Why Set Up A Data Room For Due Diligence (Overview)

Data Room For Due Diligence

Are you looking to start a due diligence process and you are in the need of a data room?

Perhaps you are looking to educate yourself on why you should have a data room for due diligence.

No matter the reason, we have some important reasons to share with you about why you should have a data room always ready to facilitate a due diligence process!

In this article, we will look at what is due diligence and why you should use a data room for your due diligence process, the data room features you need for your due diligence, your data room security features and certifications, how you can accelerate your due diligence with a data room and more.

This article is divided in the following sections:

  1. Why should you use a data room for due diligence?
  2. Data room features for your due diligence
  3. How can a data room accelerate your due diligence process?
  4. Preparing your due diligence documents and data room
  5. What areas are data rooms most used?
  6. Due diligence data room takeaways

Let’s get started!!

Why should you use a data room for due diligence?

What is due diligence?

To fully appreciate why data rooms should be used for due diligence, let’s first look at what is due diligence?

A due diligence is a process where one person, company or entity will provide another a comprehensive set of corporate documents, material and information to facilitate the appraisal and evaluation of such corporate documents.

According to Investopedia, “due diligence is an investigation, audit, or review performed to confirm the facts of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.”

When due diligence is performed?

Businesses undergo due diligence on a regular basis and it’s a crucial activity for all businesses, no matter the size.

Millions of companies around the world turn to data rooms to handle some form of due diligence.

So when do companies need to conduct due diligence?

For startups, due diligence will be done to raise cash, get funding, fundraising, raise capital with venture capitalists, with angel investors or dealing with their financial institutions.

For an ongoing business, due diligence may be regarding a business acquisition transaction, the selling of a business, purchase of a business, spin-off, divestiture, M&A deal or any other change in ownership structure.

Due diligence can also be done for regulatory audit purposes, scientific research and development, litigation and legal disputes, cross-border transactions or even for a company to house sensitive information internally.

The most common due diligence use case requiring a data room is a M&A transaction.

Having a data room for due diligence is strategic 

Whether you are running a startup or an active business, you should have data room due diligence to help you quickly engage with investors, potential buyers or potential partners.

An opportunity may be short-lived and you need to take full advantage of that.

Having a data room for due diligence is a strategic decision for your business.

A data room is not just a storage space allowing you to share information but rather a curated set of corporate information classified, organized, accurate, approved and intended for a very specific purpose.

Setting up a data room can be time consuming 

If you have already done the process, you can perhaps acknowledge that setting up a data room can be time consuming.

If not handled sufficiently in advance, you can delay your due diligence and compromise your deal.

Should you need to set up a data room quickly to immediately start a due diligence, having one already locked and loaded will save you a tremendous amount of time and help you accelerate your due diligence process.

Data rooms will help your investors, potential buyers, partners, venture capitalists or any interest parties from easily accessing your corporate information at the right time.

Data room features for your due diligence

Having the right data room set up for your due diligence activities is also an important factor.

A data room is a central repository where you want to store your confidential company information in a secure and protected fashion.

You want your data room to be user-friendly and provide document management capabilities allowing you to easily share and collaborate on your documents.

There are many data room providers out there, make sure you reach out to a few of them and compare their offerings.

You need to select the data room provider who will give you solid data room software features that will help you move forward in your due diligence process.

Data room for due diligence should have secure data management features 

There is no doubt that your data room must be secure.

According to SecurityIntelligence.com, the average cost of data breach per company is estimated to be 3.92 million in 2019.

According to the same report, the country where companies have lost the most is in the United States, an average of $8.19 million per company studied, representing more than twice the global average.

This means that your data room provider must have implemented a robust data management process to ensure the maximum security and protection of your information.

Secure data management features include:

  1. Permission-based user roles
  2. Activity tracking
  3. Audit logs
  4. Data encryption 
  5. Multi-step user authentication 
  6. Disabling of print screen function
  7. Disabling of copy functions
  8. Disabling of print function
  9. Disabling of download function 
  10. Dynamic watermarking 
  11. Access by time
  12. Access by IP address 
  13. Secure web browsing

These are some features that you should be getting from your data room provider so you can get value for your money.

