When you have chosen a buyer for your company with whom you want to close a deal, one of the most labor-intensive phases of the sales process begins: “due diligence.” This term, originally developed by American lawyers in the 1930s, refers to the examination of the target of a business transaction in terms of potential risks and liabilities. The Latin term often used by lawyers, caveat emptor, is a principle of Roman law. Translated into Finnish, it means "buyer beware." Before the 1930s, it seems buyers were not cautious, and for this reason, due diligence is now commonplace in business transactions.

The due diligence review consists of negotiations with management, the collection of materials, inspections, and analysis of the data. The review can focus on finance, legal matters, business operations, technology, environmental issues, human resources, or often all of these. The inspection is labor-intensive and time-consuming. Previously, binder documents were collected in a single room where inspectors could rummage through them.

The technological development warms the heart of an old IT guy. Nowadays, documents can be stored on the secured virtual data rooms in the cloud, where the due diligence reviewer can examine them. Documents can be made available for review by multiple inspectors and different parties with different viewer rights simultaneously.

A virtual data room has all the advantages of a physical room. You know who has accessed the room and which documents, you know which documents inspectors or buyer’s managers have read or printed. You can release information in different stages. If a competitor is shopping around, it might be wise to show the most critical information in the final stages of the process, or organize some information to so called “clean rooms” only be available for certain e.g. legal inspectors.

One of the most useful features of a virtual data room is the audit trail. There is even a practical example of this. In one transaction, after the deal was closed, the buyer presented a significant compensation claim. The seller agonized and pondered what to do. The seller believed the claim was unreasonable. The buyer claimed they were unaware of a certain liability of the seller before closing the deal. The log (or audit trail) of the virtual data room revealed that the document existed in the data room and buyer's representative had opened the document concerning the liability. Thus, not only the seller had been open about the liability, the buyer was well aware of the liability and could not invoke it. All good in the end for the seller!

By Vesa Walldén