Rigorous due diligence for confident investment decisions

Types of due diligence

Not all transactions require the same level of analysis. A full acquisition of an industrial company demands reviewing environmental and intellectual property aspects that are irrelevant when purchasing a services firm. That is why we tailor the scope of each due diligence to the specific circumstances of the transaction.

The most common dimensions are financial (quality of earnings, EBITDA normalization, net debt, working capital), tax (tax compliance, open contingencies, aggressive positions), legal (litigation, critical contracts, regulatory compliance), and labor (workforce structure, collective agreements, pending contingencies).

What we analyze

Our approach goes beyond verifying accounting figures. We seek to understand the sustainability of the business: the quality of recurring revenue, dependence on key clients, the solidity of long-term contracts, the real condition of assets, and contingencies that do not appear on the balance sheet.

Each finding is classified by risk level and economically quantified whenever possible. The result is a clear map of what you are buying, what could go wrong, and how much it could cost you.

A typical case: how we saved an acquisition

In a recent transaction, our client was about to acquire a technology company for 8 million euros. The financial due diligence revealed that 40% of revenue came from a single contract about to expire with no renewal guarantee. The tax review uncovered an open contingency with the tax authority worth 600,000 euros. These findings enabled the client to renegotiate the price 25% downward and demand specific warranties in the purchase agreement.

Tax due diligence: the Spanish regulatory context

Tax due diligence in Spain operates within a specific statutory framework. AEAT has general audit powers covering the last four fiscal years (Article 66 of the General Tax Act, LGT), extendable to ten years for tax losses. Any company being acquired has open inspection periods that a buyer assumes by default in a share deal — unless the purchase agreement provides for specific indemnities and representations.

The most common tax findings in Spanish acquisitions are:

VAT deductibility on assets. Claims for VAT recovery on assets with uncertain business purpose — particularly vehicles, entertainment expenses, and assets with dual personal/business use — are frequently challenged by AEAT and carry both the disallowed deduction and a 150% penalty on the understated output tax.

Transfer pricing on related-party transactions. Spanish subsidiaries that have paid management fees to a non-resident parent without full documentation as required under Article 18 LIS face potential adjustment of the fees to arm’s length. In a share acquisition, the buyer inherits any open period liability.

Aggressive R&D deductions. R&D tax credits are subject to a technical qualification process overseen by the Ministry of Science. Credits claimed without a binding advance ruling (informe motivado vinculante) from the relevant ministry may be challenged by AEAT on the grounds that the expenditure did not meet the technical requirements.

Pending AEAT inspections. Any ongoing inspection procedure (actuaciones inspectoras) must be disclosed in the data room. The outcome of an inspection is binding on the buyer in a share deal — even if commenced before completion. Representations and warranties on open tax periods are standard; gap cover insurance has become increasingly common in larger transactions.

Labour and employment due diligence

Employment liabilities represent a consistently high proportion of post-closing claims in Spanish M&A. The 2022 labour reform and the strengthening of ITSS enforcement have increased the risk profile of acquired companies significantly.

Key areas of labour due diligence focus:

Workforce classification. Spain’s ITSS actively pursues the reclassification of falsely self-employed workers (falsos autónomos). Acquiring a company that has historically engaged contractors who functionally behave as employees exposes the buyer to back-payment of Social Security contributions (employer share), surcharges, and interest for the open periods. The Ley Rider extended scrutiny to platform workers from 2021 onwards.

Collective agreement compliance. Non-compliance with the applicable sector collective agreement — including underpayment of salary categories, failure to apply agreed pay rises, or incorrect classification of workers into professional groups — creates contingent liabilities that carry through to the buyer. Quantifying the back-pay exposure requires mapping all workers against the collective agreement grade structure.

Social Security debts. The seller’s Social Security compliance status (situación de corriente de pago ante la TGSS) must be verified. Undeclared Social Security arrears — including unpaid contributions and voluntary reduction scheme obligations — are joint and several liabilities of the acquiring entity in an asset deal.

ERTE and furlough obligations. Companies that accessed the COVID-19 ERTE (temporary layoff) schemes under the 2020-2021 extraordinary measures may have outstanding obligations including prohibition of redundancies, headcount maintenance requirements, and unjustified redundancy repayment obligations that survive the extraordinary period.

