Due diligence is a key process for investors and companies considering an acquisition, investment or corporate transaction in Spain. It helps verify the target company’s actual position, identify potential risks and understand how those risks may affect the price, warranties or decision to proceed.
It is particularly common in company acquisitions and M&A transactions, where understanding exactly what is being acquired is just as important as negotiating the price.
The scope of due diligence will depend on the transaction, the size and sector of the target company and the risks involved. In Spain, this may require coordinated financial, tax, legal, employment and commercial analysis.
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What is due diligence?
Index of contents
Due diligence is a structured review of a company, asset or transaction. It is carried out to verify the information provided and identify potential risks before a decision is made. Depending on the circumstances, the review may cover financial, tax, legal, labour, commercial, technological or other relevant areas.
In the context of an acquisition in Spain, due diligence allows a foreign investor or buyer to understand the target company’s financial, tax, legal, employment and commercial position before completion.
Its purpose is not simply to find problems. It also helps to understand the business more clearly, test the assumptions underpinning the negotiation and identify which issues need to be resolved, accepted or addressed before closing.
What is due diligence used for?
When a company attracts the interest of a potential buyer or investor, the initial information provides a first impression of the business.
However, that information does not always reveal every existing risk. Nor does it necessarily explain how certain results have been achieved.
Due diligence allows the buyer or investor to examine the business in greater depth before assuming the consequences of the transaction.
In practice, it can help to:
- Verify the information provided by the company or its owners.
- Identify contingencies and risks that were not initially apparent.
- Test the assumptions used to value the business.
- Negotiate the price and terms based on more complete information.
- Establish warranties or other protection mechanisms against specific risks.
- Decide whether there are sufficient grounds to proceed, reconsider or withdraw from the transaction.
For example, a buyer may be negotiating the acquisition of a company whose profitability appears stable. During the review, however, it discovers that a significant proportion of revenue depends on a single customer whose contract is about to expire.
The company may still be attractive. Nevertheless, this information changes how the buyer should assess the risk and negotiate the transaction.
Due diligence and company valuation: they are not the same
Although the two processes are related, they have different objectives.
- Company valuation seeks to estimate the economic value of a business using financial information, prospects, sector characteristics and different valuation methods.
- Due diligence, by contrast, seeks to verify the reality behind that information and identify potential contingencies.
Therefore, the findings may support the assumptions used in a valuation or make it necessary to revise them. However, due diligence should not be regarded as a valuation method.
When is due diligence carried out?
In an M&A transaction, due diligence is usually performed once the buyer and seller have reached a sufficiently advanced level of interest. However, it normally takes place before the buyer definitively assumes the risks and completes the acquisition.
The specific process will vary from one transaction to another.
Depending on the circumstances, the parties may first enter into a confidentiality agreement or NDA (Non-Disclosure Agreement), submit a preliminary offer or sign a letter of intent or LOI (Letter of Intent).
These documents allow negotiations to progress and certain preliminary terms to be established before the potential buyer gains access to sensitive company information.
The review then begins. Its findings may subsequently affect the contract, price, warranties or even the decision to proceed.
Due diligence is therefore a key intermediate stage in a company acquisition. It does not replace the preliminary negotiation or the final agreement. Instead, its role is to provide relevant information before the transaction is definitively completed.
What types of due diligence are there?
There is no single classification.
Due diligence can be categorised according to the area being reviewed or according to the party initiating the process.
In addition, a single transaction may require several types of review at the same time. A company acquisition, for example, may involve financial, tax, legal, labour and commercial due diligence.
Financial due diligence
Financial due diligence analyses the company’s financial position and helps assess the quality and sustainability of its results.
Among other matters, it may review:
- Revenue.
- Margins.
- Debt.
- Cash position.
- Working capital.
- Assets.
- Liabilities.
- Investments.
- Forecasts.
It also helps distinguish between results generated by the company’s recurring business activity and those arising from exceptional circumstances.
This analysis is particularly relevant when testing the financial assumptions on which an acquisition is being negotiated.
Legal due diligence
Legal due diligence aims to identify legal risks that could affect the company or the transaction.
It may cover corporate matters, articles of association, powers of attorney, corporate resolutions, key contracts, litigation, licences, rights over specific assets, intellectual property and other potential legal contingencies.
For example, a legal due diligence may identify a key business contract containing a clause that allows termination if control of the company changes.
That circumstance alone does not mean the acquisition should be abandoned. However, the buyer should be aware of it before closing.
Tax due diligence
Tax due diligence examines the company’s tax position and any potential contingencies that could affect the buyer or the transaction.
