How to Use a Virtual Data Room for Due Diligence

A due diligence data room helps make M&A transactions smooth sailing by allowing you to securely store and organize relevant files and documents. 

This quick guide will help you set up a data room for due diligence.

What is a due diligence data room?

A due diligence virtual data room (VDR) stores sensitive documents and files on a secure platform that’s accessible only to selected people. A VDR helps you fast-track complex transactions such as M&As by allowing multiple parties to conveniently exchange information and access all the files they need.

How to organize a data room for due diligence?

You don’t have to be a tech whiz to get your virtual data room for due diligence up and running. After all, a VDR is designed to make the process convenient for everyone involved. 

Before you begin, you’ll need to choose and download your due diligence data room software. Take advantage of free trials to explore features and make sure the software has everything you need before you commit.

Step-by-step guide to setting up the structure of data room:

  1. Prepare a due diligence checklist. Put together a list of all the files you need to complete due diligence for your project. You can fast-track this process by using a premade checklist.
  2. Import the due diligence checklist template provided with the software. Due diligence software provides professional templates for different transaction types. Choose the template that most closely matches your needs. You can build on the list as the transaction progresses.
  3. Check the folder structure. Importing a template automatically sets up folders and links documents to diligence requests. Check the folder structure and tweak it as necessary.
  4. Add new users to your due diligence virtual data room. Make sure you provide access only to people who are relevant to the project. Adding more users increases transparency and improves communication, but having too many people inside the room increases the risk of data leakage. Aim to strike a balance.
  5. Upload files and documents. Use the drag-and-drop feature to quickly upload files. Make sure they’re added to the right folders and are correctly named. Check that the access level for highly confidential files is appropriate.
  6. Assign tasks to users, determine priorities, and set due dates. Check that users have access to appropriate files. You can use the data room’s project management tools to set and track priorities and deadlines.

What functions should a virtual data room have to carry out effective due diligence?

Not all virtual data rooms are created equal. Make sure you choose software that offers all the necessary features for completing the due diligence process.

  • Document preparation and review. Your data room should have features such as automated PDF conversion, smart indexing, a built-in file viewer, and drag-and-drop uploading to help speed up your due diligence process. 
  • Dynamic watermarks. Automatically adding custom watermarks to downloaded documents helps prevent data leakage. Watermarks should include the date, IP address, and name of the person who downloaded the file. 
  • Document access restrictions. This feature lets you control which documents can be edited, shared, printed, and downloaded. It also allows you to control access to highly confidential files. 
  • Self-destructing documents. You can limit access to documents by setting them to self-destruct or expire after a specified period. 
  • Full audit trails and user activity tracking. Your due diligence virtual data room should allow you to track every user’s actions on the platform, including the documents they view, print, and download.
  • Q&A section. This feature allows users to ask questions about relevant documents and keeps all communication on the platform. 
  • Data backup. This ensures you can still access critical data after an unexpected loss. 
  • 256-bit AES SSL encryption. You’re handling sensitive files, so don’t settle for less than the highest standards of data encryption. This advanced level of file encryption ensures your data is only usable within the virtual room.
  • Virus scanning. Your due diligence virtual data room should automatically check for malware and reject infected files.
  • Two-factor authentication. This feature provides an additional layer of security by requiring users to enter a code when logging in.
data room due diligence

Due diligence data room checklist

Wondering just what your data room checklist might look like? Here’s a list of some common requirements.

A due diligence checklist will help you analyze your company in an organized way. It catalogs the information and files necessary to complete due diligence. Thanks to this, the parties concerned can learn about the company’s assets, liabilities, advantages, and potential problems more easily.

There is no universal standard for due diligence checklists. What you include in your list will depend on the type of transaction, the size of your company, your due diligence goals, and the dynamics of the deal. Still, you need to comply with a basic checklist that includes documents addressing the key areas of due diligence. 

1. Business documents

  • Shareholder certificates
  • IP forms 
  • Trademark license agreement
  • Articles of incorporation
  • Tax information
  • Municipality permits
  • Business licenses
  • Employment contracts

2. Financial documents

  • Business continuity plan
  • Loan agreements 
  • Financial statements
  • Strategic plans
  • Auditor correspondence
  • Notes to accounts

3. Human resources documents

  • Regulatory and compliance documents
  • Performance appraisal documents
  • Employment contracts
  • Employee compensation documents
  • Employee handbook
  • Contracts
  • Leases
  • Guarantees
  • Consent decrees
  • Pending and potential lawsuits
  • Representations and warranties
  • Power of attorney documents

The advantages of using virtual data rooms for due diligence

The painstaking process of due diligence can bury people under a mountain of documents. Data rooms bring clarity and efficiency by providing a platform for collecting, organizing, and viewing all your due diligence files.

Secure file storage

Data rooms use encrypted cloud storage to safeguard your data. They comply with rigid security and compliance standards, including:

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

Reliable activity tracking and analytics

Data rooms allow you to track everything users do, from uploading and deleting files to viewing and editing documents. This helps you to:

  • See the progress your team members are making 
  • Evaluate the activities of all the parties involved
  • Ensure that all data is properly handled

Efficient file management 

Data rooms offer features that make file storage and organization a breeze.

  • File indexing: Data rooms automatically index files, so you won’t have to search through a maze of file paths to find what you’re looking for. 
  • In-document search: Building on the indexing feature, full-text search lets you pull up a file by typing in specific words and phrases.
  • Drag-and-drop file uploader: Drag-and-drop lets you quickly upload your files and store them in your desired location.