Due diligence in M&As, fundraising, and other similar transactions hold the key to making or breaking a deal. That’s because many potential investors leave after the pre-due diligence stage, and only the interested ones proceed further. Therefore, the company open for due diligence must ensure that it simplifies the process and makes things easier for potential investors or buyers.
Virtual data rooms are the face of modern-day due diligence. In fact, data room software has been in the M&A industry for a long time now. Although virtual data room software is developed to facilitate complex processes like due diligence, it is important to use your VDR in the right manner.
Here is a brief introduction to VDRs and a step-by-step guide to conducting data room due diligence.
What is a data room: Due diligence VDR
A due diligence data room is a cloud-based platform developed to facilitate due diligence in M&As and other financial transactions. It is a document repository where companies store, share and manage their due diligence documents.
An electronic data room has three primary functions:
- Data storage and data management
- Online communication
- Deal management
Online data room software allows companies or other profitable and non-profitable institutions to store/manage their business files in the data room for regular use or due diligence.
While a virtual data room allows data storage and sharing, it also provides multiple communication tools. That said, investors, buyers, advisors, directors, and negotiators involved in the due diligence can hold online meetings and live Q&A sessions and communicate privately through data room chat messengers.
Also, the task manager feature in the VDRs allows management to assign, track, and manage tasks assigned to the users. The management can also create a timeline for due diligence activities and track the progress.
| If you are willing to know more about due diligence timeline, task managers, ready-made checklists, Q&A, audit logs, and many other data room tools that facilitate due diligence, head over to: https://www.idealsvdr.com/data-room-due-diligence/ |
7 steps to smart data room due diligence
1. Choose the right due diligence data room
There are hundreds of virtual data room vendors, but not everyone is good enough for due diligence. In fact, even good data room software for regular use may not be good enough for due diligence, especially when hundreds and thousands of documents need to be shared.Â
Some of the best virtual data room providers for due diligence include DealRoom, iDeals, Merrill, FirmRoom, and Firmex. But you should conduct your own research and comparison to find the most suited solution. To start with, here are some necessary elements to consider:
- Security. During due diligence, you will also share the most confidential documents with investors or buyers. It is important to have a secure VDR. Some of the most important security features include two-factor authorization, document access control, audit logs, remote device purging, and fence view mode.
- Ease of use. Your potential investors may be using the VDR for the first time. An easy-to-use data room will make things simple and faster for them. Ease of use may include a simple user interface, clear folder structure, easy to navigate, easy to upload, access, open, view, and file annotation.
2. Determine how to use data room effectively
How to use VDRs is another important thing to consider. For example, many investors quit after the pre-due diligence stage, so it is better to create temporary VDRs and only upload a few documents.
Similarly, it is recommended to create separate due diligence data rooms for those who show interest in proceeding further. It will allow you to deal with everyone individually and get multiple quotations simultaneously.
3. Create a due diligence checklist
Creating a due diligence checklist is a time-saving activity for you and the buyers. You can upload documents easily, while buyers will know where to look for a specific file. Many due diligence data room services provide built-in due diligence checklists, or you can create your own.
4. Upload and organize documents
It is essential to follow the due diligence checklist when you upload documents. Upload the documents in the sequence mentioned in the checklist and make sure every file is named correctly. The file retrieval process becomes easier if your VDR has the full-text search option. The file indexing feature also simplifies the search process.
5. Set permission levels and security settings
Not everyone in your due diligence data room needs to have access to all documents. Once you upload all the documents, you should define access levels for all users. For example, you should determine who can or cannot access, edit, share, save, print, or annotate the files. Having digital watermarks and the fence view/view-only feature will be handy in this case.
6. Recheck the permission settings
Have one or more of your associates or helpers recheck the permission settings twice or even more than that. One mistake in setting access settings can create the chances of data theft and may cost you millions.
7. Invite users
After rechecking the permission settings, it is time to invite the users into the data room. At this stage, it will be convenient if your VDR has the bulk invite feature. It will help investors complete the login process.
Final words
Virtual data room due diligence becomes more effective and faster when you do things step-by-step. It is highly recommended to use a due diligence data room rather than an ordinary one. The steps mentioned above can help you simplify the process.
