Home Virtual Data Rooms for Due Diligence: Benefits, Selection, and Preparation Tips

Virtual Data Rooms for Due Diligence: Benefits, Selection, and Preparation Tips


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Introducing virtual data rooms for due diligence

The data room industry continues to accelerate the global deal scape with innovative solutions and ever-improving technologies. Company owners and executives choose virtual data rooms over physical data rooms because of the numerous features that ensure secure document sharing and facilitate financial transactions.

The due diligence process is one of the examples where virtual data room services are vital to the project’s overall success. Virtual data room software solutions help companies create a due diligence checklist, share confidential documents, sign important contracts, and improve project collaboration.

Explore the mechanics of the modern due diligence process and learn a few essential tips for choosing the best data room for the task by reading this article.

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What is due diligence?

In the corporate world, due diligence refers to a process of assessing the commercial potential and value via thorough documentation analysis. Here are a few examples:

  • Exploring the opportunities for a possible purchase
  • Acquisition of real estate, equipment, or other assets
  • Corporate mergers
  • Investment portfolio diversification
  • Substantial charity donations

Historically, the due diligence process took up significant amounts of time and effort, as it involved the expertise of various specialists and excessive volumes of data. What’s more, companies used physical data rooms for conducting the due diligence process, which often required a lot of physical space and required the presence of authorized parties.

However, with the recent rise of virtual data rooms, companies started to digitize the due diligence process, saving time and funds. And perhaps the biggest data room shift happened in the mergers and acquisitions (M&A) sector.

What is a due diligence data room?

A due diligence virtual data room is basically a virtual online repository created specifically for conducting the due diligence process. It offers virtual data room users cloud storage for storing financial documents, corporate information, and other sensitive data.

A data room can help you streamline due diligence in these areas:

  • Financial due diligence
  • Sales and customer service
  • HR and employee management
  • Compliance and legal due diligence
  • Administration, technology, and processes
  • Environmental due diligence
  • Strategic decision-making
  • Asset due diligence

With the help of an advanced virtual data room for due diligence, the sell-side and buy-side can facilitate the business transaction and collaborate on the deal more effectively.

Modern virtual data room providers offer a number of dedicated services traditional data rooms can’t provide. However, the main reason company executives choose a virtual data room over a physical data room is the security measures every virtual data room provider takes.

However, there are many other features that the best virtual data rooms offer for successful due diligence. Some of the most popular services include reporting options, the ability to assign tasks and track progress, and collaboration tools.

Due diligence as an M&A stage

M&A deal handlers rely heavily on virtual data room technology, allowing for both comfortable and safe workflow. When chosen correctly, a virtual data room will offer unique value at every stage of the operation.

01
Pre-marketing

The sell-side creates a due diligence data room checklist and gathers all the necessary financial statements and other sensitive documents in a virtual data room to prepare for the deal and take control of the situation.

02
Due diligence process

The buy-side accesses the virtual data room for due diligence to look into financial, legal, commercial, and other aspects of the seller’s performance.

03
Post-merger integrations and operations

All parties use the virtual data room to ensure smooth and effective collaboration after the deal’s closing.

But what are the specific benefits of employing a data room for due diligence?


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How can a virtual data room help with due diligence?

The main challenge of due diligence is safe document sharing without compromising its confidentiality. This means multiple parties with various roles and privileges will need to assess the data in a convenient and safe way. And that’s when the virtual data room providers come in.

Although the list of benefits the due diligence virtual data room brings is much longer:

Strong security with global compliance certificates and data controls.

A virtual data room ensures strong data protection from every possible angle, including access management as well as user-level and document-level control. Security standards like SOC 1, 2, 3, GDPR, ISO 27001, HIPAA, FISMA, and FedRAMP make the system impenetrable.

Instant team communication through a rich set of features.

Improved communications inside an online data room allow for faster and more informed decision-making. The system fosters direct and concise communication via email invitations, Q&A and FAQs, document annotations, comments, instant notifications, follow-ups, and more.

Hassle-free upload of documents in bulk.

Most due diligence data rooms offer such document management features as drag-n-drop or bulk upload. These tools help to upload large volumes of due diligence data in a few clicks to enable starting the due diligence process faster.

Easy document arrangement, rearrangement, and navigation.

The automatic index numbering tool allows for quick data organization, which results in a clear virtual data room structure that captures potential investors’ attention. There’s also in-document search, full-text search based on OCR technology, and various labels and tags to simplify data room navigation.

Ready-made due diligence checklist, fully adjustable to individual needs.

Some virtual data rooms provide a due diligence checklist that helps determine what due diligence documents are required to upload for a particular transaction. Checklists often include dozens of items related to products, services, litigation, licenses, and many more.

Full audit logs and reporting.

Detailed activity reporting lets deal administrators stay abreast of the whole collaboration process. They can get in-depth insights on activity of all collaborators of the data room, their interaction with files, time spent viewing certain documents, and more.

Rich customization and branding options.

With the help of customization options most online data rooms provide, it’s easy to give a virtual data room your company’s branded look. That’s perfect for users willing to walk the extra mile in an attempt to impress business partners.

Instant, round-the-clock access to all critical information.

Due diligence data room providers offer round-the-clock accessibility via a single secure link, reducing the need for physical presence during the document review process. It drastically accelerates decision-making processes because each stakeholder can work independently and at its own pace.

