Due Diligence: Invest with Full Information, Zero Hidden Risks

Due diligence is the structured investigative process conducted by a prospective buyer or investor to verify the material facts of a target company before completing a transaction, providing an evidence-based foundation for the purchase price, contractual protections, and post-closing representations and warranties. In Spain, due diligence typically covers financial (quality of earnings, working capital, debt analysis), tax (review of the four non-prescribed fiscal years under the General Tax Act, LGT), legal (corporate structure, material contracts, litigation, licences), employment (contracts, social security, collective agreements), and operational dimensions, with specific regulatory review required for licensed or regulated sectors. The findings feed directly into the Share Purchase Agreement or Asset Purchase Agreement (SPA/APA), informing price adjustments, specific indemnities, closing conditions, and the representations and warranties that determine post-closing liability.

Our due diligence processes are distinguished by their practical, decision-oriented approach. We do not merely identify risks: we quantify them, prioritise them, and propose concrete solutions for the negotiation. Every report is a negotiation tool, not an academic exercise.

Why Inadequate Due Diligence Turns Acquisitions into Financial Liabilities

Hidden tax contingencies, undisclosed litigation, related-party transactions that inflate reported EBITDA, customer concentrations that disappear post-closing, and environmental liabilities that were never in the information memorandum — these are the discoveries that transform a strategic acquisition into a restructuring problem. The difficulty is that many of these issues are deliberately obscured, structured to survive superficial review, or simply not visible without deep sector experience and a forensic mindset. Standard due diligence — a financial review and a legal checklist — is not enough. In our 180+ completed due diligence processes, we have found that material issues surface in more than 60% of transactions reviewed: the question is not whether risks exist, but whether they are identified before or after closing.

Our Due Diligence Process: Financial, Tax, Legal and Operational in Parallel

We approach due diligence with the mindset of an experienced investor who has seen what goes wrong across dozens of transactions in comparable sectors. Financial due diligence begins with quality of earnings: separating normalised, recurring EBITDA from one-off items, related-party transactions, and accounting policy changes that inflate reported performance. We build a detailed working capital model that informs the price adjustment mechanism and prevents the post-closing disputes that arise from poorly defined definitions. Tax due diligence, conducted in parallel by our specialist team, examines not just filed returns but the underlying compliance quality, transfer pricing positions, and any areas where the company’s interpretation of tax law is aggressive.

Legal due diligence reviews the material contracts, litigation register, employment arrangements, intellectual property ownership, and regulatory licences. Operational due diligence assesses key customer and supplier dependencies, management team quality, and the reliability of the commercial assumptions that underpin the acquisition case. Where specific areas of concern warrant it, we deploy our forensic accounting capabilities to investigate irregularities in greater depth. Real-time reporting is part of our protocol: material findings are communicated to the client as soon as they are identified, not held until the final report.

Real Results in Due Diligence: €340M+ Contingencies Identified and Priced

• EUR 340M+ in contingencies identified and translated into price adjustments, specific indemnities, escrow mechanisms, or conditions precedent in the purchase agreement.
• 180+ processes completed across financial, tax, legal, employment, and operational dimensions.
• Reports structured as direct negotiation tools: each risk quantified into a range of outcomes with a clear recommendation for the transaction.
• Vendor due diligence commissioned to identify and resolve issues proactively — before the sale process opens — consistently generating better pricing outcomes and shorter timelines.
• Post-M&A forensic investigation capability deployed when discrepancies emerge between represented and actual financials after closing.

Due diligence in M&A transactions operates within the framework of the Companies Act (LSC) for corporate matters, the General Tax Act (LGT) and specific tax legislation for tax contingencies, the Workers’ Statute and Social Security legislation for employment matters, and the specific regulatory frameworks of the target’s sector. EU merger notification thresholds under Regulation 139/2004 require assessment for cross-border transactions. GDPR compliance status of the target is an increasingly important dimension, with data protection contingencies now regularly appearing in purchase price adjustment mechanisms. The M&A and valuations teams work in close coordination with the due diligence team to ensure that transaction structure, pricing, and contractual protections are optimised as a coherent whole.

Regulatory Framework Governing Due Diligence in Spain

Due diligence in Spain-nexus transactions operates within a multi-layered legal and regulatory framework:

General Tax Act (LGT) — statute of limitations: The LGT (Law 58/2003) establishes a general four-year statute of limitations for AEAT assessments (Art. 66 LGT) running from the filing deadline of each tax return. Consequently, tax due diligence covers the four most recent non-prescribed fiscal years for all applicable taxes: IS, IVA, IRPF (withholding obligations as employer), and Impuesto sobre Transmisiones Patrimoniales if applicable. Where the AEAT has initiated an inspection process (procedimiento de inspección), the statute of limitations is interrupted (Art. 68 LGT) and can be extended. The detection of a live AEAT investigation or a recently concluded inspection is a material finding in any tax due diligence.

