By Closd.
For many years, M&A attorneys used to conduct due diligence processes in-person, and on-site. Picture yourself locked in an office with countless other lawyers, reviewing heaps of documents displayed on a table for countless hours. Now just picture the tremendous waste of time and lack of efficiency this would represent.
15 years ago or so, lawyers finally decided to take the plunge and digitize this process, until physical due diligence completely disappeared – for the common good. Virtual Data Room (VDR) providers then arose on the market but did not meet all of the sector’s needs, especially in terms of user experience and value. As a consequence, a lot of legal professionals switched to cloud-based drives (Dropbox, Google Drive, SharePoint, etc.) or online file transfer services (WeTransfer, etc.) for their due diligence processes. Although this switch allowed them to rapidly gain flexibility, the massive digitalization of the industry soon led professionals to challenge the legal value and security guarantees of such tools, in particular for the management of extremely confidential documents.
That is why legal professionals and dealmakers should adopt a proper data room solution that meets all their needs in terms of features, user-friendliness, security, and legal compliance.
Data room vs. cloud storage: definition and comparisons
A VDR is a digital secure space where a high volume of confidential documents are shared and can be reviewed remotely. Its privacy and access rights can be continuously and thoroughly monitored and modified while potential buyers or investors review the target’s financial statements, corporate documentation, commercial contracts, etc. It is mostly used to facilitate due diligence processes in M&A or private equity transactions, but there are a lot more uses for it.
If we stick to this definition, we might be tempted to think that simple cloud-based storage could work just as well. However, legal implications and security guarantees greatly differ. Here is a quick summary of the main differences between a cloud-based drive designed for business needs and a data room designed for transaction management:
1. Storage: Most cloud-based drives are capped in terms of capacity; data rooms usually allow users to upload an unlimited number of documents, which is necessary for large targets that have a massive amount of documents to be reviewed.
2. Features: Cloud-based drives do not offer specific features like watermarks and Q&A.
3. Security: Due diligence processes are highly sensitive, since a company has to share its most confidential information with third parties, sometimes competitors. Consequently, they require rock-solid security guarantees from the VDR provider. This includes military-grade encryption standards, secure connections, replication of data on several private servers, advanced authentication procedures, and granular access rights.
4. Legal guarantees: Cloud-based drives do not provide detailed action logs and, especially, do not issue a data room archive and certificate that is required for the seller’s warranty.
5. Support: Most of these solutions don’t offer advanced customer support, which is often required for such high-stake processes.
The main arguments in favour of data rooms are their security and confidentiality commitments. Above all, basic drives do not offer advanced features that are specially designed for legal practice.
How to choose your data room: 5 features you cannot go without
Choosing the best data room solution for your firm or company is therefore critical since it directly impacts the quality of service you are delivering to your clients. We have listed 5 features that are indispensable to closing the deal faster and more safely:
1) Invitation of participants: There are often a lot of people involved in a due diligence process. You should be able to bulk invite people in a few clicks and hide them from other participants. This is particularly useful in sell-side processes, to avoid opening the same data room several times.
2) Q&A: An integrated Q&A (Questions and Answers) module should provide a clear dashboard displaying all the pending questions, to allow you to identify the blocking points in the due diligence process. Questions and answers should be easily extracted to be attached to the contract. Commenting threads should be easy to manage and customize. Notifications are also a plus to help accelerate this process.
3) Precise access rights management: Granular access management is essential to help you keep up with your confidentiality commitments. It should allow you to create permission groups, and manage the visibility of each document. Advanced settings should also allow you to activate watermarks to prevent users from downloading files that are only available for consultation.
4) Detailed activity logs: Job activity logs are a record of all the actions performed by the users of the data room and allow admins to track information such as document uploads and downloads, file consultations, renaming, deletions, etc.
5) Digital archive and certificate: We should all be done with USB keys. Encrypted digital archives, stored in an electronic safe, are safer and easier to manage. VDR solutions allow you to quickly issue a certificate that guarantees the security and legal value of your deal.
The revolution of next-gen data rooms
After a thorough evaluation of requirement specifications, you should now have a better overview of your needs in terms of features. But to ensure a successful product adoption, more pragmatic aspects should also be taken into consideration.
It is not a secret that legal professionals are not the most tech-savvy, which is why they need to be able to work with user-friendly solutions to help them streamline the whole transaction process. Next-gen data rooms, which are generally more affordable, decided to focus on user experience as an improvement to existing solutions.
Also, collaborative data room solutions will help you improve communication with your colleagues, opposite parties, or your clients. This will greatly improve their experience with your services and allow more reactivity and efficiency, as well as a reduction of human errors and time-consuming tasks (follow-up emails, calls, etc.).
Finally, using a data room alone is certainly a great step ahead, but adopting a solution that natively integrates with a leading transaction management solution, or even better, with an ultra-secure electronic safe with probative value, is a game-changer. Managing your entire workflow on a single platform makes it easier to accelerate the completion of the transaction and comply with legal requirements for storing your sensitive contracts.
To put it in a nutshell, the best data room solution should be: 1) user-friendly and easy to set up, 2) designed for dealmakers, 3) secured by design, and 4) cost-effective. By choosing such a solution that checks all the boxes, you can expect side benefits that will not only improve your daily work and firm’s security commitments, but also your customer experience and retention, and eventually, your ROI and brand image.
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[ Artificial Lawyer is proud to bring you this sponsored article by Closd. ]