10, May 2022

Using a Data Room for Due Diligence

What is a due diligence virtual data room?

A due diligence data room is an online repository for storing and sharing confidential data. It’s where enterprises store all documents relevant to a due diligence process so they can share them with prospective investors, buyers and other interested parties.

A virtual data room can be:

  • cloud-based: a cloud solution that’s hosted in a third-party server and delivered as SaaS
  • cloud-hosted: on-premise software hosted in the client’s server, but accessible remotely and managed by the vendor 
  • an application downloadable to desktop computers, mobiles, or both.

Advantages of using virtual data rooms for due diligence

Greater security

The number one advantage of virtual data rooms over physical ones is increased security. When a company uses physical data rooms, it’s hard to keep control of thousands of pages during the printing, binding, and transportation process, so there’s always the risk that confidential documents will be misplaced, stolen or lost before they get to the data room. 

Also, physical data rooms can be damaged by fires or natural disasters such as floods, earthquakes, and windstorms.

On the other hand, sensitive documents stored in a virtual data room are in an entirely secure environment:

  • They are protected by data encryption in transit and at rest.
  • Administrators control access, so that only authorized users can view or interact with the documents.
  • Granular access permissions mean the administrators can decide which user can view, edit, download or print which document.
  • Users’ access to the data room is protected by two-factor authentication.
  • Features like fence view prevent unauthorized people from seeing or photographing confidential information on an authorized user’s screen.
  • Activity tracking and customizable watermarks discourage malicious users from sharing documents with unauthorized persons.
  • All the data in a virtual data room is stored in secure servers, which are protected against unauthorized physical access as well as natural disasters.

Easier organization

In a physical data room, documents are organized in files and cabinets. When there are any updates to a document, it has to be archived — or disposed of securely — and the new version must be printed, bound, and stored in its place. If the files are reorganized, labels must be manually changed. And the data room manager has to keep manual records of all these operations. 

The same processes can be carried out within virtual due diligence data rooms, but in considerably less time. With a few clicks, a data room administrator can upload a new document version, alter an existing one, and delete or archive old versions. All alterations are automatically recorded by the data room system, so one can see when each change was made, as well as consult previous document versions.

When adding new files to the data room, the administrator can use automatic naming and indexing tools, which reduce to a few instants the time necessary for organizing hundreds of documents.

Increased rapidity

The organization features in data room software not only make it easier to organize confidential information, they also make it much less time consuming. And collaboration tools have the same effect: in a few minutes, users can leave notes, ask questions, and exchange messages about important documents in the data room. 

Furthermore — and unlike a physical deal room — an online data room does not require users to travel to a specific location in order to review documents related to a due diligence process. They can do so from their own offices (or their homes even!) wherever they are in the world. This means enormous gains of time for all parties involved in the deal.

Lower cost

When you consider that an electronic data room saves you time and effort, that it’s more secure, and that it spares you the expenses of renting and managing a physical data room, it’s easy to see how it’s also the most economical option for you to store and share confidential documents.

Hiring virtual data room services obviously means a cost, but more likely than not that’s greatly outweighed by those savings. Moreover, the number of virtual data room providers on the market means you have a vast choice of services and plans to choose from — you are sure to find one that fits both your needs and your budget.

How do I use a virtual data room for due diligence?

If you have never yet used a virtual data room, you may be curious to know more about the process of using it to facilitate a due diligence process. It’s clear that before you start using a VDR you must first find which is the best data room provider for your company. But for the moment, let’s satisfy your curiosity — we’ll skip to the next step, and get into the details of what you will do to set up and start using your due diligence data room.

Create the data room

In this first step, you will log onto your virtual data room platform and create a new data room. You will name the data room according to the project it relates to. Depending on what virtual data room software you use, you may also have the option to customize your data room with your company’s logo and colors.

Upload documents and folders

For this step, you have two options: you may either create folders in the data room and upload documents from your computer onto them, or you may upload entire folders from your computer onto your data room. Some data rooms have an automatic folder structure tool, which will create folders automatically according to the standard you set.

Most virtual data rooms give you the options of drag and drop upload as well as bulk upload, so you can easily upload large numbers of folders and files if necessary. 

A due diligence checklist includes all kinds of corporate records — such as records of financial transactions and business transactions, and financial statements — but you will need to upload a lot of other documents to your data room, depending on the kind of due diligence being carried out. 

