Virtual Data Room for Due Diligence: How To Choose, Prepare And Use

Due diligence is known to be one of the most complex business operations. But fortunately, the modern IT industry offers virtual data rooms that make diligence processes much easier. 

So, how does a virtual data room for due diligence benefit all parties? Does it affect the procedure at each stage? How to choose a data room for the best results? What are the top data room providers? Find out the answers right now.

What Is Due Diligence?

Due diligence is a compulsory part of an M&A, during which buyers can check whether a purchase is worth their investment. To be more precise, they conduct a thorough analysis of sell-side financial statements and other critical documents to explore the appropriateness of deal-making. So, due diligence is a proven way for an acquirer to avoid potential losses by evaluating business problems, liabilities, and risks on time.

Reasons For Due Diligence

At first glance, it may seem that only a buyer has grounds for this procedure. However, it is an excellent opportunity for sellers to understand a company’s financial integrity better and determine its fair market value.

Basically, due diligence is essential for the following reasons:

  • confirmation of data brought up during the investment process or transaction
  • obtaining information that is useful for evaluating the transaction
  • detection of flaws to avoid unprofitable business
  • confidence that the deal complies with all relevant criteria

The parties should avoid unaudited information and shortchanging the procedure to achieve these goals. Still, they should involve experts, ensure transaction transparency, and provide ultra-security of data.

What Is A Due Diligence Data Room?

The due diligence data room is a secure online space for storing M&A documents and productive collaboration between parties.

The reliability of this cloud solution is undeniable since the original purpose of a data room due diligence development was to facilitate M&A and due diligence. The developers considered all the parties’ needs throughout the entire deal life cycle and, thus, significantly streamlined it. As a result, today’s due diligence data room has almost replaced the physical deal room, which carried many privacy threats and complicated the course of procedures.

Why Does Your Business Need Virtual Data Rooms For Due Diligence?

A due diligence virtual data room has become a must for a successful transaction due to its many benefits to every participant. Here are the most important ones:

Top-level data room security

The platform includes robust protection mechanisms that apply to all the data. In addition, virtual data room users get tools to control access and activity tracking features. This solution compares favorably with international data protection standards, including SOC 2 Type II, HIPAA, FedRAM, GDPR, etc. What is more, providers regularly undergo software security checks by independent organizations.

Saving time and effort

The unique features of due diligence data room software are a way to complete tasks faster and automate them. For example, you do not need to rummage through a pile of papers to find a document because a search engine helps. As for task automation, you no longer need to index files manually.

Activity tracking

The best virtual data room for due diligence offers options for monitoring all the transactions’ actions. Thus, administrators can see each participant’s login and logout times, activity, the data they view, and the changes made. Notably, this function serves as an analytics tool because admins track the most visited documents, draw conclusions about their importance and use this knowledge to their advantage. 

Smooth and efficient collaboration

The feature set for cooperation is not inferior to the main property of the virtual data room solutions – security. Consequently, multiple users stay in touch 24/7 and are always up to date with the latest developments, essential for due diligence. In addition, parties do not need to use additional programs for data exchange and communication because VDR providers have worked through this. 

Efficiency in terms of time and costs

Due diligence data rooms are an all-in-one product that includes fast communication, instant access to documents, and options for repetitive tasks. As a result, due diligence parties significantly reduce financial and time costs with such a set. After all, now they do not need to use physical data rooms that require payment of rent, rummage through large volumes of data, or perform tiring monotonous tasks.

How Does A Data Room Improve The Due Diligence Process?

The above list of benefits clearly indicates the platform’s suitability for each stage. Moreover, a VDR helps to complete each of them successfully based on the recommendations of due diligence experts:

  • The first recommendation is the involvement of superior technologies. It is especially true for the online due diligence data room developed for corporate transactions and characterized by specific features and high security.
  • The second piece of advice is a distribution of tasks. Team members must be aware of their areas of responsibility before the procedure begins. And that is why data room software options allow you to assign tasks from any device and place. Moreover,  performers immediately know about them via notifications, which speeds up diligence workflow.
  • And finally, it is the process control. Since due diligence involves ultra-sensitive data and many parties, you need to track everything to keep things running smoothly and secure. Luckily, virtual data rooms offer help with controlling everything through tracking and reporting.

As you can see, due diligence data room services align with the essential expert tips to make your deal smooth.

