Digitally facilitating the due diligence process

Virtual data rooms (VDRs) are revolutionising the process for mergers and acquisitions

Due diligence for any merger or acquisition involves the buyer examining financial and other records such as HR files, contracts, agreements with investors and other key data.

Due diligence is an essential element of any M&A process. In simple terms, it involves an examination of a company’s financial and other relevant records by a potential buyer.

Those records can include HR files, contracts with senior executives, agreements with investors, customer contracts, ESG data, and so on. In many cases, the volume of documentation involved can stretch to thousands of pages and more.

Of course, companies don’t want to share commercially sensitive information unless it is absolutely necessary. And they certainly don’t want to put it anywhere where they don’t have complete control over who has access to it.

And that’s where the concept of a data room came from. In the pre-digital age, it was a secure room where all the documents required for the due diligence process could be stored and made available to would be buyers.

The room could be located on the seller’s premises or more often than not in the offices of a law or accounting firm. Potential buyers could send their teams in to review the documents having entered into strict non-disclosure agreements (NDAs).

The need for a physical location no longer exists and deals of any substance utilise virtual data rooms (VDRs). A VDR is a secure digital repository for all of the sensitive company information and documents required for due diligence.

Due diligence can be carried out remotely without the need for people to travel to examine physical records and documentation. And the time consuming and cumbersome process of gathering large volumes of documents and records and placing them in one physical location is obviated.

VDRs enable M&A due diligence processes to be conducted in a structured, efficient, collaborative manner where parties can analyse and access matters on the deal. Users can include potential investors and buyers, legal, financial, tax and other advisors and indeed the sellers and other stakeholders.

Sellers can also carry out their own due diligence process and place the results in the VDR to accelerate the transaction process.

“Carrying out a level of seller due diligence and sharing this with the buyer can often help speed up the diligence process on the buy side,” says A&L Goodbody Corporate and M&A partner Stephen Quinlivan. “But in any case, having your information well prepared for buyer diligence, and providing prompt responses to buyer Q&A, can help speed along the buyer diligence process, which is often the biggest time drag.” 

The vitally important question of confidentiality must also be taken into consideration. How can a seller ensure that sensitive data contained in the VDR remains confidential? VDRs can provide strong controls and management capability over who has access to and what they can do with the documentation in the platform.

User security and documentation protection settings can be applied to individual documents if needed, restricting individual users from accessing, downloading, editing, and altering documents. And user activity when accessing documents in the VDR is tracked at all times.

Business owners can also be quite selective about what they put in the VDR. While everyone signs NDAs, there may still be certain material deemed too sensitive to share. This can include key customer contracts with prices and margins contained in them. It is possible to redact that information until such time as the deal has reached an exclusive stage with a buyer or even until later still.

A VDR makes all of these arrangements and measures simple to execute. It also speeds up the due diligence process quite significantly by removing the need for people to manually inspect documents.

There is no set template for a VDR, and business owners need to look at the particular circumstances of the proposed sale process before deciding on the approach to take. A well populated data room provides the necessary information to those evaluating the opportunity in an efficient manner. M&A Advisors have knowledge of multiple VDR providers and the benefits of one over the other.

Choosing the right VDR to use on a particular transaction generally comes down to cost, data sensitivity, deal structure and the market in which the investment opportunity will be targeted – local or international, for example. Sellers should always discuss the transaction objectives with their M&A advisor before moving forward to setting up a VDR.