Large amounts of data, frequent data sharing, multiple meetings, and regular Q&A sessions. This is what comes with the due diligence process. Multiple parties would want to examine the due diligence data, but the target company is reluctant to let their confidential information leave the property—due diligence can be very challenging. These problems become worse in cross-border M&As.
Dealmakers can address these challenges using digital due diligence data room software. It is an online solution that provides everything needed to perform due diligence in one place.
What is due diligence?
Due diligence is simply a process in which investors or a company thoroughly examine the target company’s important data. It allows buyers to learn about the financial health, operations, and any potential issues linked with the target company.
There are different types of due diligence based on the nature of the transaction. For example, due diligence for a startup will be different as compared to M&A due diligence. However, the overall objective is the same and that is to assess whether it is worth investing in a business or not.
Due diligence is a core component in M&As and similar transactions. In fact, it is a key M&A success predictor and inadequate due diligence limits companies’ ability to capture truly transformational value of the deal.
A virtual data room solution is used to facilitate the following types of due diligence.
- Legal Due Diligence
- Financial Due Diligence
- Human Resources Due Diligence
- Employee/Management Due Diligence
- Environmental Due Diligence
- Asset Due Diligence
- Technology/Intellectual Property Due Diligence
- Customer/Sales Due Diligence
- Administrative Due Diligence
- Strategic Fit Due Diligence
What is a due diligence data room?
Due diligence or virtual data room is an online document storage and data management platform used to share, store, and manage data during the due diligence process. Companies use due diligence virtual data rooms for mergers and acquisitions and other transactions like
- Divestitures
- Startup fundraising
- Initial public offerings, and
- Private equity investments
The due diligence data room essentially provides a virtual workspace where buyers, sellers, and other stakeholders can perform all due diligence activities.
Why do you need a virtual data room for due diligence?
As mentioned above, the purpose of due diligence is to carefully examine a business from all sides before deciding to buy it. This is not just a general check; it is focused on the specific details of the deal and the businesses involved.
Due diligence helps protect both the buyer and the seller, but it mainly protects the buyer. This phase often uncovers the hidden risks or problems of buying a business. A data room provides a secure space where all this important information can be stored and accessed.
Making a decision with all the right information is the best approach. A due diligence data room helps by reviewing the benefits, costs, and risks of the decision ahead.
Due diligence data room providers
Data room service providers for due diligence come with their unique services and feature sets. Here is a detailed comparison of top virtual data rooms for due diligence.
| VDR providers | Description | Notable Due Diligence Expertise/Features | Free demo/trial |
| Ideals | Ideals is a popular virtual data room for secure document management in industries like M&A, private equity, and biotech. It is praised for its easy-to-use design and quick setup. Aquila Capital and EY are notable clients of Ideals | • Granular permissions • Document security • Collaboration tools like • Q&A sections. • Redaction • Detailed audit trails and reports • SOC 1/2/3 and ISO 27001:2013 certified data centres • 24/7 customer support | Yes |
| Intralinks | Intralinks is known for its advanced technology and offers secure document-sharing and collaboration tools for M&A, fundraising, and capital markets. It serves global businesses like Credit Suisse and Stanley Black & Decker. | • AI-powered document redaction • Collaboration tools like Q&A sections • Real-time analytics • ISO 27701 | No |
| Datasite | Datasite is a virtual data room that helps manage the full M&A process, from due diligence to post-merger integration. It is trusted by major firms like Goldman Sachs and Johnson & Johnson for handling complex transactions. | • Granular permissions • AI-powered document redaction • Optical Character Recognition • ISO 27001, SOC 2, and GDPR compliance | Yes |
| Sterling | Sterling provides a Virtual Data Room (VDR) for securely storing and sharing sensitive business documents. The company started as a financial printing service in 1988 and gained expertise in information security. Sterling launched its VDR services in 2010 and is now the leading VDR solution in the UK. | • Reporting• Document security • Collaboration tools • Access management • ISO 27001 certification • GDPR and DPA compliance | No |