Due diligence data rooms to have security certifications

Data room providers must have the most secure data room environment possible.

If your data room provider is unable to demonstrate to you that their data room environment meets strict and best security standards possible, then you should not work with that data room provider.

Some security standards are listed below:

  • SOC 1
  • SSAE 16
  • ISAE 3402
  • SOC 2 Type II
  • FISMA
  • DIACAP
  • FedRAMP
  • HIPAA
  • ITAR 
  • DOD CSM 

Make sure you speak with your data room provider about this.

Data room providers should also have:

  • PCI DSS Level 1
  • ISO 9001
  • ISO 27001
  • FIPS 140-2
  • MTCS Level 3

Major organizations will vet their virtual data room providers in advance and ensure that the providers meet the above security and industry standards.

Data room for due diligence should have document management features

A solid data room must provide you with robust document management system features.

At the end of the day, you are going to share and exchange documents so make sure that the data room software solution you choose will be easy to use and user-friendly.

Typical document management features offered by data room providers are: 

  1. Version control and management features
  2. Check-in and check-out features
  3. Alerts and notifications features
  4. Collaboration features to work on documents 
  5. Integration with your content management systems

Having the right data room will increase your chances of running a successful due diligence process.

How can a data room accelerate your due diligence process?

Having a well-organized, well classified, well documented and accurate records in your due diligence data room will help you accelerate the closing of your deal.

Typically, the due diligence process is an important undertaking.

Your company may have hundreds, if not thousands, of relevant records and data to share with a buyer.

Consider a large-scale M&A deal between international organizations.

There may be even millions of records and data that may need to be exchanged between them.

Your data room will help you organize your information in such a way that your investor or buyer will be able to process the data with ease and access them as needed.

Your data room should help you share your confidential information while keeping full control on the security and access of your data.

Preparing your due diligence documents and data room

Preparing your due diligence documents and data room is perhaps one of the most important milestones in a successful due diligence process.

Collecting, classifying, reviewing and vetting the data you will ultimately host in your virtual data room can make or break your deal such as a M&A transaction.

The first step in setting up a data room is to prepare the files you want to upload and share using the data room.

Gather all your physical files and digitize them

Some of your contracts, documents or information may be paper-based and physically held somewhere in your archives.

In most cases today, your due diligence will be done using a virtual data room platform.

This will require that you digitize your physical documents so you can upload them to your virtual data room. 

You’ll need to start preparing ahead of time in case you have a lot of paper-based documents to share with your buyer.

Gather all your relevant electronic files

Once the relevant physical files are digitized, you will need to identify the relevant digital files and data you want to share in your data room.

What’s absolutely critical for your due diligence process is that the files you share are to the point, relevant and accurate.

It’s therefore crucial that you have your company executives or legal advisors authorize the scope and extent of information hosted in your virtual data room.

The more organized your due diligence data room, the easier it will be for you to get your executive approvals.

What areas are data rooms most used?

You may need a due diligence data room for many reasons in the life of your business.

Data room for startups and data room for M&A transactions are the most common use cases.

You may need a data room to handle a successful due diligence in other instances as well, such as:

  1. Regulatory due diligence 
  2. Data privacy and data protection due diligence 
  3. Asset due diligence 
  4. Intellectual property due diligence
  5. Human resource due diligence 
  6. Litigation due diligence 
  7. Scientific due diligence 

Due diligence data room takeaways

There is no doubt that you stand to benefit having a well organized, accurate and complete data room for your due diligence process.

In this article, we have looked at how setting up and maintaining a due diligence data room can be useful for your business, no matter the size.

We looked at why you should use a data room for your due diligence process, the data room features you need for your due diligence, your data room security features and certifications, how you can accelerate your due diligence with a data room and more.

We hope that you enjoyed this article.

Did you already have to set up a due diligence data room? What was your experience? We would love to hear from you. Drop us a comment!