How Virtual Deal Rooms Help Teams Meet Due Diligence Requirements


Due diligence ensures that parties to a transaction share a baseline understanding of essential facts.

Reaching this baseline, however, can be challenging. A large volume of information, much of it confidential, may be exchanged during due diligence. The parties may be required to process a great deal of information in a short amount of time.

In the past, deal rooms helped contain this vital information. Today, virtual deal rooms offer an alternative. Done correctly, a virtual deal room can protect the confidentiality of key information while also expediting the due diligence process.

Due Diligence in an Electronic World

Due diligence requirements predate the widespread use of computers and the internet. Today’s reliance upon these tools, however, has changed many aspects of business — including the best methods for performing due diligence.

For example, the documents and data to be reviewed in due diligence are often electronic rather than paper-based. Corporate records, stockholder information and financial reports may be stored electronically.

The digital nature of these records may make them vulnerable to hackers if they are stored and shared on consumer-grade, internet-accessible devices. That’s where tools like virtual data rooms, with specialized security and privacy controls, come in. They can help protect information while due diligence proceeds.

Traditional Due Diligence Concerns

Many of a buyer’s or seller’s biggest questions during due diligence remain the same as they did before digital data storage or virtual deal rooms became commonplace.

For instance, buyers still want to determine whether a company for sale in an M&A deal faces risks to its sustainability and growth. Buyers tend to scrutinize a company’s financial performance to ensure it has not been overstated during the negotiation process. And buyers will likely be wary of large customers or gaps in the executive board that will be difficult to replace, says Bill Kenedy of Lutz Consulting.

This information often includes proprietary information or trade secrets. For example, a company whose primary manufacturing method or chemical formulas are a trade secret holds a valuable asset that must be considered during M&A negotiations.

In the past, this information was protected by keeping it in a physical deal room, to which access was tightly controlled. Today, the same information may be shared electronically, but the same access controls can be implemented.

Cybersecuirty Due Diligence

Due diligence in the digital world also means examining issues related to technological privacy and security itself. For instance, buyers often want to see evidence that the seller practices good cybersecurity and that it has sufficient means in place to protect any proprietary information or trade secrets, Richard D. Harroch and fellow M&A experts write at Forbes.

While most buyers and sellers recognize the need for cybersecurity due diligence, fewer know how to ask the right questions that allow them to comprehend a company’s cybersecurity, privacy and data protections, says Melissa Ventrone, an attorney at Clark Hill PLC.

When these issues aren’t addressed, a company may face “subsequent data breaches or privacy complaints, loss of business revenues, higher cybersecurity premiums, underperforming stock value, and loss of consumer confidence,” Ventrone says.

virtual data

VDR Features for Promoting Due Diligence

Virtual deal rooms facilitate due diligence in the digital era. Often, they include features that not only preserve the security of due diligence, but can actually improve the process.

Stay on Schedule

Reviewing necessary documentation in a merger or acquisition can take months, particularly when additional time to address buyer questions is included, Brandon Downs at Business Benefits Group writes.

To cut down on the time required, it can be tempting to take shortcuts during due diligence. Reducing the due diligence performed, however, can have negative effects on the health of any resulting deal.

In a 2019 article in Contemporary Accounting Research, Daniel Wangerin found that “less due diligence [in M&A deals] is associated with lower post-acquisition profitability, a higher probability of acquisition-related goodwill impairments, and lower quality fair value estimates for the acquired assets and liabilities.” Not only does proper due diligence help the deal itself to close satisfactorily, but it may also help the post-deal transition proceed more smoothly.

Time may be of the essence in a business deal, but so is a thorough understanding of the business itself. Virtual deal rooms can help lessen the time required for due diligence without requiring the parties to take shortcuts.

VDRs help reduce time commitments by making confidential documents accessible through a secured online system. When parties can access key information from anywhere in the world, they are saved the time and expense of traveling to a single physical deal room.

Address Cybersecurity Concerns

Currently, 77 percent of companies worldwide operate without the comprehensive cybersecurity tools and practices they need, Manu Mohan at EY Law writes, citing company data. In any merger or acquisition, then, it is more likely than not that a target company won’t have the cybersecurity protections it needs. Due diligence helps reveal the gaps.

A virtual data room, by itself, is not a substitute for sound cybersecurity and data privacy practices. However, the right VDR can help allay concerns about security and privacy in the deal-making process itself.

For instance, a VDR helps ensure that information cannot be removed from the deal room itself, either by the parties viewing it or by unauthorized third parties. Files cannot be copied out of the deal room and end up in unauthorized hands or sold on the dark web — a concern that cybersecurity due diligence should address, Ventrone says.

With a secure means of reviewing data in place, parties involved in due diligence can proceed more confidently. Time and energy can be spent on the financial, regulatory and cybersecurity details unique to the parties and the deal rather than on protecting those details from unauthorized intrusion.

Digital security

Best Practices for Digital Security and Due Diligence

Due diligence can no longer overlook digital security and privacy threats. Companies exploring a merger, acquisition or other business deal must practice good cybersecurity during the due diligence process. A virtual deal room can help.

Choose the Right Tools

For any business deal that will involve the transfer of sensitive information digitally, a secure virtual deal room is a must.

Cloud-based file-sharing tools like Google Drive and Dropbox, while popular, do not offer the security protocols necessary to protect business information from intrusion by third parties. These tools also make it easy to copy, download or share files, which can open the information therein to further exploitation.

In a virtual deal room, however, individualized controls allow administrators to decide which users can perform which tasks on which documents. For instance, an administrator may set a particular user’s access to documents in view-only mode, preventing that user from copying, forwarding or printing the document, says Will Kenton at Investopedia. A VDR may even allow administrators to control viewing within documents, redacting information for users who need only a small part of the document.

Know Cybersecurity As Well As Financials

A company’s data has become a valuable corporate asset. Both the data and the company’s means for protecting that data may be evaluated during a merger or acquisition, says Ben Wootliff of Control Risks, a specialist global risk consulting firm.

The analysis, however, may not be as thorough as it needs to be. Many M&A deals rely on a boilerplate list to examine cybersecurity and privacy, but the list may not address the actual concerns a business faces in these areas.

Instead, “a target’s cybersecurity vulnerabilities and privacy risks should be as closely investigated as financial documents within the M&A due diligence process,” Ventrone says.

A virtual deal room can help by serving as a secure location for cybersecurity due diligence in addition to financial and legal due diligence. For instance, information like vulnerability assessment results, copies of complaints or regulatory inquiries concerning a company’s data privacy, and copies of contracts with software and other vendors can be examined in a deal room setting.

By choosing a virtual deal room with due diligence in mind, parties to a merger, acquisition or other transaction can balance efficiency and data protection. The right deal room can help parties meet their due diligence requirements with tools and protocols designed for today’s digital world.

Recommended for you