, marketing strategies, and more.

Legal due diligence

Due diligence legal aspects involve evaluating past and future liabilities. During this process, the user access to the virtual data room is given to internal or third-party legal teams that will look at anything from licensing agreements to settled and ongoing disputes.

Other due diligence varieties cover the matters of taxes, operational mechanisms, intellectual property, information technology, and local regulatory requirements.

Advantages of using data rooms for due diligence

A well-chosen and organized virtual data room offers a lot more than a solution to store your documents. Below is the summary of benefits you get with the right due diligence VDR.

Utmost data security

Escalated data safety differentiates virtual data rooms from public-access file storing solutions, such as Google Docs. The highest-grade software and hardware combination ensures that extra-confidential documents like intellectual property summaries remain secure while allowing convenient access to authorized users.

Data room features that come in particularly helpful during due diligence are:

Security compliance with industry standards such as ISO 27001, SOC 2, HIPAA, etc.
Two-factor authentication
Document-specific NDAs
Detailed activity tracking
Dynamic watermarking

Simplified file organization

A data room allows to save time during the due diligence process by providing instant access to large volumes of documents. Both internal and external users can retrieve the required documents in a secure environment and use various tools to amend, comment, or sign.

When it comes to document organization, you will benefit from tools like:

Templates for automatic folder structure
Extensive file format support
Full-text search

Remote contribution

As briefly mentioned before, a due diligence data room is a digital space that enables interested parties to participate in the process regardless of their physical location. As cloud storage, your data room can be simultaneously available to dozens of necessary due diligence professionals.

To further improve the online contribution inside your virtual data room, look for features such as:

An option to invite users via different channels
Multi-user access to the same documents
Offline editing

Improved accountability and reporting

Data room due diligence introduces a new level of collaboration transparency. Administrative users can track who accessed the platform, how long they stayed, and what actions they took.

Activity reports have a virtually unlimited number of applications, from human resources’ evaluations to tracking the progress of deal-specific financial documents. As for the due diligence process, data room activity analytics serve as measures of engagement and investors’ interest.

To track the task completion and other processes inside the data room, you might use:

Infographic dashboard visualization
Color-coded department or project-oriented reports
Actionable task management items

Optimized communication

Unlike the physical storage, electronic data room technology offers a lot more solutions for sharing and exchanging data. Participants can review and request information within or outside their user group using chat, direct messaging, video calling, and more.

You and other parties will benefit from communication instruments such as:

Integrated Q&A
Private and group messaging
Configurable notifications

Cost-effectiveness

Virtual data rooms eliminate the need to deal with physical data and allow gathering multiple parties in a digital space. This means that a data room is a lot more time- and cost-effective solution for due diligence than in-person meetings.

A VDR can significantly reduce costs associated with:

Paperwork printing and distribution
Travel and accommodation
Storage space maintenance

How to choose a virtual data room for due diligence

If you have been using a physical data room until now, the transition to digital dealmaking can be challenging at first. Primarily due to the sheer number of VDR solutions on the current market.

To streamline your due diligence process and ensure the security of your documents, consider the following suggestions.

Define the search criteria

Most virtual data room providers have several target company profiles to which they offer the most value. To find the right fit, you first need to outline the requirements of your project. This process includes answering questions like:

What is your company’s size and industry of operation?
How many due diligence data rooms do you plan to establish?
Who will be the users of your virtual data room?
How many documents do you need to store?
Which security measures and features are essential to your deal’s success?

The answers to these questions will help you to build a search framework and quickly filter out the data room vendors that don’t match your cause.

Research and shortlist data room providers

Since your due diligence VDR will contain a lot of confidential information, your priority is to look for reputable providers, preferably with experience in supporting due diligence. The data rooms you should shortlist must have at least ten years of experience, align with your requirements, and meet your budget.

Review expert and user feedback

The next stage is browsing feedback from past and current virtual data room users across independent sources. Any successful data room provider will have recent reviews that can help you assess their product’s quality and customer satisfaction levels.

Pay attention to the comments that mention:

Interface design and usability
Access management capabilities
Tools for processing high volumes of documents

Request demonstrations and free trials

Once you have selected several providers you want to explore in more detail, reach out to their teams requesting tailored price quotes, free demonstrations, and trial periods. Established data room companies would typically allow up to a month of complimentary testing to help users familiarize themselves with the software and see if it makes the right fit.

During the trial period, try out the tasks you will perform throughout the due diligence process. For example, assign task roles to various categories of users, see how easy it is to navigate the data room from different perspectives, and experiment with different approaches to organizing your documents.

Top 5 due diligence data room providers

iDeals
With nearly 15 years on the market, the iDeals virtual data room offers an abundant set of due diligence features, including military-grade security protocols, eight levels of user access privileges, remote shred, and an option to work with all kinds of documents online and offline.
Intralinks
Intralinks is a fitting software for handling confidential information during complex transactions in the financial sector. The platform offers tools like single-click mobile access and fast setup.
Datasite
Datasite delivers data room software to large and enterprise-level companies undergoing mergers and acquisitions and M&A-related due diligence. The software’s strongest suit is an all-round approach to high-stake transactions.
Box
As a data room built on top of a file-sharing service, Box allows its users to easily access the necessary files and collaborate in an easy-to-navigate interface.
Brainloop
While Brainloop’s primary focus is board management solutions, the provider also offers sufficient features for managing company documents within secure data rooms.

Virtual data room setup for due diligence

Once you have browsed the fitting data rooms and made your choice, it is time to get the digital space ready for the upcoming due diligence. You, or anyone assigned as your data room administrator, will need to take the next six steps to get the due diligence virtual data room up and running.

Step 1: Visualize your virtual data room layout

To expedite the data room setup process, begin with picturing the most optimal way to organize all the necessary documents. The ideal structure will combine convenience and security. For example, consider that some files, such as financial statements, will be accessed by multiple parties, while HR data will be exchanged on a strict need-to-know basis.

Tip: A due diligence data room checklist can be a great asset in planning the optimal virtual data room arrangement. Ask your provider to supply you with a pre-designed one or advise you on creating a list from scratch based on your deal’s specifics.

Step 2: Create a logical folder structure

Based on the data room blueprint from the previous step, create folders and subfolders to store the documents in. Ensure that the folder system will be easy to understand even for the new users and that all sensitive documents have sufficient levels of protection.

Apply an automated data room index tool to quickly locate the necessary files and correspond digital documents with their physical counterparts, if applicable.

Step 3: Gather and upload all the necessary files

Next, fill out the data room with content, gradually adding all documents related to the due diligence process. Make sure that all the formats are supported by software and convert those that are not, if needed.

Tip: To make uploading documents faster and easier, use tools like bulk and drag-and-drop uploads.

Step 4: Establish user roles and rights

Configure the access rights of all invited users before they join to guarantee utmost security. Data rooms that were built for due diligence will typically allow you to set up several types of user privileges on both role and file levels.

Step 5: Assign NDAs to highly confidential documents

Certain documents require higher levels of protection than others. Use the virtual data room tools for NDA assignments to add an extra layer of accountability to selected documents. The agreement condition will pop up each time an authorized user opens the file.

Step 6: Invite the participants to your virtual data room

Finally, add the new users to the data room and start fulfilling requests over the course of the deal. Keep an eye on the active participants of the due diligence procedures to add and remove contributors as needed.

Tip: Use the view-as feature just before sending out the invitations to ensure each user has the appropriate access rights.

To maintain the security and effectiveness of your due diligence data room, create a schedule to review documents, user rights, and the platform structure. Because while this software offers numerous automated tools for interacting with documents, the due diligence process requires a hands-on approach.