6-step guide for setting up a due diligence data room

  • 1. Set The Right Data Room Folder Structure
  • 2. Follow the due diligence checklist
  • 3. Set the permissions
  • 4. Upload the documents
  • 5. Invite users

1. Set The Right Data Room Folder Structure

Data rooms give you the privilege of effortless data organization. But in order to make it work, it’s essential to set the right folder structure. The idea is to make a balance between adding too many and too few folders. Our suggestion is to divide information into key themes and areas:

  • Tax folder
  • Commercial folder
  • Corporate and financial folder
  • Legal folder
  • Technical folder
  • Environmental folder
  • HR and operational folder

This type of data room index will help all participants to easily find their way through complex data structures.

2. Follow the due diligence checklist

A virtual data room ensures a smooth due diligence process, but it becomes much more efficient when you follow a dedicated due diligence data room checklist. The list should contain standard due diligence documents and steps to execute a due diligence process. We are talking about these elements:

  • Assets and liabilities
  • Financial documents
  • Contracts
  • Benefits
  • Possible drawbacks

3. Set the permissions

The best thing about due diligence data rooms is the ability to securely manage sensitive data and confidential documents. Unlike traditional data rooms, virtual counterparts enable you to set the right access levels for each user or group of users. Depending on the role, each user will have different permission in terms of accessing sensitive documents, uploading or deleting files, editing information, and so on.

4. Upload the documents

Now it’s time to upload all the relevant documentation into the due diligence data room. That includes financial statements, data on business transactions, contracts, investments, and asset inventories. Of course, do your best to double-check all the information and documents before you upload them.

5. Invite users

Modern data room providers allow you to send invitations when everything is in place. It’s a big benefit compared to physical data rooms because you can invite all the necessary parties to the online platform with just a few clicks. This includes users from opposite sides of a deal, as well as third-party advisors or auditors who are necessary for financial due diligence.


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How to organize your data room for due diligence

We already mentioned that data rooms should contain relevant folders, but how do you organize them? Follow the steps below:

  1. Define folders to upload your due diligence document to. First of all, you should think about the documents to be included in each folder. Most companies sort these documents into common categories such as financial, legal, risk management, human resources, tax information, technical information, etc.
  2. Break folders into subfolders based on the types of documents they contain. Then you can subdivide each category further with subfolders depending on the type of documents contained in them. For example, you can have a folder for contracts and another one for benefits in the legal section. You don’t have to be too precise when organizing folders, but you should make sure that all the relevant documents are easy to access.
  3. Double-check the suggested structure. The point is to ensure quick access and orientation. However, you should also avoid overcomplicating the folder structure, as this can lead to confusion and slow down the due diligence process. You should also make sure that users have access only to what is necessary for them. This will help protect sensitive data and reduce the risk of unauthorized access.

How to start using a due diligence data room?

Now that we’ve got all that covered, the next question is how to start using a due diligence data room. It largely depends on your business needs, but we will cover the basic steps here:

1. Choose the best VDR

It all begins with the VDR selection. The good thing is that we already tested multiple options and concluded that iDeals is the finest data room for due diligence. This platform makes a virtual data room solution for companies across all verticals. Users praise iDeals for its powerful features:

  • Ease of use. It’s easy to set up a data room. With drag-and-drop uploads, single-sign-on, and auto-indexing, users can get a data room running in just 15 minutes.
  • Customer support. Clients enjoy the privilege of customer support speaking 11 languages, in-app live chat with 30 sec response time, and dedicated managers — all on a 24/7 basis.
  • Security. With 8 levels of granular permissions and complete audit logs, the iDeals data room offers a level of protection that cannot be compromised.

2. Beware of software and hardware security

Data room technology is a combination of advanced cloud computing and top-grade physical storage facilities. The following features indicate the virtual data room providers’ commitment to ensuring high-level security:

  • At least 98% server uptime
  • Continuous data backups
  • Data transfer encryption using 256-bit AES keys
  • Unauthorized access protection via multiple-step authentication
  • Versatile security configurations inside the data room

Another approach to ensuring data security is locating proof of certifications and compliance by independent organizations, such as:

3. Structure folders and send user invites

When everything is in place, you can start to create folders and upload documents. Afterward, you can send user invitations to the participants of your deal. You should also enable audit trail monitoring, customization tools, and other features.

Besides that, you are free to assign tasks to other users and track the progress of their activities. This will help you keep your data room organized and make sure that due diligence is performed correctly.

Tips for the due diligence virtual data rooms maintenance

In order to make the most of your data room software, it’s necessary to avoid common due diligence mistakes. Besides that, you can follow a few practical tips to protect intellectual property and ensure proper maintenance of data rooms. Here’s how to do that:

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Using a proper due diligence checklist

As we already mentioned, the due diligence checklist is the starting point for all data rooms. Make sure to have a complete list of documents and steps even before you start preparing the data room.

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Keeping documents updated in real time

Make sure to update documents regularly with fresh information. This will prevent any misunderstandings throughout the whole process and make the entire due diligence process smoother, with more accurate results.

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Rely only on fresh audits

If you decide to require an audit report, make sure it’s as recent and up-to-date as possible. This will reduce the risk of discrepancies between the documents and ensure proper due diligence maintenance.

Key takeaways

Here are the key points to know about due diligence data rooms:

  • Due diligence is the process of assessing the commercial potential and value via thorough documentation analysis
  • A due diligence virtual data room is a virtual online repository created specifically for conducting the due diligence process.
  • VDR improves due diligence by protecting data, improving communication, creating checklists, and enabling customization features.
  • Choose a data room based on features like security, user interface, customer support, and free trial or demo

A virtual data room adds value to the due diligence process. Visit our main page to compare virtual data rooms and choose the best providers for due diligence available on the market.

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