For instance, a due diligence data room checklist for a real estate transaction will include construction blueprints and plans, property video tours, etc.

Organize documents and folders

Once you’ve uploaded the folders and files, it’s time to organize them. If your folders and documents were already named and organized in your computer, then you can skip this step. But it’s more likely they weren’t — you’ve probably collected them from different computer folders, so now you need to make sure they are in the correct data room folders. You can easily do so by using the drag and drop feature.

Also, make sure your naming system is consistent and easy to understand. The best virtual data rooms have automatic naming tools, which will save you a lot of trouble — you only have to set the naming standard, and the tool will rename every file in the data room accordingly.

Lastly, you should create a data room index. Again, many leading providers of online data rooms offer automatic indexing tools, which will save you an enormous amount of effort. With a few clicks, you can have a full index, which will make it really easy for any user to find and view important documents in your data room.

Create user groups

User groups save you time, because they eliminate the need to allot user permissions individually. You can simply decide on what permissions members of that group will have, then add multiple users to it. 

Group members are able to see and communicate with each other, so if you are sharing your data with groups you don’t want to be aware of each other — say, two different companies who both want to buy your business — you should create two separate groups. 

Invite users

Now that your groups are set, all that’s left to do is for you to invite new users to your virtual data room. You will do so by inserting their email addresses into the invitations tool. Your data room will then send each person an invitation email. 

If you want to add new users to your due diligence virtual data room, but you don’t want them to see or communicate with others, don’t add them to a group. Just assign them individual permissions.

How do I choose a due diligence data room provider?

Now that we’ve looked more in detail at how you will use your due diligence data room, let’s go one step back and consider this important question: how do you go about choosing which is the best virtual data room for your company?

Step 1. Decide on a budget

There are dozens of virtual data room software on the market, and prices range from under $50 a month to over $1000 a month. So, before you start selecting providers, you must know how much you want to spend on your due diligence data room. 

If you’ve been using a physical data room up to now, remember to include in your budget the amount that you will save by no longer using it.

Step 2. Find out your specific needs

While there certainly are staple features that every due diligence data room must have, there are also specificities that depend on your industry and company size. In order to find out what are your specific needs, you can simply answer the following questions:

  • How many projects will you be facilitating the due diligence process for at the same time? Once you have this answer, you will know how many virtual data rooms you need. 
  • How many people do you want to share your due diligence documents with? The answer is the number of user permissions you must have.
  • How much data will you need to store in your due diligence data room? Knowing this, you will know the amount of storage space you need.
  • Does your company have any security compliance needs? In other words, are there any rules or laws you must follow regarding data security? 
  • Is there any other feature that would be important to have? For instance, if foreign prospects will be using your due diligence data rooms, multilingual access is something you should probably offer them.

Step 3. Shortlist data room vendors

Now that you know exactly what you need from a due diligence virtual data room, you can start shortlisting virtual data room providers. There’s no need to amass a large number of options — a shortlist of three or four is ideal. 

You can find information in the providers’ own websites, but have a look at independent websites as well. Also, check customer reviews. You can find reliable reviews on independent review websites and on online forums. They will help you have a realistic idea of what you will get if you hire the services of your shortlisted providers.

Here are the criteria for shortlisting due diligence data room providers: 

Features

Which providers offer the specific features you need?

Security

If your company needs to comply with legal demands on the security of due diligence data, do these providers have the required certificates?

Experience

Which data room providers specialize and have experience in your industry?

Pricing

Do these providers offer pricing plans that suit your budget? This is not only a matter of the price itself — for instance, if you have relatively few documents to store, but must share them with many people, it will be convenient to hire a plan that charges per volume of data rather than per number of users.

Support

Which providers offer the level of support you need? Most offer only email support for their low-budget plans. This may be perfectly fine with you — but you should know what their response time is, and make sure you’re comfortable with it. If you prefer telephone support, make sure your preferred plan includes it. If a provider is in a different time zone, check if their business hours coincide with yours.

Free trial

While this is not an absolute criterion, we strongly recommend you only include in your shortlist those providers that offer a free trial of their due diligence data room. This way you can test their software and make sure it works for you.

Step 4. Try your chosen options

Now that you have your virtual data room provider shortlist, it’s time to contact them and sign up for free trials. If something’s the matter with your first try, you still have two or three carefully selected options, and among these you are sure to find the data room provider that will work best for your company.