Virtual data room software is gaining more popularity by the day, as they’ve become a one-stop solution for due diligence-related procedures. Since companies and businesses undergo due diligence for different reasons, you’re about to find out how VDRs can provide industry-specific benefits for due diligence.
Learn more about what a virtual data room is.
What is a due diligence data room?
Due diligence data room is a secure cloud solution where several parties in M&A deals may share sensitive data, including commercial, legal, and financial documents that can be shown to potential investors for evaluation and analysis. Prospective investors and potential buyers may easily access due diligence data rooms after receiving authorization from the seller and signing the NDA.
What is the role of the due diligence data room in the M&A process?
An online data room may be used to build a due diligence data room and replace a traditional data room in M&A transactions. A virtual data room for due diligence creates a secure environment for transferring confidential information, financial statements, and other documents relevant to the deal. The target company’s presentation of documents and the purchasing company’s assessment of those documents both contribute to the decision to proceed with the acquisition and review process.
Due diligence data room vendors
Due diligence checklists for industries
iDeals provides checklists for financial (accounting), Legal, IT, Commercial, Tax, and Operational due diligence
Datasite offers a checklist of documents and information to prepare for the due diligence process for the finance, legal, and IT industries.
Citrix offers a due diligence package that provides all needed information about policies, practices, and controls.
DealRoom is a virtual data room and due diligence management software that makes it simple for M&A professionals to submit due diligence checklists. DealRoom allows users to create checklists, send requests, track statuses, and interact all in one spot.
Due diligence checklists from Firmex give a complete overview of action items to ensure you have all of the necessary papers. General, Commercial Real Estate, Consumer Goods, Healthcare, Industrial, Manufacturing, Mining and Resources, and Technology are among the industries.
Digify offers a simple investment due diligence checklist for free.
SecureDocs offers a free due diligence checklist with the following document categories covered: Stockholder information, Financial records, Material contracts, Intellectual property, IT systems and networks, Taxes, etc.
Smartroom provides the ultimate M&A Checklist on their website.
Drooms offers a due diligence checklist, which you can download by filling out the form on the website.
On their website, they offer a startup fundraising due diligence checklist.
What to consider when choosing a virtual data room for your due diligence project?
Modern due diligence data room providers are well aware of their clients’ needs. This understanding results in a wide range of good products for users. The following are the most important factors to consider:
Experience within the target industry
You need to make sure that the virtual data room provider you choose has enough experience working in your industry, so in case you have any issue specific to your niche, the provider will be able to quickly assist you and resolve the problem.
The comparison of ratings allows you to quickly identify what customers think of the software and which level of the overall user experience to expect from a certain vendor.
For due diligence data room security is the highest priority. The sensitive data will be shared, so the vendor should complete a certification program and comply with international security regulations to ensure users all data is safe.
Features for efficient work
Document management should be simple, as it speeds up the deal’s progress. The more that can be done in the virtual data room for due diligence, the better.
The pricing structure of the virtual data room software should be clear, without any hidden fees that may be over your budget.
Usage and access convenience
The software should be user-friendly, using the VDR should be equally convenient for all new users involved in the transaction. Flexible platform support is also important, as it helps users make decisions faster and streamline the deal.
Questions you need to answer before choosing a data room provider for due diligence
The common questions to ask before committing to any data management software include the following:
- Does a data room vendor provide due diligence checklists for your project? – These save a lot of time and provide a convenient due diligence data room structure to help you better organize all documents related to the transaction.
- How can I track the progress of due diligence? – The software can generate reports with details on all user activity that allow admins to track and analyze the progress on certain tasks. Activity tracking helps admins identify any suspicious user behavior and prevent a data breach.
- How can I be sure that the highest standards of security are in place? – Confidential data handling requires advanced technology and impeccable practices. Best features for external and internal security include 256-bit AES encryption, ISO 27001 certification, advanced permissions, multi-factor authentication, and more.
Must-have features of a virtual data room for due diligence
Here are the features that should be present in the VDR for a successful due diligence process:
1. Security and compliance
Choose data rooms that offer superior data protection and digital rights management to avoid data leaks. It must have capabilities such as 256-bit data encryption, remote shredding, automated watermarking, limited viewing mode, and access management to assure document security. Virtual data rooms should also be ISO27001, SSAE 16, HIPAA-certified, and also SOC2-compliant.
2. 24/7 technical support
Your virtual data room has to have the appropriate multilingual functionality to suit authorized users of various ethnic and geographic origins. This is especially important in cross-border M&A transactions.
3. Advanced collaboration tools
Due diligence entails complicated transactions that might create a lot of problems. Make the conversation go smoothly by using virtual data rooms that allow you to post queries and receive responses quickly. Secure chats for seamless communication should be available in the data room for due diligence.
4. Free trial
Using a due diligence data room is one of the greatest methods to guarantee that you’re using the right due diligence data room for your purposes. You may want to test out the platform before committing, and a free trial allows you to do so.
How to structure a virtual data room for due diligence?
Now that you’ve decided what due diligence virtual data room vendor is right for you, you should ensure that your data room is rightly structured to ensure nothing is missed.
