Best Practices for Remote Due Diligence

Last updated on June 23rd, 2023 at 08:13 am

Thanks to the pandemic Remote Due Diligence is the new normal. In fact many forward looking companies are looking at it as an opportunity of infusing technology to weed out inefficiencies in the investment due-diligence processes.

One of the most common tasks outsourced by almost every company is that of due diligence. Due diligence is an essential part of a merger or acquisition, yet it is a very risky endeavour. Due diligence data room provides a single space for multiple parties to access and request information and store documents & files for an M&A transaction. Therefore, to minimize the risk of an M&A, companies will often hire a third party. But along with the benefits of experience and outside perspective, these companies also bring in the risks of corruption, regulatory compliance, IT, and operations, among others. 

Transparency and vigilance, regardless of trust, is important, as it ensures that both companies are on the same page. Here are a few of the best practices that can, in turn, enhance the effectiveness of your virtual due diligence processes:

Leverage External Content 

Internal screening, risk assessments, and continuous monitoring are, without a doubt, important of third party due diligence. A multitude of companies prefers using external data sources to track information that would help them validate the third party. Sources like sanction lists and credit ratings make for exceptionally verifiable resources. These resources can provide a good and complete assessment of a third party’s risks. External content can provide a lot of insight into the third party and provide valuable information. 

Ensure You Have the Right Technology

VDRs for years had made it possible to conduct legal and financial due diligence remotely, allowing users to securely share confidential documents with other companies. But now that in-person meetings and site visits aren’t always possible, more technology is needed so that operational and environmental due diligence can also be carried out remotely. Most companies are now therefore using video conferencing solutions like Zoom and Microsoft Teams for the purpose of conducting virtual site inspections. Video also helps face-to-face interaction which has always been an important part of the due diligence process. Frequent video meetings throughout the process, builds trust amongst all parties and makes them feel more confident about the prospect of working together.

Allocate Enough Time for Due Diligence Process

Due diligence is a very lengthy and long drawn process where both parties want to be sure that the proposed deal makes wise sense, and that the other side is providing an honest representation of their business status. It is therefore imperative that you should set and adjust your expectations and allocate enough time in the M&A process for remote due diligence. With technology challenges like user error, connectivity issues, and video fatigue, it’s rare for remote due diligence to progress as smoothly as in-person interactions, especially for businesses that are still getting used to new technology. Exclusivity periods are now often 90 or 120 days instead of 60 days, as there is a greater scrutiny from buyers who now want to see how the business model has changed due to the pandemic. This extends the process as more information must be exchanged and reviewed. 

Make Use of Experts 

While carrying out remote due diligence you will be screening various aspects of the business so it is important to work with experts in their respective fields. Depending on what specific part of the M&A you are working on, you may require help from HR experts, accountants, tax experts, and even marketing specialists, among others. Now, these experts are, of course, third-party companies that you will be working with during your M&A process. So be sure you plan exactly how much access they should have of your deal documents and proposals, lest it may lead to confidentiality issues.

Confidentiality Issues

When due diligence is carried out remotely Data privacy and security issues are elevated as everyone on your due diligence team must be familiar with and follow your confidentiality policies, and only share sensitive data when necessary.

Prioritize sharing of data and develop procedures for sharing confidential information that reduce the chances of your sensitive business data inadvertently ending up in the wrong hands.

VDRs come equipped with security features that make this process easier, including two-factor authentication, document watermarks, audit logs, and permission-based user roles. All of these features help you remain in control of the file sharing process, and limit the fallout if any documents are accidentally shared with unauthorized users.

Interact carefully and Engage with the Right People

Connecting with your would-be business partners is essential during remote due diligence. But remote M&A transactions make it “more difficult. The best way is to reach out to your existing network – such as entrepreneurs, venture capital firms and co-investors – as they can help do much of the legwork for you. These connections can provide references and verify a company’s reputation, making it less likely that the deal will fall through. In the absence of such a network, there are many reputed M&A advisors and lawyers to handle specific parts of the due diligence process on whom you can depend and entrust your remote due diligence process.

Have Organized and pre-determined Meeting Agendas

Having an organized meeting agenda, and adhering to it, ensures that all participants will efficiently share their information and concerns. Holding virtual meetings also lowers the barriers of attendance and enables more people to participate, ensuring that every meeting has a detailed agenda that will help keep the deal proceedings on track and on time.

You’ll spend more time in meetings during remote due diligence, especially if you’re not already familiar with the other business. This may include repeated conversations with key players, product and tech demos, and informal discussions to get to know others involved.

Communicate as often as possible With Key Stakeholders

During remote due diligence transparency in communication and dealing is of utmost importance hence communicate as clearly, frequently, and honestly with the concerned stakeholders. All queries and concerns must be addressed promptly to avoid any glitches in the future process due to misunderstanding or miscommunication.  Be especially careful when building models and running analyses during times of economic turbulence, separating temporary stumbles from deeper structural problems – and be sure to communicate your conclusions to key stakeholders.

Establish a Proper Escalation Process

Escalation is a very common part of any business operation, including M&As. That said, companies often disregard escalation complaints or will avoid escalating problems entirely. Not escalating problems to the right people at the right time can lead to very serious problems, which can prove to be very difficult to solve later in the future. Your company should use an escalating process to address complaints and deliver them to the right people. By addressing problems and complaints as they come, you can save your company from a world of hurt. 

Although some aspects of remote due diligence are more challenging than performing it in person, deal-makers are becoming more confident and proficient in the remote due diligence process – thanks to technology like virtual data rooms. With proper remote due diligence processes and its management, you can improve the likelihood of the success for your merger.