Financial due diligence: quality of earnings methodology

Financial due diligence in Spain follows a standard quality-of-earnings (QoE) methodology adapted to Spanish accounting standards (PGC) rather than IFRS. The core deliverables are:

Normalised EBITDA. Starting from reported EBITDA, the analysis adds back non-recurring items (one-off costs, income from asset disposals, litigation settlements), adjusts for related-party transactions at non-market rates, and identifies sustainable versus exceptional revenue streams. The normalised figure is the basis for applying the acquisition multiple.

Net debt bridge. All debt-like items must be identified — not just bank debt, but also finance lease liabilities under the post-IFRS 16 accounting treatment, pension provisions, deferred taxes, contingent liabilities from ongoing litigation, and the working capital peg adjustment.

Working capital peg. Agreeing the normalised level of working capital (debtors, creditors, stock) that the target company requires to operate is critical. The working capital mechanism in the sale purchase agreement (SPA) adjusts the price if actual working capital at completion differs from the agreed peg. Errors in setting the peg — which require 18-24 months of monthly working capital data to set correctly — are a common source of post-closing disputes.

Legal due diligence: contracts, IP, and regulatory compliance

Legal due diligence reviews three areas of primary concern in Spanish acquisitions: critical contracts, intellectual property, and regulatory compliance.

Critical contracts. Change of control clauses in customer contracts, supplier agreements, and financing facilities may trigger termination rights or require consent on a change of ownership. A single major customer contract with a change-of-control clause that triggers automatic termination can fundamentally undermine the transaction rationale.

Intellectual property. Patents, trademarks, software, and domain names should be registered in the target entity’s name and not encumbered by third-party licences or ownership disputes. In technology acquisitions, a code review identifying third-party open-source components with licence obligations (particularly copyleft licences like GPL) is increasingly standard.

Regulatory compliance. Sector-specific licensing (pharmacies, financial services, energy, waste management, data processing under GDPR) and environmental permits must be current and transferable. The loss of a key operating licence post-closing is a significant deal risk that should be addressed through representations, pre-closing conditions, or escrow arrangements.

The due diligence report: structure and how to use it

The due diligence report is not simply a catalogue of findings — it is a decision-making tool. BMC structures reports in a format designed for active use in price negotiation and SPA drafting, rather than as a compliance exercise that sits unread in a data room.

Each finding is classified by risk type (financial, tax, legal, labour, operational), severity (deal-breaker, material, minor), and quantification (exact amount where calculable, range where uncertain, non-quantifiable with qualitative risk description). The executive summary presents findings in order of materiality, flagging any deal-breakers prominently and providing a recommended price adjustment range based on identified contingencies.

The findings map directly to the SPA negotiation: quantified contingencies become the basis for specific price adjustments or deductions from the final purchase price; unquantifiable risks become representations, warranties, and indemnities that the buyer requests from the seller; deal-breakers that survive negotiation become conditions precedent to closing or grounds for walk-away.

For buyers using external financing (bank debt, PE financing, or bond financing), the due diligence report is a required deliverable for the lenders’ own credit assessment. BMC coordinates with lenders’ advisors to ensure our report satisfies the format and scope requirements of the financing documentation.

Vendor due diligence: preparing for a sale

Increasingly, sellers commission a vendor due diligence (VDD) before launching a formal sale process. A VDD is conducted by the seller’s advisors and covers the same areas as a standard buy-side due diligence but is designed to be shared with prospective buyers under a reliance letter. The objective is to accelerate the buyer’s own due diligence process, reduce the information asymmetry that leads to price uncertainty, and identify issues that can be addressed before buyers discover them independently.

For Spanish family businesses selling for the first time, a VDD serves an additional purpose: preparing the management team and the documentation for the level of scrutiny that a professional buyer will apply. Many SME sellers have never assembled a comprehensive virtual data room or been through a due diligence process — the VDD process itself is a valuable preparation exercise.

Key areas where VDD adds most value in Spanish SME transactions: resolving ambiguities in the company’s employment contract archive before a buyer identifies them as liabilities; commissioning updated property valuations for real estate assets; reviewing and documenting transfer pricing policies for intercompany transactions; and obtaining a binding technical opinion on R&D deduction claims to confirm their defensibility.

BMC prepares both buy-side and vendor due diligence reports, providing sellers with a realistic assessment of their company’s risk profile before engaging with buyers, and providing buyers with the depth of analysis needed to make confident investment decisions.