Due Diligence Stages And Data Room Benefits

The due diligence procedure may differ depending on the size of organizations, industries, etc. However, check a few of the essential steps relevant to all companies and see how a data room can help:

Preparation of documents

For a detailed and comprehensive analysis of a target company, bidders study financial statements and other documentation thoroughly. However, first, sellers should prepare necessary data – collect, organize, and make it available. Therefore, it is crucial not to miss anything important during the preparation since this leads to delays. 

Luckily, sellers can use the due diligence checklist to avoid a deal failure. This way, you can ensure that your data is complete and structured.

Data sharing

Sellers must monitor the transfer of sensitive documents and the other party’s actions to avoid unauthorized use. For instance, physical data room clients receive unreliable mechanisms such as video surveillance and specific rules for access to the repository.

In turn, virtual data rooms provide a simple yet super secure exchange of confidential data. For this, an administrator sets the permissions to use each file. Thus, participants cannot view or share what an admin has hidden from them.

Verification of documents

Bidders are attentive to each document, and they often have questions for a seller. Consequently, this encourages additional calls, correspondence, and meetings, taking up time.

An electronic data room includes a unique question and answer module (Q&A). It is a tool to help the sell-side respond to buyer questions quickly and comprehensively, making it easier for both parties to manage the process.

Post-due diligence

A seller should satisfy the compliance requirements and ensure an audit trail and data disclosure evidence at the final stage. Since a data room is designed for due diligence, it includes the options and services for the final stage of the procedure too.

Thus, the data room software complies with international data protection standards, generates audit reports, and contains all information about all activities taking place in the online data room.

How To Choose A Virtual Data Room For Due Diligence?

Even though data room due diligence rules business transactions in advanced companies, not all products are worth the investment. Therefore, consider the following points when choosing software:

  • Document control. Since data protection is critical to due diligence, you should ensure that data room options are of the highest quality. Check how an admin can manage access security and options available for users afterward. Ideally, participants’ access should match their tasks during the procedure, but no more than that, to avoid the risk of leaks.
  • Security. As mentioned, data protection is one of the hallmarks of virtual data rooms. However, not all platforms are equal in quality, so check all types of data encryption, multi-factor authentication, compliance with international data protection standards, etc.
  • Cooperation. Regarding this aspect, pay attention to the data room collaboration features and their security. Since due diligence involves many participants, you need tools for communication, access to data from any device 24/7, the ability to change security settings, and timely notifications of updates.
  • Ease of use. It may seem not worth much attention. However, due diligence participants know the procedure involves complex operations requiring an easy-to-use tool that reacts to user commands within a few clicks.
  • Price. Data room vendors have different pricing policies, but there are offers for any budget. However, before purchasing the most expensive or cheapest deal room, evaluate the needs of your team. Then, you can compare them with the virtual data room services and see if that solution is worth the investment.
  • Reviews. The most trusted resource for checking a particular due diligence data room provider is user reviews. There is always first-hand information on the pros and cons of a data room. So, do not blindly trust virtual data room providers and rely on reviews, as vendors may hide software defects.
  • Free trial. It is an opportunity to test virtual data rooms. A good vendor offers their service for free so that you check convenience and safety. However, some providers do not have such a service. You pay for the purchase in such a case, but you do not know what you will get. 

What Are Data Room Features For Successful Due Diligence?

The security of due diligence data room contents, the ease of workflows, and the result depend on the features listed below. Therefore, they should become another criterion when choosing the best data room for you.

User management

This category includes the following options for controlling all parties to the transaction:

  • Granular user permissions. With virtual data room software administrators can restrict the ability to view, edit, share confidential documents, and print. This improves data integrity and helps track usage.
  • Group setting. All authorized users can be divided into groups for easy management and security. For example, while one group is full administrators with tools to manage contents and participants, the other has limited access and fewer options.
  • Bulk or single invitation. For convenience, some providers make it possible to invite hundreds of users or one. Moreover, a data room administrator sets the access settings before a new member logs in.
  • Notifications. A virtual data room sends notifications about new data, users, and changes to the persons specified in the settings. As a result, all relevant persons are always in the loop.