Ley de Sociedades de Capital (LSC) — corporate dimension: RDL 1/2010 governs the corporate structure review in due diligence: validity of shareholder resolutions, director appointment and removal procedures, capital increases and distributions, statutory restrictions on share transfer (derecho de adquisición preferente, clauses de consentimiento), related-party transactions requiring approval under Art. 229 LSC, and the corporate minute book (libro de actas). The LSC also determines the scope of director liability (Arts. 236–241 bis LSC) that may be inherited post-acquisition.

Workers’ Statute (ET) and social security (LGSS): Employment due diligence centres on compliance with the Estatuto de los Trabajadores (RDL 2/2015) and the Ley General de la Seguridad Social (RDL 8/2015). Common exposures: incorrect employment contract classification (indefinite vs temporary), misclassification of workers as self-employed (falsos autónomos), collective agreement compliance, social security contributions for all categories of workers, severance obligations (Art. 56 ET: 33 days per year of service, maximum 24 months), and pending ITSS (labour inspectorate) proceedings.

GDPR/LOPDGDD — data protection compliance: Data protection compliance status has become a standard due diligence workstream since GDPR enforcement began in 2018. Key assessment areas: existence and currency of Register of Processing Activities (RPA), legal basis for principal data processing activities, data processor agreements (DPAs) with third-party processors (Art. 28 GDPR), past AEPD complaints or investigations, and DPIA completion for high-risk processing. Data protection contingencies — particularly for technology companies processing significant volumes of personal data — now appear regularly in purchase price adjustment mechanisms.

EU merger control and FDI screening: For transactions meeting EU thresholds (Regulation 139/2004: combined worldwide turnover > EUR 5B and each party EU turnover > EUR 250M), pre-closing notification to the European Commission is required. For transactions meeting Spanish thresholds (CNMC: combined Spanish turnover > EUR 240M and at least two parties > EUR 60M each), notification to the Comisión Nacional de los Mercados y la Competencia is required. The Foreign Investment screening regime (RD 571/2023) requires prior authorisation for non-EU/EEA investments in strategic sectors — defence, critical infrastructure, critical technologies, media, food security, health — above EUR 500M or representing ≥ 10% of a Spanish company’s capital.

Environmental liability (TRLIA): For acquisitions involving industrial, real estate, or agricultural assets, the assessment of environmental liabilities under the Texto Refundido de la Ley de Responsabilidad Medioambiental (RDL 7/2008) is a standard workstream. Environmental liabilities are not extinguished by corporate transactions and can represent material post-closing exposure.

Sectors Served in Due Diligence

Technology and software: Due diligence for technology acquisitions centres on: IP ownership verification (who created the software, employment agreements vs contractor agreements, work-for-hire clauses), software licence compliance (open source GPL contamination, proprietary third-party licences), GDPR compliance as a SaaS provider, recurring revenue quality (churn rates, contract terms, annual vs monthly billing), and R&D&I deduction documentation. Technology company valuations are particularly sensitive to normalised vs reported ARR and SaaS metrics.

Healthcare and life sciences: Regulated sector due diligence covering: sanitary authorisations (conciertos sanitarios) for clinics and hospitals, pharmaceutical licences (AEMPS authorisations), employment compliance for healthcare professionals (MIR residents, specialist qualifications), health data processing under Art. 9 GDPR/LOPDGDD, and sector-specific labour agreements (Convenio Colectivo de Hospitales). Public funding exposure (concierto público revenue concentration) is a specific risk requiring quantification.

Retail and distribution: Due diligence focused on: lease agreement terms and renewal options for commercial locations, franchise agreement review, inventory valuation methods and provision adequacy, customer concentration analysis, e-commerce regulatory compliance, and late payment exposures under Ley 15/2010 Morosidad.

Agri-food and food processing: Specific due diligence dimensions: AICA (Agencia de Información y Control Alimentarios) compliance under Ley 16/2021 for agri-food commercial relationships, food safety authorisations (AESAN/APPCC plans), cooperative vs company classification implications, EU PAC subsidy income quality and transferability, export licence and phytosanitary compliance.

Real estate and construction: Due diligence covering: title verification (Registro de la Propiedad extracts, cargas y gravámenes), urban planning compliance (licencias de obras, cédula de habitabilidad, certificado de eficiencia energética), IBI and plusvalía municipal obligations, SOCIMI regulatory compliance where applicable, lease agreement review (Law 29/1994 for residential, freedom of contract for commercial), and environmental site assessment.

