Due diligence is the audit process that allows a buyer to verify that the company being acquired is genuinely what the seller says it is. It is a risk management tool, not a bureaucratic formality. Understanding what it uncovers, what it does not uncover and when it is essential allows buyers and sellers to approach a corporate transaction realistically and without surprises.
What Due Diligence Actually Is
The term “due diligence” describes the exhaustive investigation process carried out by a potential buyer before closing an acquisition, merger or investment transaction. The objective is to identify the real risks of the business (hidden liabilities, tax contingencies, litigation, employment issues, operational vulnerabilities) and to obtain the information needed to set the final price and negotiate the contractual warranties.
A well-executed due diligence is not designed to torpedo the transaction. It is designed to ensure the buyer makes their decision with complete information and that the purchase agreement fairly reflects the allocation of risks between the parties.
Types of Due Diligence and What Each Uncovers
Financial due diligence
Analyses the quality and sustainability of historical earnings, actual working capital, net financial debt, the capital expenditure needed to maintain the business and the coherence between the declared EBITDA and the cash flows generated. It identifies adjustments that modify the purchase price: undeclared debt, investment commitments, working capital differences relative to the normalised average.
Tax due diligence
Reviews compliance with tax obligations over the last four years (the years not yet prescribed), identifies contingencies from deductions applied without sufficient support, undocumented transfer pricing, incorrect withholdings or potential liabilities from ongoing tax inspections. This area is critical because tax penalties can be significant and are not always provisioned in the balance sheet.
Legal due diligence
Reviews contracts with customers and suppliers (change of control clauses, automatic renewals, penalties), ownership of assets (property, intellectual property, licences), ongoing or potential litigation, general regulatory compliance and the corporate structure.
Employment due diligence
Analyses employment relationships: contracts, applicable collective agreement, variable pay commitments, pension plans, potential employee claims and the risk of reclassification of falsely self-employed workers. In companies with a large workforce, this area can concentrate significant contingencies.
Operational and commercial due diligence
Evaluates customer concentration, quality of the contract portfolio, competitive position, key supplier dependency and the robustness of operational processes. Particularly relevant for strategic buyers who value post-acquisition integration.
When Due Diligence Is Essential
Due diligence is practically obligatory in any business acquisition where the price is significant. It is especially critical when:
- The buyer is a private equity fund with fiduciary obligations to its investors
- The company has regulated activities (financial, healthcare, telecoms)
- The company operates across multiple countries with complex tax structures
- There is a history of litigation or high sectoral litigiousness
- The information provided by the seller has not been externally audited
Vendor Due Diligence: Preparing Before Going to Market
An increasing number of sellers commission their own prior due diligence — vendor due diligence — before starting the sale process. The advantages are clear: it allows identification and resolution of issues before the buyer discovers them, avoids downward price renegotiation in the final phase of the transaction and accelerates the process by reducing the buyer’s review time.
A vendor due diligence also sends a positive signal to the market: a seller who has audited their own company demonstrates transparency and reduces the buyer’s risk perception.
How BMC Can Help
Our due diligence team carries out buyer reviews and vendor due diligence for business acquisitions and mergers across all sectors. Our approach integrates the tax, legal, financial and employment areas under unified coordination, delivering a consolidated report with prioritised findings and action recommendations.
If you are evaluating an acquisition or preparing your company for sale and need a rigorous due diligence process, contact our team for an initial scope and budget assessment.
Specific Legal Framework
Due diligence in business acquisitions in Spain lacks regulation making it formally required, but it is linked to multiple rules that determine its scope and consequences:
- Royal Legislative Decree 1/2010 of 2 July (Companies Act — LSC), Arts. 107–108: Regime for the transfer of shares in private and public limited companies. Legal due diligence verifies the absence of statutory restrictions on transfer (pre-emption rights, board approval requirements) that would invalidate the transaction if not respected.
