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What is a Due Diligence Virtual Data Room?

What is a due diligence virtual data room? What makes a data room different from other types of file storage, such as Google Drive? In this article, we will discuss the purpose of a due diligence data room, and the necessary features a data room must have for it to be used for an M&A transaction.

What is M&A Due Diligence Data Room?

A due diligence data room securely stores important documents and files for an M&A transaction. Data rooms also provide a single space for multiple parties to access and request information.

In business terms, due diligence is the research and analysis of a company or organization done in preparation for a business transaction, such as a potential acquirer evaluates a target company and its assets.

The whole diligence process has completely shifted due to technology advances, and for the better.

due diligence data room

Where Does “Due Diligence” Come From?

The term “due diligence” has been used since at least the mid-fifteenth century, and it meant “requisite effort.” However, centuries later, a more legal meaning was associated with term; the care that a reasonable persons takes to avoid harm to other persons or their property.

If that sounds familiar, that’s because it is synonymous with “ordinary care.” It hasn’t been until recent years that due diligence has become common jargon in business contexts, specifically the research a company performs before engaging in a financial transaction.

How are Data Rooms and Due Diligence Connected?

Due diligence requires access to highly confidential information from multiple parties. Before technology advances, companies wouldn’t let their confidential information leave the property. This required all interested parties to travel to the company. Now, with cloud technology, all data is uploaded into the cloud, where teams have access to it.

Cloud storage has made due diligence more safe, efficient, and affordable. Some software, like DealRoom, combine due diligence software and a virtual online data room into one integrated platform. Teams have the ability to set permissions, securely share documents, and communicate. Instead of the due diligence process being physical and expensive, it is now happening electronically, in an efficient and cost effective way.

due diligence virtual data room

If you happen to find yourself in a due diligence process, it is likely that you will cross paths with a virtual data room.

Areas where data rooms are used

M&A transactions occur across all industry types. Within most industries, these are the main areas for due diligence:

  1. Financial Due Diligence
  2. Human Resources Due Diligence
  3. Environmental Due Diligence
  4. Employee/Management Due Diligence
  5. Asset Due Diligence
  6. Customer/Sales Due Diligence
  7. Technology/Intellectual Property Due Diligence
  8. Administrative Due Diligence
  9. Legal Due Diligence
  10. Strategic Fit Due Diligence

Diligence will always vary from deal to deal. For example, a large corporate company will have different legal diligence needs than a ten person marketing firm.

So, Why Use Data Rooms?

The goal of due diligence is to evaluate a business from all aspects prior to making a purchase decision. It is not a general investigation and is tailored to the specific elements of the deal and the businesses involved. Due diligence protects both parties, especially the purchaser. Often, it is during due diligence where potential liabilities are uncovered. And data rooms provide a safe place for this information to be gathered and accessed.

An informed decision is the best decision. Due diligence data room adds value by evaluating the benefits, costs, and risks associated with an upcoming decision.

Due diligence became a standard practice in the United States with the passage of the Securities Act of 1933. The act had two goals: make sure there was transparency in financial statements so investors could make informed decisions, and to create laws against fraud and misrepresentation in the securities market. 

What is an Electronic Due Diligence Data Room?

An electronic due diligence data room, often referred to as a virtual data room, is essentially online cloud storage. They house a safe place for important data, such as documents and files, to be uploaded, shared, and stored. Data rooms used to be physical rooms where paper files were stored. When cloud technology came about, the physical rooms got shifted to the cloud. This makes it easier for M&A teams to share information between buyers and sellers.

Virtual data rooms are commonly used by investment banks, especially during due diligence. For example, during a sell-side process, investment banks will gather information and upload it into a data room for their client to look through and access. Virtual data rooms provide a safe place for confidential information to be stored and accessed by multiple parties.

Advantages of Using Data Rooms for Due Diligence

1. High Level of Security

Most data rooms meet strict security and compliance standards such as

  • SOC 1/SSAE 16/ISAE 3402
  • SOC 2 Type II
  • FISMA, DIACAP, and FedRAMP
  • HIPAA/ITAR compliant
  • DOD CSM Levels 1-5

2. Easy Files Management

Most data rooms have adopted drag and drop file upload technology. Having the ability to drag and drop multiple files at a time is efficient and great for time management. Data rooms also provide easy file management with:

  • Built-in file viewer: Built-in Excel and document viewer gives users file visibility, without ever having to leave the data room software.
  • In-document search: Quickly search and find the files you need inside your data room with smart full-text search feature.
  • Indexing features: Easily access the entire virtual data room, which users can rearrange with drag-and-drop, renumber, and export to PDF or Excel.

3. Activity Tracking & Analytics

Many data rooms have the ability to track team members logging on and off, how much time was spent viewing a document and which document was viewed the most. And being able to see which documents your client viewed the most helps you to figure out what is most important to them. Tracking features also helps management get an overview of what team members are working on, and the status on their projects.

4. Q&A/Requests Management

The Q&A feature creates a way for users to ask questions regarding the folders and documents they have been given access to, without leaving the platform. Whenever a question is asked, an email alert is sent out, and the answer can be answered via email or through the Q&A tab. However, the Q&A feature still requires teams to use Excel trackers.

DealRoom, for example, took a different take on Q&A and created requests management. All buyer document requests and communication regarding the due diligence process can go through the data room. Everything is updated in real time, so users no longer need to worry about version control. It supports all file types, so folder structure uploading and sharing is easier, or safer.

Teams can upload pre-made templates, and the room will automatically populate with the diligence requests. From there, users can request files, documents, and tasks from specific users. Within each request, users can add attachments, set due dates, write comments, ask questions, and more. They can mark the status of the request.

How to Do You Use a Due Diligence Data Room?

The quickest way to start using a due diligence data room is by importing a pre-made request template. By importing a pre-made template, the data room and folder structure is automatically populated and organized. 

From there, users can start fulfilling requests using drag and drop upload. They can also assign task roles, communicate with other users, and invite new users to the room.

Here’s how to get started:

  1. Create or download a pre-made due diligence data room checklist
  2. Import the pre-made template into the data room
  3. Check that automatic folder structure is correct
  4. Invite new users into the room
  5. Start fulfilling requests by uploading documents
  6. Assign users various tasks as well as set due dates, and priorities

Data Room Due Diligence Rules

No two virtual data rooms are alike, however, many adhere to the same strict security protocols. Many investment banks can only use a data room if they meet specific security standards set by FINRA and SEC.

In additional to the security compliance and certifications listed above, data rooms also need to have PCI DSS Level 1, ISO 9001 / ISO 27001, FIPS 140-2, MTCS Level 3. Investment banks often have an approved vendor list which indicate which data rooms they are allowed to choose from. In order to be on the list, a data room provider will typically go through a security compliance check.

Top Due Diligence Data Room Providers

There are many different data room providers out there. They all vary on features, functionality, price, and industry type. Here are a few common due diligence data room platforms:

  1. DealRoom
  2. FirmRoom
  3. Intralinks
  4. Merrill
  5. SecureDocs
  6. ShareFile
  7. Box
  8. iDeals
  9. Firmex
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