Data management

This aspect is equally important for due diligence because the procedure includes many files:

  • Drag and drop. Uploading files to a virtual workspace is easier with this feature, as multiple files can be moved to the virtual data room from the desktop with a single click. Also, there is no need for plugins.
  • Search engine. The data room due diligence process of searching corporate records is instant, and for this, a user should enter a keyword. Moreover, some tools include an optical recognition system and search filters.
  • Automatic data room index. The program automatically arranges documents during upload for better navigation. So, a user does not have to work with indexes manually, wasting time.
  • Bulk upload. This option saves time, too, as you can upload many documents simultaneously. However, some providers limit the number of files, while others allow an unlimited number of them.

Ease of use

As mentioned earlier, the ease of running a high-tech solution is essential in due diligence process for speeding up workflows, so check for these virtual data room features:

  • No plugins. Ideally, the software does not require the installation of additional plugins. If so, you can work with documents of any format right in data rooms.
  • Single sign-on. This technology saves you the hassle of remembering passwords as you log on to the system with a single set of credentials.
  • Mobile app. For due diligence parties, the application and its user-friendliness are vital. In addition, high-quality optimization for mobile devices makes the participants efficient and available 24/7.
  • Scroll view. A virtual data room provider offers this feature for easy transition from one document to another. That is, one click is enough to view the next file.

Q&A

The Q&A data room module is a set of options for convenient cooperation on emerging issues from a buyer. The best providers include:

  • Frequently asked questions. It is a special section in which a seller enters information that may interest a buyer. This way, participants find the necessary data through a search engine without sending requests.
  • Question and answer reports. All content of the Q&A sector is automatically converted into a report; a data room also generates a spreadsheet with all module messages.
  • Live discussion. It is a forum with pre-set permissions to post replies and discuss topics. Users can also start discussions and ask questions.
  • Appointment of experts. It is another feature from top diligence data room providers that speeds up due diligence. Namely, you can tag experts specializing in your question, potentially speeding up the response.

Security compliance

Compliance with international data protection standards is one of the most critical selection criteria. In essence, it defines the due diligence data room rules that a provider must follow to ensure security:

  • ISO27001. Trusted providers operate under this certification, which validates network and system security, business continuity, organizational security policy, and sensitive data protection assessment.
  • SOC2. This audit checks a virtual data room for aspects of integrity, availability, privacy, and security. If the solution is certified, the provider complies with all of the above and is trustworthy.
  • Ultra-secure data centers. A credible provider should use biometric authentication mechanisms, physical security, and multiple levels of surveillance to ensure protection.

If most of these options are available, it will take the potential buyer less than normal time to review data room for due diligence. After all, there is a multifunctional environment for this, providing convenience, protection, and cooperation at the highest level.

Compare The Features Of The Best Data Rooms For Due Diligence

This table presents the data room features of the major providers on the market, so you can compare them and pick the one that’s potentially best for you.