- Ley 27/2014 of 27 November, Corporate Tax Act, Arts. 76–89: Special regime for mergers, demergers, contributions and exchanges. Tax due diligence analyses whether the transaction can qualify for this neutrality regime or whether it will generate immediate taxation. Article 89.2 LIS establishes that the special regime is incompatible with tax fraud or evasion.
- Ley 58/2003 of 17 December, General Tax Act, Art. 42: Tax liability of acquirers of business undertakings. The buyer acquiring a business or branch of activity may assume pending tax debts of the seller, even unknown ones, unless a tax debt certificate is obtained from the AEAT (Art. 175.2 LGT).
- Royal Legislative Decree 2/2015 of 23 October (Workers’ Statute — ET), Art. 44: Business succession. Acquiring a company as a going concern implies automatic subrogation in employment contracts and applicable collective agreements, generating potential employment liabilities that employment due diligence quantifies.
- GDPR (EU Regulation 2016/679) and LOPDGDD: Companies with customer or employee databases transfer personal data processing activities in the transaction, which may require AEPD notification and updates to the buyer’s processing registers.
Practical Example: Due Diligence of Distribuciones Ramos, S.L.
Scenario: Private equity fund interested in acquiring 100% of Distribuciones Ramos, S.L., a distribution company with 45 employees and €8.5M turnover. Indicative price: 6.5x adjusted EBITDA (declared EBITDA: €1.1M).
| Area | Main finding | Impact on price |
|---|---|---|
| Financial | Actual working capital €280,000 below normalised level due to one-off early receipts | -€280,000 price adjustment |
| Tax | 2022 R&D deduction without sufficient documentation (AEAT could regularise €95,000 + interest) | €120,000 guarantee holdback |
| Employment | 3 sales staff contracted as self-employed (falsely self-employed): estimated pending Social Security contributions €78,000 | Seller declaration and warranty |
| Legal | Contract with main customer (35% of turnover) contains change of control clause allowing termination within 30 days | Pre-closing renegotiation required |
| Result | Real adjusted EBITDA: €1,050,000 → adjusted price: €6,825,000 vs initial €7,150,000 | Buyer saving: €325,000 |
The due diligence identified a €325,000 price adjustment and eliminated the risk of post-closing surprises in the three critical areas.
Common Mistakes BMC Helps Avoid
- Limiting tax due diligence to the four prescribed years. If in the years not yet prescribed there are tax losses, deductions or credits generated in prescribed years, the AEAT can review the origin of those items (LGT Art. 66 bis). A rigorous due diligence analyses the origin of all tax assets.
- Not obtaining a tax debt certificate from the AEAT before closing. Article 175.2 LGT allows requesting a certificate of the transferor’s tax debts. If the certificate is not requested, the buyer may be jointly liable for unknown tax debts of the seller.
- Ignoring the risk of subrogation in employment contracts. In acquisitions of going concerns, Article 44 ET imposes automatic subrogation. Many buyers structure the transaction as an asset deal to avoid this, but the Supreme Court applies purposive criteria (STS rulings from 2023) that can determine subrogation even when the company is not transferred as a unit.
- Not reviewing the change of control clause in key customer contracts. A contract representing more than 20% of turnover with a termination-for-change-of-control clause is a material risk that must be resolved before closing, not after.
- Confusing declared EBITDA with normalised EBITDA. The EBITDA published in the accounts may include non-recurring items (asset sales, subsidies, one-off bonuses) that inflate the valuation multiple. Financial due diligence adjusts EBITDA to its real sustainable level.
Next Steps
- Define the scope of due diligence before signing the NDA: which areas, how many years and what level of documentation is required from the seller
- Prepare the data room with standard documentation (constitutional documents, contracts, tax returns, payroll, litigation) to speed up the process
- Request the AEAT tax debt certificate from the transferor under Article 175.2 LGT
- Analyse contracts with the five main customers for change of control clauses requiring consent or renegotiation
- Calculate the net working capital position over the last 12 months to establish the price adjustment mechanism in the SPA
- Define seller warranties (rep & warranties) and the guarantee holdback mechanism for identified contingencies
