Virtual Data Rooms and Due Diligence: 4 Mistakes to Avoid
It feels like ancient history, but it was just a few years ago. Before the age of cloud computing, when due diligence situations like acquisitions or investments arose, companies shared documents with one another in physical data rooms. Because there was no other way to ensure access to files would be secure, stakeholders would travel to one another’s offices, or to neutral locations, to review documents in person.
Today, this can be accomplished remotely, by using a virtual data room (VDR) that only accepts encrypted connections from sanctioned users. However, enabling business due diligence processes with a virtual data room doesn’t have to be complicated. The most important prerequisite to doing it effectively is simple and has nothing to do with technology: preparedness. When the due diligence process is a scramble, it costs your team valuable time and money.
Even outside of mergers and acquisitions, up-to-date libraries of due diligence documents can be important in bringing on new partners, complying with IRS audits, and even collaborating internally.
For the vast majority of use cases, your company will want to utilize a third-party VDR service to share files with key stakeholders. And while the importance of being able to competently navigate your own VDR is clear, it is equally important to make necessary information accessible to the external entities involved – easily and securely.
This is because in all the aforementioned scenarios, time-efficiency – without neglecting good business practices – should always be your chief concern. So today we will discuss a couple of mistakes to avoid when facilitating due diligence with a virtual data room.
1. Not Having Documents Ready for Due Diligence
Storing your internal records, documentation, and data correctly should occur long before whatever event requires your due diligence. Doing so will help you avoid situations where you need to find a specific document but are scrambling to find it.
Different companies handle different types of files differently, and some will need regular “latest version” updating, while others will be relatively static. Make sure you know where to find your latest financial statements, lists of intellectual property assets, insurance policies, working capital figures, lists technologies that your business is dependent on, sales pipeline figures, plans for integrating with the prospective buyer or partner, existing contracts with key partners, tax files, management and ownership infrastructure policies, supply chain documents, and more.
It’s a lot to keep track of, and especially with small businesses, poor choices as seemingly minor as unintuitive file naming can become massive problems later on. Part of planning sufficiently involves having a well-defined document naming and filing system.
This way, whether information needs to be found as a part of virtual data room-driven due diligence, or just located on internal servers, it can be accessed quickly and easily.
2. Insufficient Access Permission Management
You should also decide, if any, what digital rights management (DRM) tools you might want to utilize.
Not only will there be a small learning curve involved in operating new software generally, but also knowing how to revoke access or provide updates when necessary functions both to protect your business’s sensitive information and prevent misunderstandings or inconsistencies.
Further, in the planning process, it is pivotal to have a comprehensive NDA which protects your business and its information. Having incomprehensive NDAs can be detrimental to your company following a failed deal, as they’re pivotal to your protection.
This is especially true if the company you are looking to sign a deal with is a direct competitor.
3. Sharing Files Outside of Your Virtual Data Room
Often virtual data room due diligence still involves some interaction between corporate entities. In sharing your due diligence documents, being responsive to inquiries and receptive to the needs of the organization reviewing the information is of similar importance.
In doing so, maintaining a rigorous standard for disclosure – requiring the submission of all inquiries in writing – is a necessity. While a well-made NDA should keep your business protected, it is important to keep a record of correspondence regarding due diligence. Moreover, file exchange should seldom, if ever, occur outside of the VDR.
Facilitating virtual data room due diligence can further benefit from employing the right people to assist in the process. Frequently, legal counsel will participate in creating not only the previously mentioned NDA, but also in drafting a disclosure schedule.
Because problems in one’s disclosure schedule can impede deals and even result in litigation, having the right advice, legal or otherwise is a must.
4. Not Telling the (Whole) Truth
Especially in thinking about avoiding litigation, there is no greater risk – both to your finances and your reputation – than dishonesty.
While regulation prohibiting outright falsehoods in your due diligence documents already exists, omitting information until requested, or exaggerating projections, is equally worthy of avoiding.
More than anything else, a lack of accuracy in your virtual data room will simply waste everyone’s time. Missing information is more likely to make your company seem disorganized than it is to actually hide anything.
While this again speaks to the importance of accurate and up-to-date information in your VDR or corporate server, the most important aspect – regardless of why you need your due diligence documents – is that time is of the essence.
Taking the proper steps to prepare and facilitate the virtual data room due diligence process will help you stay on track. Holding yourself and your employees to the highest standards of integrity, meanwhile, ensures avoiding headaches that come with bad practices. And finally, remember that there are no shortcuts in business, only opportunities in which you must choose to be diligent.