Virtual Data Rooms For Due Diligence

VDR Provider
Best for
Access Security
Deployment
Document Management
Q&A
iDeals
  • Small business, Mid-size business, Large enterprises
  • Access control and expiration
  • Time and IP access restriction
  • Granular user permissions
  • User security impersonation
  • Two-factor authentication
  • Mobile device management
  • Web
  • Linux
  • Android
  • Windows
  • iOS
  • Optimization for mobile devices and tablets
  • Automatic indexing
  • Drag and drop
  • Bulk upload
  • Full-text search engine
  • Windows Explorer integration
  • Q&A reports
  • Live discussions
  • Appointment of experts 
Intralinks
  • Large enterprises
  • Granular user permissions
  • User security impersonation
  • Web
  • Linux
  • Windows
  • Optimization for mobile devices and tablets
  • Auto-indexing
  • Document version control
  • Digital rights for easy file management
  • Easy-to-use Q&A
  • Bulk import of questions
Datasite
  • Large enterprises
  • Granular user permissions
  • Two-factor authentication
  • User security impersonation
  • Web
  • Drag and drop
  • Search in 16 languages
  • Document classification
  • Excel import
CapLinked
  • Small business
  • Mid-size business
  • Large enterprises
  • Group user permissions
  • Web
  • Document access expiry
  • Remote shredding
  • Fence view
  • Q&A assignments
  • FAQ
  • Q&A audit
OneHub
  • Small business Mid-size business
  • Granular user permissions
  • Access control and expiration
  • Two-factor authentication
  • Web
  • Mac
  • Windows
  • Linux
  • Optimization for mobile devices and tablets
  • Drag and drop
  • Automatic versioning
  • Sharing through links
  • No Q&A
Firmex
  • Small business
  • Mid-size business
  • Large enterprises
  • Access control and expiration
  • Granular user permissions
  • User security impersonation
  • IP access restriction
  • Two-factor authentication
  • Web
  • Optimization for mobile devices iPhone and iPad
  • Auto-indexing
  • Drag and drop up to 10GB
  • Secure file viewer
  • Basic Q&A module
  • Q&A forums
SmartRoom
  • Mid-size business
  • Large enterprises
  • Access control and expiration
  • Granular user permissions
  • iOS
  • Windows
  • Optimization for mobile devices
  • Zip upload
  • Document redaction
  • Sharing through links
  • Question threading
  • Question status track
Ansarada
  • Small business
  • Mid-size business
  • Large enterprises
  • Access control and expiration
  • Granular user permissions
  • Web
  • Automatic numerical indexing
  • File tagging
  • View-only access
  • Intuitive reports
  • Q&A via email
  • Full audit trail of all Q&A content
SecureDocs
  • Small business
  • Mid-size business
  • Large enterprises
  • Granular user permissions
  • Two-factor authentication
  • Web
  • Full-text search
  • Bulk upload
  • Built-in e-signature
  • Available
DealRoom
  • Mid-size business
  • Large enterprises
  • Granular user permissions
  • Two-factor authentication
  • Web
  • Document access expiry
  • Granular document permissions
  • Remote shredding
  • No Q&A
ShareVault
  • Short term projects
  • Access control and expiration
  • Granular user permissions
  • Two-factor authentication
  • Web
  • Windows
  • Mac
  • iOS
  • Android
  • Optimization for mobile devices and tablets
  • Remote shredding
  • Date and time expiration
  • No Q&A
Citrix Sharefile
  • Mid-size business
  • Large enterprises
  • Access control and expiration
  • Granular user permissions
  • Two-factor authentication
  • Web
  • Windows
  • Mac
  • iOS
  • Android
  • On-premise Windows and Linux
  • Optimization for mobile devices and tablets
  • View-only access
  • Data backup
  • Document expiry
  • Q&A section with an export option
Digify
  • Small business
  • Mid-size business
  • Access control and expiration
  • Granular user permissions
  • Web
  • Windows
  • Mac
  • iOS
  • Android
  • Optimization for mobile devices and tablets
  • Restricted forwarding
  • Granular permissions and expiry
  • File index
  • No Q&A
Donnelley Venue
  • Mid-size business
  • Large enterprises
  • Two-factor authentication
  • On-premise
  • Automatic electronic archiving
  • Bulk upload
  • AI contract analysis
  • 4-levels permissions
  • Customizable Q&A workflows

How To Set Up And Prepare A Data Room For Due Diligence?

Preparing virtual data rooms consists of several steps but requires a responsible approach. If you do everything right, the procedure will go smoothly:

  1. Prepare a due diligence checklist with accurate information
  2. Install the selected virtual data room on your devices
  3. Structure folders and subfolders you need
  4. Set permissions for each software user according to their tasks
  5. Send invitation links to everyone
  6. Upload data for procedure
  7. Assign tasks and set goals through collaborative tools
  8. Start due diligence with online data rooms

What Is The Due Diligence Data Room Structure?

Structuring your data room for due diligence is the organization of the cloud storage by creating folders and levels for greater convenience. Besides, it is crucial to pay special attention to the names and design so that all this guides a user to the necessary data quickly.

To achieve the best structure for data room due diligence, those responsible for structuring will be helped by deep knowledge of the organization’s system, the industry specifics, and the business model.

How to choose the best structure for data room due diligence?

Since each industry has its specifics in workflows and conducting due diligence, the answer about the best structure is ambiguous. It is best to rely on simplicity when structuring to let interested parties review documents easier.

Fortunately, advanced diligence virtual data room providers offer tremendous support in organizing their cloud storage. Therefore, with the help of experienced professionals, the deal gets off to a good start.

Types Of Due Diligence

The procedure has many goals, the achievement of which benefits a seller and a buyer. Hence, there are many areas for due diligence, including the following:

  • Financial due diligence
  • Human resources due diligence
  • Environmental due diligence
  • Employee/management due diligence
  • Asset due diligence
  • Customer/sales due diligence
  • Technology/intellectual property due diligence
  • Administrative due diligence
  • Legal due diligence
  • Strategic fit due diligence

Although the essence and purpose of the due diligence process do not differ much, many aspects depend on the industry.