Company Size Segmentation

Microenterprises and early-stage transactions (target enterprise value below EUR 2M): Red flag report plus focused financial and tax review. Typical timeline: 2–3 weeks. Fixed fee EUR 6,000–EUR 15,000 depending on complexity and number of years reviewed.

SME acquisitions (EUR 2M–EUR 30M enterprise value): Full financial (QoE), tax (4 open years, all taxes), legal, and employment due diligence. Virtual data room review. Typical timeline: 4–6 weeks. Fixed fee EUR 20,000–EUR 45,000.

Mid-market transactions (EUR 30M–EUR 200M enterprise value): Comprehensive multi-workstream process including operational and commercial due diligence, management interviews, GDPR and regulatory assessments, and coordination with legal advisers. Typical timeline: 6–10 weeks. Fixed fee EUR 60,000–EUR 150,000 depending on scope and number of entities.

PE and institutional transactions (above EUR 200M or multi-entity group): Full-scope due diligence with specialist workstreams (environmental, technology, regulatory sector), W&I insurance support (underwriter Q&A process), and post-signing completion accounts support. Fees by proposal.

Worked Example: Hidden Tax Contingency in a EUR 28M Agri-Food Acquisition

A private equity fund was acquiring a Spanish agri-food distributor (EUR 22M EBITDA, EUR 28M agreed enterprise value) operating through a group of four entities. The seller’s information memorandum presented a clean tax history. Our tax due diligence covered the four open fiscal years (2020–2023).

Key finding: the group had treated payments to 23 “commercial agents” (agentes comerciales) as self-employment income (IRPF professional withholding, 15%) rather than employment income (IRPF general withholding, 24%). Review of the actual arrangements — fixed monthly payments regardless of sales results, exclusivity, integration into the management structure — indicated that the relationships met the criteria for employment (falsos autónomos) under the LGSS and ET rather than independent commercial agency under Ley 12/1992.

The contingency exposure: underpaid IRPF withholding of EUR 1.2M across four years, plus Social Security employer contributions not paid on the employment income of EUR 1.7M, plus the interest and penalties applicable to an AEAT regularisation. Total contingency: EUR 3.4M–EUR 4.1M (base + interest + penalty range), representing 12%–15% of the agreed enterprise value.

Resolution in the SPA: specific indemnity for the employment reclassification exposure up to EUR 4.5M, secured by EUR 3.5M escrow held for 4 years. The purchase price was also reduced by EUR 1.2M to reflect the net present value of the anticipated regularisation cost. Our recommendation to restructure the 23 commercial agent relationships post-closing as genuine independent agency arrangements (with variable commission, no exclusivity, and autonomous structure) was accepted as a closing condition.

The due diligence fee for this transaction was EUR 38,000. The specific indemnity and price adjustment negotiated on the basis of our finding protected the buyer from a potential EUR 4.1M loss — an 108:1 return on advisory cost.

Five Common Mistakes in Due Diligence

1. Treating the information memorandum as the starting point rather than a marketing document. An IM is prepared by the seller to present the business favourably. Due diligence starts from the assumption that the IM is selectively accurate at best. Material items not proactively addressed in the IM — because the seller chose not to disclose them — are precisely what due diligence is designed to find.

2. Commissioning only financial due diligence. Many buyers commission financial due diligence but assume legal and tax are covered by their transaction lawyers. Due diligence by transaction lawyers is typically a high-level legal review; specialist tax due diligence (4 years, all taxes, AEAT risk assessment) and employment due diligence (falsos autónomos, collective agreement compliance, ITSS open proceedings) are distinct workstreams that require dedicated resource.

3. Not defining working capital reference carefully. The working capital adjustment mechanism in the SPA is frequently the source of post-closing disputes. Poorly defined working capital baskets — vague definitions of “normal course” working capital, inconsistent treatment of accruals, inclusion or exclusion of specific items — generate disagreements that cost EUR 500,000–EUR 5,000,000 to resolve in arbitration. Precise working capital definition in due diligence prevents this.

4. Underinvesting in the quality of earnings review. Many buyers focus on the headline EBITDA figure rather than investigating the sustainability of the revenue base. In Spanish mid-market transactions, common EBITDA inflation mechanisms include: large one-off non-recurring revenues booked in the most recent year; management fees charged to subsidiaries that inflate the target’s EBITDA; related-party revenues at above-market rates; accelerated revenue recognition ahead of the sale process. The QoE adjustment is often more significant than the tax contingency.