Depending on the agreed scope, the review may include tax returns, tax audits or inspection procedures, related-party transactions, tax positions adopted by the company and other matters with tax implications.
The analysis must always consider the specific circumstances.
A particular tax treatment does not necessarily mean that a contingency exists. Likewise, not all risks have the same probability or potential impact.
For this reason, identifying a tax issue is only part of the work. Its scope and possible effect on the transaction must also be understood.
Employment due diligence
Employment due diligence provides a clearer view of the workforce and identifies risks relating to employment relationships and the company’s labour obligations.
It may include a review of:
- Employment contracts.
- Working conditions.
- Pay structures.
- Applicable collective bargaining agreements.
- Spanish Social Security contributions.
- Labour inspection proceedings.
- Litigation.
- Occupational risk prevention.
- Other applicable employment obligations.
It is also useful for understanding costs that may continue after the acquisition.
For example, an employment-related issue that was not properly reflected in the initial information could create future costs or liabilities. The buyer would therefore need to take it into account.
Commercial due diligence
Commercial due diligence examines the position of the business within its market and the sustainability of its activity.
It may cover matters such as:
- Customer portfolio and customer concentration.
- Key commercial contracts.
- Recurring revenue.
- Sales trends.
- Competitive positioning.
- Sector outlook.
- Dependence on customers, suppliers or channels.
- Market opportunities and threats.
This analysis helps determine whether the commercial reality of the business supports the assumptions on which the investment is being considered.
Technology, cybersecurity and other specific due diligence reviews
In some companies, business value depends heavily on technology, systems, particular intangible assets or compliance with sector-specific regulations.
In these cases, the scope of due diligence may need to be expanded.
Depending on the transaction, it may be necessary to analyse technological infrastructure, systems, software or specific operational risks, among many other aspects.
For example, a technology company and an industrial company will not necessarily require the same review.
The scope should reflect the actual risks of the business rather than follow a standard checklist.
Vendor due diligence: when the review is initiated by the seller
So far, we have mainly referred to due diligence initiated by a party considering an acquisition. However, the seller can also act in advance.
A vendor due diligence is a review commissioned by the seller before or during a sale process.
Its purpose may be to identify potential problems early, prepare the information more effectively, organise the data room and help potential buyers understand the company’s position. It can also reveal issues before they arise during an advanced stage of negotiations. However, this does not mean that the buyer will waive its own checks.
The scope of each review and the level of reliance placed on the information will depend on how the transaction has been structured.
What is analysed during due diligence?
The review should answer one fundamental question:
What information do we need to understand the risks of this transaction properly?
For this reason, not every due diligence reviews the same documents or examines each area to the same depth.
Even so, several areas are frequently analysed in company acquisitions:
| Area | What is reviewed | Risks it may reveal |
|---|---|---|
| Financial | Revenue, margins, debt, cash, working capital, assets, liabilities and forecasts. | Undisclosed debt, cash flow pressure, non-recurring results or differences from forecasts. |
| Tax | Tax returns, proceedings, tax positions and relevant transactions. | Tax contingencies, liabilities, inspections or tax treatments requiring further review. |
| Legal and corporate | Articles of association, deeds, corporate resolutions, contracts, powers of attorney, litigation, licences and assets. | Corporate disputes, problematic contracts, litigation or insufficiently documented rights. |
| Labour | Workforce, contracts, collective agreements, costs, Social Security, litigation and employment obligations. | Employment liabilities, disputes, non-compliance or unforeseen future costs. |
| Commercial | Customers, sales, contracts, market, competitors and strategic suppliers. | Customer concentration, potential loss of business or dependence on third parties. |
| Technology, intellectual property and other areas | Systems, software, licences, intangible assets, cybersecurity and specific requirements. | Technological dependencies, unprotected assets, security weaknesses or sector-specific risks. |
The table provides an initial overview. However, the work does not simply involve checking whether certain documents exist.
Information must also be cross-checked between different areas.
For example, a commercial contract may have financial, legal and tax implications. Similarly, an employment contingency may affect future costs and, therefore, the financial forecasts used in negotiations.
This is why coordination between specialists becomes particularly important in complex transactions. At LEIALTA, we have a multidisciplinary team capable of integrating the different areas of analysis and providing a comprehensive view of the transaction.
Stages of due diligence: how the process works step by step
An effective due diligence requires a structured process.
Requesting large amounts of documentation without first defining what needs to be analysed can create unnecessary work. More importantly, relevant issues may still be overlooked. These are the main stages:
1.Defining the scope and the team
The first step is to establish what will be reviewed and how much detail will be required.
