Due Diligence

What Is Due Diligence?

Due diligence is the systematic process of investigating a target company, business, or asset before a transaction is completed. The term comes from US securities law but is now universally used in M&A and investment transactions worldwide. In Spain, the process follows broadly international standards but has important local specificities — particularly in the tax, labour, and regulatory areas — that foreign investors must understand.

The due diligence process has two primary purposes:

1. Identify risks and liabilities that could affect the value or viability of the deal.
2. Inform negotiation of the purchase price, representations and warranties, and indemnification provisions in the sale and purchase agreement.

The Four Main Workstreams

Legal Due Diligence

Reviews the corporate structure, ownership, authorisation to operate, material contracts, litigation history, intellectual property, real estate, and regulatory compliance. In Spain, key areas include:

• Corporate documents from the Registro Mercantil (commercial registry)
• Pending litigation and claims at the courts and arbitration bodies
• Licences and authorisations from sector regulators (CNMV, Banco de España, AEAT)
• Data protection compliance under the LOPD-GDD (GDPR in Spain)

Tax Due Diligence

Reviews the last four years of filed tax returns and tax positions, open inspection procedures, transfer pricing documentation, and any aggressive tax positions taken. Spain’s AEAT has a four-year inspection statute of limitations (from the filing deadline), but this can be extended for certain items. Key Spanish risks include:

• Unpaid IVA and undeclared income identified by the AEAT’s data-matching systems
• Undocumented transfer pricing on related-party transactions
• Undisclosed tax inspections (procedimientos de comprobación) in progress
• Social Security contribution shortfalls (a frequent finding in SME acquisitions)

Financial Due Diligence

Reviews historical financial statements, quality of earnings (QoE), working capital, debt and debt-like items, and financial projections. In Spain, reviewing cuentas anuales deposited at the Registro Mercantil provides an independent starting point; however, Spanish SMEs often maintain accounts primarily for tax purposes, which can obscure true economic performance.

Labour and Employment Due Diligence

Reviews employment contracts, collective bargaining agreements (convenios colectivos), pending litigation at the Juzgados de lo Social, Social Security contribution compliance, employee benefit obligations, and any works council (comité de empresa) or trade union arrangements. Spain’s employment protections are strong, and undisclosed labour contingencies are a common source of post-acquisition surprises.

Spain-Specific Due Diligence Considerations

• Régimen Especial de Trabajadores Autónomos (RETA): If the target employs contractors registered as autónomos, scrutinise whether those relationships could be reclassified as employment, triggering Social Security and labour law liability.
• Real estate: Verify cadastral values, urban planning classifications, and that buildings have valid licencias de primera ocupación.
• Environmental: Spain’s strict environmental liability rules can result in clean-up obligations attaching to the purchaser if the target holds contaminated land.
• Public contracts: If the target holds public contracts, change-of-control provisions may require prior approval or risk early termination.

Buy-Side vs Sell-Side Due Diligence

• Buy-side due diligence is performed by or on behalf of the acquirer to identify risks before signing.
• Vendor due diligence (VDD) is commissioned by the seller and shared with prospective buyers, streamlining the process in competitive auction processes. VDD is increasingly common in Spanish PE-backed transactions.

How BMC Can Help

We provide integrated legal, tax, and labour due diligence for acquisitions of Spanish companies and assets, coordinating all workstreams under a single engagement to deliver a consolidated risk report and deal-structuring recommendations.