5. Leaving warranty and indemnity insurance assessment to the last week. W&I insurance — increasingly standard in mid-market and PE transactions — requires the underwriter to review the due diligence report, conduct a call with the advisers, and produce a coverage document. If the W&I process begins with one week to signing, the underwriter cannot provide meaningful coverage for the issues identified. The W&I underwriting process should begin when due diligence findings are substantially complete, typically 2–3 weeks before the anticipated signing date.

How We Work: Our Due Diligence Process

Week 0 — Scope calibration and data room preparation: We agree the scope of work with the client, define the due diligence workstreams, prepare the document request list (DRL), and establish access to the virtual data room. We provide the seller or their advisers with a structured DRL organised by workstream to maximise the speed and completeness of document provision.

Weeks 1–3 — Document review and management meetings: The workstream teams (financial, tax, legal, employment) conduct systematic document review in parallel. Management interviews and site visits are conducted in week 2 or 3. Real-time findings are communicated to the client as material issues are identified — we do not hold material findings for the final report.

Weeks 3–5 — Report preparation and clarification questions: Clarification questions are submitted to the seller via the VDR Q&A process. Report drafting begins in parallel. The preliminary draft is reviewed internally for completeness and quantification accuracy before submission to the client.

Final report and SPA negotiation support: The due diligence report is delivered as a direct negotiation tool, with each material finding quantified into a risk range and a specific recommendation for SPA treatment (price adjustment, specific indemnity, warranty, condition precedent, or acceptance). We remain available to support SPA negotiation on the findings from our report and to respond to underwriter questions for W&I insurance coverage.

The purpose and scope of due diligence

Due diligence is the structured investigation process through which a buyer or investor obtains sufficient information to make an informed acquisition or investment decision, price and structure the transaction appropriately, and identify the risk allocation mechanisms — warranties, indemnities, escrows, price adjustments — needed to protect against identified risks. In a Spanish context, due diligence also identifies obligations that survive the transaction, including historic tax liabilities, employment commitments, and regulatory licences.

The scope and depth of due diligence varies significantly by transaction type, size, and risk profile. A share acquisition of an unlisted family business requires a different approach from a private equity secondary buyout or a strategic acquisition in a regulated sector. Our first step in any due diligence engagement is calibrating scope to ensure that investigative effort is concentrated on the areas of highest risk and most significant value impact.

Financial due diligence: quality of earnings and beyond

Financial due diligence centres on the Quality of Earnings (QoE) analysis — the forensic assessment of whether reported EBITDA is sustainable, recurring, and fairly stated. Common QoE adjustments in Spanish private company transactions include:

• Owner remuneration normalisation: owner-managed businesses frequently under-report management costs. Replacing actual owner compensation with a market-rate management salary is a standard normalisation.
• One-off items: exceptional revenues, non-recurring costs, and restructuring charges must be separated from underlying trading to arrive at a defensible sustainable EBITDA.
• Revenue quality: concentration risk (dependence on a small number of key customers), contract terms and notice periods, and revenue recognition practices all affect the quality and predictability of the revenue base.
• Working capital analysis: the normalised working capital requirement determines the reference working capital for the locked-box or completion accounts mechanism — a figure that is frequently disputed between buyer and seller and can represent a material adjustment to the purchase price.
• Net debt definition: identifying all debt-like items (leases under IFRS 16, deferred consideration, pension deficits, unfunded liabilities) that reduce equity value from the enterprise value anchor.

Tax due diligence: AEAT exposure and structure assessment

Tax due diligence in Spain focuses on the historic AEAT audit risk of the target company — the risk that the AEAT conducts a tax inspection and assesses additional taxes, penalties, and interest for years within the general four-year statute of limitations. Specific focus areas include:

• Transfer pricing: are intercompany transactions documented and priced at arm’s length?
• IRPF/Social Security: are employment relationships correctly classified? Incorrectly classifying employees as independent contractors is a common exposure.
• VAT: has VAT been applied and reported correctly on all transactions, including cross-border services and real estate transactions?
• IS deductions: are claimed deductions (R&D, accelerated depreciation, carried-forward losses) adequately documented and legally defensible?

Our tax litigation team contributes to tax due diligence where identified exposures may require defence before the AEAT.

Legal and commercial due diligence coordination

For comprehensive transactions, financial and tax due diligence operates alongside legal due diligence (key contracts, IP ownership, litigation, regulatory licences) and commercial due diligence (market position, competitive dynamics, management quality). We coordinate the overall due diligence programme and ensure that findings across workstreams are integrated into a coherent risk picture for our client.

The due diligence report is not the end of the process — it is the input to the negotiation of the Share Purchase Agreement (SPA), the warranty and indemnity (W&I) insurance underwriting, and the final pricing decision. Our business acquisition team takes the due diligence findings through to transaction completion.

Contact our due diligence team to discuss the scope and approach for your transaction.