| DealRoom | DealRoom is a VDR built for companies handling multiple M&A deals, offering a data room with tools for tracking diligence and managing projects. It can be used for individual deals or larger operations. | • Risks & issues tracker • 4-level permissions • Diligence requests • AI-powered data room | Yes |
| Document Vault | Document Vault is a popular secure virtual data room based in London that offers a safe online space for storing and sharing sensitive documents. Founded in 2006, it uses advanced technology to protect and encrypt all types of personal and corporate files. | • Document security • Permission-based controls • ISO 27001 and 9001 certified | No |
| Imprima | Imprima is a virtual data room vendor that offers a secure platform for due diligence with AI-powered features. It is commonly used for sensitive transactions like M&A, real estate deals, and IPOs. It was founded in 2001 in London. | • Smart redaction • Q&A tools • Indexing • ISO 27001:2013 and GDPR compliance | Yes |
| Drooms | Drooms was founded in 2001 and is based in Frankfurt. It offers a leading virtual data room solution popular in Europe and globally. It is used for secure business processes like due diligence, M&A, and real estate sales. Drooms provide two main options:· Drooms TRANSACTION for due diligence· Drooms PORTFOLIO for asset management | • Q&A modules • Document translation • Indexing • Project management • Real-time reporting • Access permission settings • ISO 27001:2013 and GDPR compliance | Yes |
How to choose a virtual data room for due diligence?
Every electronic data room due diligence is not the same. Different vendors come with their strengths and flaws. Therefore, it is important to do your research and see what fits your needs. Here are some key factors to consider when choosing a virtual data room service.
1. Identify your needs
Different data room providers can cater to different types of businesses based on their needs. you need to identify the scope of the project, how long it will take, and how many users there will be. Doing so will help you choose the right package according to your needs.
For example, if it is a small-sized due diligence, it is better to choose a data room vendor that offers usage-based pricing. Similarly, fixed monthly subscription pricing models suit medium or large-scale transactions. Detailed virtual data room pricing comparison will help you determine which method suits you.
2. Security
Security is the backbone and one of the biggest selling points of online data room technology. Only a secure data room can help you prevent data breaches and costs associated with them. Your chosen data room must be able to give you full control over data flow during the transaction. Here are some important security features to look for.
- Multi-factor authorization
- Granular access permissions
- Dynamic watermarking
- View-only access
- 256-bit AES encryption
- Secure spreadsheet viewing
- Document shredding
3. Compliance
Security compliance is another important factor to consider when choosing a due diligence data room. Every virtual data room vendor claims to be secure, but how can you believe them? Therefore, ask them for third-party security certifications, such as:
- ISO 27001
- SOC
- HIPPA
- FINRA
- SSAE
It is important to note that the virtual data room provider you choose must comply with your regional or local regulatory bodies. For instance, businesses operating in the UK and Europe must look for GDPR-compliant virtual data room vendors.
4. Collaboration tools
Due diligence is a process in which multiple parties regularly communicate with each other. A due diligence data room must have necessary communication tools like Q&A sections and instant messaging service for a smoother due diligence process.
5. Ease of use
Everyone involved in the due diligence process may not be tech-savvy and that is why choose a virtual data room service that is easy to use. Ideally, basic training should do the job.
What’s more, the data room must be easily accessible from mobile phones as well. It should support common operating systems like Windows, Android, and iOS.
6. Free demos or trials
Free trials are important to get a practical overview of the software. It allows you to assess whether the design is user-intuitive, how easily it can be integrated with other tools, and what level of customization it offers.
7. Multilingual support
Your due diligence team might include people from different countries. Ensure that your data room offers support in multiple languages to meet the needs of users from various backgrounds. This is particularly important for international M&A deals. Most modern data room providers offer support in several languages to accommodate a diverse range of users.
8. Customer support
Last but not least, solid customer support is vital to employ and use a virtual data room without hiccups. Ideally, the customer support service should be available 24/7 and must be able to provide services in different languages.