- Find the right provider. You’ll have to make a decision early enough. As long as the features and functionality of the VDR meet your industry needs and the provider is security compliant, you can move on to the next step.
- Determine the due diligence stage you are in. If you’re trying to do a first-time test run, you should estimate how much information you’re sharing, especially if it’s a teaser for investors to determine if they’re willing to follow through.
- Ensure files are properly named and structured. Use existing file naming conventions to arrange and organize the files to avoid mix-ups. You can even get an automatic folder structure for maximum convenience. Index the files alphabetically or according to your industry-specific technique.
- Group your files in the order of importance to your business operations. Group them into a few top-tier folders consisting of different document sub-categories, depending on their similarity.
- Validate your VDR security. Maintain control of all the data and manage user permissions. Determine how you want each user to interact with each file, especially if you want to control printing and downloading.
- Add stakeholders to the data room. Ensure they are properly grouped depending on what side of the deal they are, and their importance to the due diligence process. Recheck their accesses and permissions to double-check oversights.
- Run internal due diligence. Test your VDR beforehand by running pre-due diligence. This allows you to access your VDR from a user’s point of view. It also helps to spit slips and omissions, so they can be fixed early enough.
Basic due diligence data room content checklist
Depending upon the industry, there might be required documents of specific formats to be uploaded to a data room while some compliance regulations must also be met. Having a due diligence data room checklist of requirements and pre-setup index templates can help to save a lot of time and keep your data room workspace organized. iDeals Solutions has assisted with thousands of projects and provides professional due diligence data room indexes for various industries.
Using a checklist helps to ensure that there are no oversights in preparing for data room due diligence. Here are the important documents to include on your checklist for virtual data room due diligence.
- Business information documents. These describe the incorporation of the company, such as permits and trade licenses.
- Financial information documents. These certain documents will give a potential buyer a look at how the business has fared financially in a minimum of three years.
- Human Resources (HR) documents. These are necessary documents regarding human resources, the work and people culture of the organization, including copies of all employment agreements, relating to any compensation arrangements and other types of similar agreements.
- Intellectual Property (IP) documents. Documents relating to intellectual property, trademarks, and copyright of the corporation, including agreements for granting rights to use IP owned by a third party and summaries of any instances of the alleged infringement.
- Legal documents. All important legal documentation concerning the company, such as articles of incorporation, by-laws, minutes of meetings, powers of attorney, government litigation, etc.
- Commercial documents. Lists of the top 25 customers, revenues, and material sales channel partners for each of the past 3 years.
- IT documents. Files with details about any current or planned IT initiatives or software purchases.
- Environmental, health, and safety documents. Summary of all environmental investigations, litigation, and any past or ongoing remediation efforts relating to environmental matters.
- Tax documents. Results of tax audits, resolutions, and all material communications and agreements with any taxing authority.
Using the due diligence virtual data rooms across industries
Since due diligence cuts across different industries, a data room user might want to be sure the software is tailored to meet industry requirements. So you might want to ask your provider questions about how the software is designed with features, workflows, and possible use cases of the VDR.
A financial service data room for an insurance company, stock brokerage, or bank will need to detail specific features. Since these facilities often go through different aspects of due diligence from time to time, large storage capacity is an important feature of this process.
Whether to license a new product or for a clinical trial of a project, the right software is required to make the process seamless. However, biotech due diligence is important as it involves confidential documents, intellectual properties, and health records.
Investments in renewable energy are on the rise so it’s not surprising that more mergers, IPOs, and licensing deals are also rising, increasing demand for due diligence in the industry. A virtual data room provider should be able to support the storage requirements and file formats that these deals involve.
The engineering industry is a dynamic one, and data rooms are important to manage finance documents across different projects, and share confidential documents in the case of mergers. It’s important that your data provider supports all file types used in the industry aside from office files, such as DWG, DXF, RVT, etc.
The most popular types of due diligence for which VDR is used
There are up to five different forms of due diligence that must be conducted as part of the procedure in the vast majority of cases.
Due diligence type
Why it’s important
Business due diligence
This will apply to any and all mergers and acquisitions that are being considered, including post-merger integration. This will require not just a detailed evaluation of your current financial status, but also a market study of your target clients and consumers.
Financial due diligence
The team will concentrate on this aspect of due diligence by confirming that the financial data you’ve provided is correct and complete. Financial due diligence is the stage of the due diligence process when you will almost probably play the most significant role and be asked to provide the most information and financial records.
Legal due diligence
This part of the procedure comprises looking at your company’s legal aspects. Lawyers will examine your current contracts with vendors and assess them for any potential liability issues.
IT due diligence
During the IT due diligence process, a team of IT professionals will most likely be brought in to assess your company’s current technical resources. They’ll be looking for security risks, downtime issues, and other IT issues that may need to be solved before the transaction can go through.
Environmental due diligence
The team, as well as other interested parties that use the online repository, may wish to spend some time identifying potential environmental hazards associated with acquiring your company now or in the future.
Among other types of due diligence, you can find the following: M&A due diligence, HR due diligence, asset due diligence, tax due diligence, customer/sales due diligence, and more.