Why a Virtual Data Room is Your Best M&A Due Diligence Tool

Mergers and acquisitions (M&A) are never slam dunks. The process is complex, and requires time, effort, and skill.

Despite the challenges, buying and merging are becoming more frequent strategies for growth, especially among small and mid-sized (SMB) companies. One in four SMBs expect M&A activity to pick up in 2018, according to a survey by accounting firm Deloitte.

That’s because participating in a merger or acquisition can hugely benefit small companies. Joining up with another company can help scale your business, let you provide better service to customers, and encourage innovation and collaboration.

If you’ve decided to take the leap and make an M&A deal, you might currently be overwhelmed by all moving parts involved. An upcoming merger or acquisition can start to feel like a game of Jenga, where one misstep can cause the whole deal to come crashing down.

M&A teams are tasked with answering and documenting hundreds of questions related to contracts, financial statements, property lists, customer and supplier information, insurance policies, and organizational charts. In fact, there are at least 20 essential due diligence areas in an M&A transaction, each with multiple elements.

All of that information can get really confusing really quickly. To keep track of all the moving pieces, your team should establish a virtual data room (VDR) early in the process.

Below, we’ll discuss why you should consider using a VDR, the features you should look for in a VDR system, and associated cost factors.

Using a virtual data room to track M&A due diligence
You may have heard the terms “online data room” and “virtual deal room” used as synonyms for virtual data rooms, proprietary online intranet storage areas accessible to authorized outsiders.

VDRs are used to store sensitive, electronic information in a secure, often password-controlled environment. Users with access to the VDR can view and share documents with internal teams and external partners, such as attorneys or accountants.

VDRs simplify the M&A process but are especially helpful with due diligence and the associated hundreds of activities required for successful execution. VDRs offer the following benefits:

Remote access—documents can be sent, reviewed, and discussed quickly and simultaneously, regardless of where buyers and sellers are located

Paperless transactions—teams can edit and approve documents digitally, saving hours and the environment from the burden of hard copies

Secure, private interactions—controls and authentication tools ensure that VDRs remain safe from hackers
Search capabilities—you can establish directories, navigable content, and full-text search functionality in your VDR

Cross–referencing—you can create due diligence checklists linked to documents in your VDR for easy review
Scheduling—you can schedule disclosure activities with links to related materials, which you can update as documents are uploaded into the data room

Activity tracking—you can track all activities that occur in the VDR, including document changes and when team members accessed certain materials

Questions to ask when evaluating virtual data rooms
When evaluating VDRs for use in M&As, providers should be able to answer the following questions about their systems. Every company’s needs are different, so make sure to discuss your security, reporting, access, reliability, and ease-of-use needs with your team before meeting with a provider.

Security—determine the type and level of security offered by the VDR
Ask about features such as two-factor authentication, whether access is limited to certain devices, and if access can be controlled based on team member role.

Regarding document access, check if watermarks are applied to documents when downloaded. If so, are the watermarks dynamic, showing who downloaded a document and when? Does the VDR provider offer document virus scanning? Can access be revoked, even after a document is downloaded?

Reporting—assess the activity and document control tracking capabilities of the VDR
Activity tracking should let you see who entered the VDR and what they did, from uploading a document, to viewing, downloading, and printing documents.

Document controls help teams find the latest version of documents while retaining the ability to view previous versions, if needed.

Access—determine the ease of working with the VDR
What types of devices or platforms can be used to access the VDR? Are additional applications or plug-ins required to use it?
Does the VDR support multiple languages?
Is the VDR available around the clock?
Reliability—learn how the VDR is managed by determining where it’s located, and what type of servers are used to support it

What fail-safe plans does the server partner have to ensure reliability? This includes areas like a standby system in case of server problems and no downtime if system components need to be repaired or replaced.
User–Friendliness—the features that make a VDR easy and helpful
Does the system include the ability to upload multiple documents at once, a drag and drop function, and the ability to link documents?

Is there a Q&A section for users to ask questions when they get confused?
Does it include any other features that make VDRs easier to use, such as text searches, compatibility with Word, Excel, and PowerPoint documents, and no document size limit?

Factors that will influence your VDR software cost
Cost should be a secondary consideration when looking into a virtual data room, as investing in a VDR during an M&A can save you time and money, as well as provide security for the buyer and seller.

VDR system costs will vary based on your answers to the following questions:

How many pages can be uploaded to the VDR? How many pages will be scanned? These questions help the provider determine how much storage you’ll need.
How many team members need access to the VDR? Provider plans may have an established number of included user licenses; you’ll pay extra if you exceed that limit.

How long will the M&A process take? Set prices may be available for a quarter, six months, and full year, with monthly payment options for M&A activity that lasts longer than one year.

In addition, provider plans offer varying levels of support and training that affect the final cost. Support includes help setting up the VDR, customer support to address questions and problems, and provision of extra features, such as archiving when the M&A is complete.

A VDR makes a complicated process easier
Mergers and acquisitions are difficult transactions. There’s no need to make the process harder on yourself by not investing in a modern tool, such as a virtual data room.

Let’s recap some of the benefits:

You can share valuable information with the controls needed to maintain confidentiality.
You’ll avoid the cost of a physical data room and make the M&A process more efficient, as you’ll be able to straightforwardly upload and access key documents.

Documentation of your M&A is secure and monitored, giving you time to focus on what’s important: completing the deal successfully.

If you’ve used a virtual data room in a merger and acquisition, what benefits did it provide for your team? Was the process more efficient? Share your experience in the comments below!

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