Benefits of electronic data room for due diligence
A due diligence virtual data room primarily protects confidential information in the due diligence process. Here are some other key benefits of using a due diligence virtual data room.
1. Centralized data management
Virtual data room software acts as a central data management platform in due diligence. It allows sellers to simply store and manage deal data in one remotely accessible place. The data room also ensures optimal data categorization so that buyers and other interested parties can easily find any file.
2. Detailed deal overview
One of the best things about the due diligence virtual data room is that it provides a detailed overview of where the transaction is heading. For example, the detailed audit logs show data room users’ activities. Sellers can see what type of documents are different buyers reviewing. This helps them identify the interested buyers and focus on them.
3. Opens multiple opportunities
The problem with the physical data rooms is that they allow you to present data to one potential buyer at a time. On the contrary, a due diligence data room gives you the luxury of dealing with multiple buyers at once. This not only speeds up the process but sellers can choose from the best possible option.
4. Saves cost
Cost efficiency is another perk of using data room software. Physical data rooms require you to bear expenses like logistics, paper and printing costs, and space rent. A virtual data room helps you minimize these expenses and protect your sensitive information as well.
How to use a data room for due diligence?
Starting with a pre-made request template is an easy way to set up a due diligence data room. The template automatically creates the necessary folder structure for you. Here is how to choose, set up and use a virtual data room for due diligence.
1. Choose the right data room provider
Finding the best provider for your needs can take time. There are many options and each with different pricing, features, and uses. Choose a secure data room vendor. The cost of the data room is important but it should not be the key factor in your decision process.
2. Select a suitable plan
Pick a plan that charges a fixed fee. This gives you more flexibility to manage files and collaborate with others. The plan you choose should depend on how much data you need to store and the size of your project. More users and data usually mean higher costs.
3. Start a free trial and get a checklist
Request a due diligence data room checklist from your provider. This helps you organize and gather all necessary information before setting up your data room.
4. Collect due diligence data
Collect all the confidential documents needed for due diligence in one place. They may include legal documents, HR data, financial statements, business plans, etc. If you are using physical data rooms, it is necessary to prepare scanned copies of all files.
5. Set up the folder structure
Use the checklist to create a layout that works for your business documents. Organize folders and subfolders logically with clear names to make it easy to find the files.
6. Upload documents and assign roles
Once your folder structure is ready, upload your documents. Pay attention to file names and order. Add users, set roles, assign due dates, and prioritize tasks.
The next step is to create user roles and set access permissions based on their role in the process. Always cross-check permission settings before inviting users.
VDR vs free file-sharing platforms for due diligence
| Feature | Traditional platforms | Virtual data room software |
| Security | Basic security features like basic data encryption | Advanced security features like digital watermarking, 256-bit encryption, view-only access, etc. |
| Compliance | Doesn’t necessarily comply with industry-relevant regulatory standards | Strictly comply with regulatory standards like GDPR, ISO, and HIPPA |
| Access control | Limited or no user permission customization | Granular permission settings for users |
| Integration | Offer limited or no integration with third-party applications | Smooth integration with Slack, SalesForce, and similar third-party tools. |
| Data management | Simple file storage with minimal tracking | Advanced document organization and version tracking |
| Usage | Better suited for general or small-scale data sharing | Specifically designed for advanced due diligence process in M&As and similar transactions |
Key takeaways
- Due diligence data room is a secure, centrally controlled data management platform used to store and share corporate information in due diligence.
- Data room due diligence provides better security than physical data rooms. They provide complete control over with the help of granular access permissions and other security features.
- Choosing the right data room vendor is the key to success. Go for a data room that provides more security features, customization, collaboration tools, and free demos.
- Unlike physical data rooms, an online data room reduces expenses like paper/printing and physical storage costs.
- An online data room streamlines the due diligence process by simplifying data management and ensuring smooth collaboration between multiple parties. A virtual data room ensures maximum transparency throughout the process.