Due diligence data room: What is it?

Physical data rooms have become obsolete in recent years as the need for greater security and accessibility increases. Virtual data rooms for due diligence have become the new norm with greater emphasis being put on streamlining work processes and reducing costs.

Due diligence data room services provide sophisticated security features that address businesses’ growing privacy concerns while also providing a safe place for data to be stored and accessed by authorized interested parties.

Using a virtual data room for due diligence as opposed to a physical data room provides many advantages including clearly organized folders for ease of use, increased security with seamless accessibility, less chance of losing files with backup copies being available on the cloud and the opportunity to minimize the impact of human error.

What is a data room due diligence?

Before we define a virtual due diligence data room, let’s say a few words about due diligence in general. Basically, it is a process carried out by stakeholders to review information and carefully assess the potential costs and risks inherent in a variety of business transactions.

This could involve buying new equipment or property or merging two or more corporate entities. A diligence process varies from one company to another.

Electronic data room due diligence benefits both parties and is designed to uncover any potential liabilities before a decision is made. Data rooms offer a secure place for sensitive information to be gathered and stored.

The definition of online due diligence data room

A due diligence data room is a virtual platform for managing and storing confidential business documentation. A virtual data room facilitates the organization of M&A transactions by providing a secure location for authorized parties so that they can review documents, conduct due diligence, and manage assets simply and intuitively.

Before a virtual data room was invented, due diligence required all parties to travel to the physical location where the confidential data, including intellectual property and financial documents (e.g. financial statements), was stored. These days such sensitive information is uploaded onto the cloud where it can be accessed by authorized individuals or teams more efficiently.

Data rooms have made the entire process of conducting due diligence safer, more efficient and inexpensive. Certain types of software can be used to integrate virtual online data rooms with due diligence software creating a single platform with a more coherent workflow.

Best ways to use data rooms for M&A

Draw a schematic of the data room

Start by drawing small squares on a sheet of paper that represent the major files, under this, write the names of the files you expect to be added initially. This will make it much easier to assign task roles and access to the different files.

Give access to the relevant stakeholders

It’s important to give the appropriate level of access to users depending on their function. For example, you wouldn’t give buyers full access to the data room as they don’t require all the information.

Another example would be any folders containing contracts and other employment details that shouldn’t be shared outside of the HR department. This basically involves access management for multiple users.

Any pending commercial or financial transactions should be restricted by hiding the names of the companies involved in the transactions. Digital rights management is an extremely important issue that requires special attention.

Develop a systemised filing system

Using a clear and precise filing system for your documents is paramount to maintaining clear communication across all channels and staying in control of the M&A processes. It’s good practice when creating different folders to include a master file that contains the documents needed by the majority of users. By the way, you can also benefit from an automatic folder structure.

Upload relevant documents and files

Files in the virtual data room must be updated on a regular basis. The M&A process can be slowed down by outdated documents that clutter the data room and ultimately cost money.

Regularly Interact with the data room

Regularly engaging with the data room enables users to develop a proficiency that benefits their overall workflow and productivity. It also avoids the scenario in which the data rooms are left unused for long periods and filled with outdated documents.

How to use data rooms for due diligence

There are many benefits to using a virtual data room for due diligence that will change the potentially old-fashioned processes in your company and make complicated transactions much faster and easier to complete. But only if you use the solutions of the leading providers for your virtual data room.

1. Create a checklist for your due diligence data room

The due diligence data checklist is an index of documents needed during the transaction period. At this point, you’ll gather all the necessary documentation and upload it to the cloud for later use.

2. Develop a precise and unique system for naming your files

Using a clear and precise naming system for your documents is crucial to maintaining clear communication across all channels and staying in control of your due diligence processes. Using generic names may cause your files to be confused with other files. For this reason, it’s crucial to develop a clear naming scheme that’s clearly communicated to all relevant stakeholders.

The benefits of due diligence data rooms

  • Offers advanced security features. Security is one of the most important things to consider when choosing data room vendors for due diligence. Virtual data rooms give you full control over your documents and the ability to set permissions and access limits.
  • Ensures efficient file management processes. Unlike a physical data room, virtual data rooms allow you to efficiently manage important files. You can do it by using a variety of tools including the file viewer, keyword search, and indexing options.
  • Ability to track activity and review analytics. Data room administrators can use the features and tools in VDRs to access metrics like user activity. They can also track log-in/off times to make the due diligence process more efficient. These features are available in any popular data room software.
  • Facilitates more efficient collaboration. Features like the Q&A section and commenting available in a virtual data room help to improve workflow and facilitate communication across the board.
  • Saves time and money. Virtual data rooms for due diligence save time and money by providing faster methods of communication within teams. They ensure fast access to files and help to avoid the problem of duplicate work by allowing users to see who is working on specific tasks at certain times. So basically, virtual data room providers help organizations save both time and money.
  • Minimizes human error. The vast majority of data breaches are caused by human error. Using a VDR for all the data is a cost-effective way of minimizing human error by ensuring administrators have complete control of the important documents at all times.

Due diligence data room checklist

The following is a basic data room due diligence checklist. See the documents and files your due diligence data room might contain.

  • Proof of prior funding round and liquidity history
  • A record of future projections and company financials
  • Tax history, previous audit statements and any third-party financial evaluations
  • Articles stating incorporation and relevant legal documentation
  • Any significant third-party agreements and partnerships, including appropriate confidential documents
  • Any licenses and permits needed for operating legally, as well as official correspondence with any regulators relevant to the business
  • Any intellectual assets such as IP, patents, trademarks and ongoing R&D investments
  • Records proving ownership – a cap table, for example
  • Shareholder certification
Business development
  • Information on products and services from historical models to upcoming strategies
  • Future business goals, potential marketing strategies and financial projections etc.
  • Documentation of any capital assets the company holds, including long-term leases etc.
  • An overview of the key team, including employment contracts and corporate records
  • Current sales strategy and pipeline, including existing customers’ MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue)
Business operations
  • Minutes from previous board meetings for a review process
  • Your business continuity plan and documents related

Due to the fact that all transactions involve unique requests and considerations, this list should be used as a guide only. Using a virtual data room will facilitate the process of conducting due diligence by providing concise data for informed decisions.

Final thoughts

Secure data room due diligence is a top priority for all businesses. Don’t wait to implement an online due diligence data room in your organization! Instead, opt for the best virtual data room software. With our due diligence data room checklist, you can start enjoying the benefits of high technologies available today!