Overview – Conducting Due Diligence Online with Virtual Data Rooms

Whether a company is up for sale, selling off one of its parts or seeking debt or private equity financing, it needs to present the transaction to potential buyers or investors in an organized and marketable format. Even though this upfront effort provided for potential buyers is frequently called “sell-side due diligence”, the same details are usually required for lenders or investors. Thus, prominently displaying this structured and categorized information in online due diligence rooms can considerably improve value, shorten deal times and reduce transaction costs.

“Get the right information
to the right people
at the right time…”

This combination of organized material and its web-based presence has created a new online due diligence platform which was formerly reserved for only the largest deals, but it is now readily available for small to mid-sized transactions. In other words, this combination of accurate information and its instant availability through online deal rooms assure that the right information is getting to the right people at the right time.

Organize the Facts - Sell-Side Due Diligence Online

Often there are many reasons for the divestment of a corporate division, such as disposing of non-core assets, industry consolidation or just the opportunity to sell to a willing buyer at a premium price. Likewise, private equity investment may be utilized for repaying debt or for making strategic acquisitions. Too often, transaction delays and unwanted surprises adversely impact the financial return achieved. The sell-side due diligence approach allows the company to “put the best foot forward” in displaying in-depth information to address the initial concerns and issues of the potential buyer, lender or investor, therefore streamlining the deal process.

“Put the best
  foot forward”

Owners typically will spend their time and effort running and growing their businesses, not grooming their businesses for sale. Hiring a sell-side due diligence “swat team” to organize accounting records and legal documents, as well as to develop business and marketing plans, may add a small amount to the transaction costs. However, the benefits of this upfront, pre-emptive effort can outweigh the expenses by bringing previously unidentified issues to light early in the process and potentially improving both the economic and non-economic terms of the deal.

From the buyer’s or investor’s perspective, this early due diligence process provides additional control so that resources used pursuing a transaction will not be wasted, because a deal-stopping issue comes to light at the last minute.

image detailing the traditional due diligence deal approach and the virtual data room approach

Virtual Rooms Replace Boxes of Paper Files, Conference .Rooms and E-mail

There are real reasons why a virtual due diligence room is preferable to the normal practice of assembling boxes of documents in a conference room or simply sending all the documents back and forth between the various parties by e-mail. Probably most importantly, e-mail is not a secure way of sending documents between the parties involved in the transaction. Documents could be intercepted while in transit, since few individuals today make much use of encryption - so the fact is that the document could be read by outsiders. It’s like sending deal documents written on a postcard through the mail. Given the sensitivity of many of the deals taking place on a daily basis, this alone is a powerful reason to switch to a secure and controlled due diligence methodology.

“Security is paramount”

Another issue running through transactions is that the various document drafts contained within e-mails and office document management systems are not always easily accessible when away from the office. Even if one could get to the information, there is constantly the question of whether the most up-to-date information is being viewed. A secure, online deal room solves that problem.

So what is an online deal room anyway? Basically, it is a separate, password-protected website on a secure server. The secure server aspect is critical - it enables the website to be protected against being viewed by anyone other than those logging in with the correct usernames and passwords. If they enter these correctly, they are then in a fully controlled and secure environment.

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