To do this, the transaction, the company and its main characteristics need to be understood.
Among other matters, it may be necessary to define:
- Companies or assets included.
- Areas covered by the review.
- Periods to be analysed.
- Priority risks.
- Professionals involved.
- Expected timetable.
- Contact persons for each party.
A company with several subsidiaries, international operations and numerous properties will require a different approach from a simpler business.
Moreover, collecting more documentation does not necessarily lead to a better analysis.
A well-designed due diligence should focus on the information that can genuinely affect the decision.
2. Information request and data room preparation
Once the scope has been defined, an information request list is prepared. This request list specifies which documents need to be provided. The seller then organises the information in a data room, which is usually digital.
A data room is a secure and organised environment where advisers and potential buyers can access the documentation required to analyse the transaction. At the same time, access to sensitive business information can be controlled.
Preparing and managing data rooms is a standard part of professional due diligence and M&A processes.
3. Reviewing and cross-checking the information
Once the documentation is available, the analysis begins.
The team’s role is not simply to read documents. It must also check whether the information is consistent and identify any missing documentation.
For example, management may state that a particular customer represents only a small proportion of the business.
That statement should be capable of being verified against the available commercial and financial information.
The opposite may also occur. An issue that initially appeared concerning may be satisfactorily explained once the relevant documentation has been reviewed.
4. Q&A, clarifications and interviews
Questions naturally arise during the analysis.
To address them, the parties usually conduct a Q&A process (questions and answers) involving the teams participating in the transaction.
Advisers may request:
- Additional documents.
- Clarification of specific data.
- Explanations of transactions.
- Information that was not initially available.
Where necessary, meetings may also be held with management or the individuals responsible for specific areas.
The aim is not to generate questions unnecessarily. Instead, it is to obtain enough context to interpret the findings correctly.
5. Identifying and assessing findings
As the review progresses, findings begin to emerge. However, they will not all have the same importance.
Some may be purely documentary and relatively easy to resolve. Others may have a financial, tax, legal or commercial impact.
For this reason, the analysis should distinguish between issues that require attention, their potential effect and any missing information needed to assess the risk properly.
At this stage, the team also identifies red flags. These are findings that deserve particular attention because of their potential impact on the transaction.
6. Preparing and presenting the report
Once the analysis has been completed, the main findings are structured in a due diligence report.
The document should allow the decision-maker to understand:
- What has been analysed.
- What information could not be reviewed.
- Which issues have been identified.
- What the main risks are.
- What impact those risks may have.
- Which matters should be considered during negotiations.
A technically comprehensive report can lose much of its value if it fails to distinguish between important matters and secondary issues.
Ultimately, the objective is to turn information and findings into criteria that support better decision-making.
What documentation is required for due diligence?
There is no universal due diligence checklist. Instead, the information required will depend on the company, its activity, the type of transaction and the agreed scope.
Nevertheless, certain documents are commonly requested.
| Legal and corporate documentation | |
| Deeds and articles of association | □ |
| Corporate structure | □ |
| Relevant corporate resolutions | □ |
| Powers of attorney | □ |
| Key contracts | □ |
| Litigation | □ |
| Licences and permits | □ |
| Documentation relating to specific assets and rights | □ |
| Financial and accounting documentation | |
| Annual accounts | □ |
| Balance sheets and profit and loss accounts | □ |
| Debt information | □ |
| Financing arrangements | □ |
| Cash position | □ |
| Budgets | □ |
| Forecasts | □ |
| Information on investments and significant assets | □ |
| Tax documentation | |
| Tax returns | □ |
| Tax certificates | □ |
| Information on tax inspections or proceedings | □ |
| Documentation on transactions with significant tax implications | □ |
| Labour documentation | |
| Workforce information | □ |
| Employment contracts | □ |
| Employment conditions | □ |
| Collective bargaining agreement | □ |
| Employment costs | □ |
| Social Security contributions | □ |
| Labour inspection proceedings | □ |
| Litigation and other relevant employment information | □ |
| Commercial documentation | |
| Main customers | □ |
| Sales trends | □ |
| Commercial contracts | □ |
| Strategic suppliers | □ |
| Information on products or services | □ |
| Market and competitor information, where relevant | □ |
The initial list should not be treated as fixed. During the review, new issues may arise that make it necessary to request additional information.
What is a due diligence report?
The due diligence report is the document that sets out the scope of the review, the main findings identified and the matters that may affect the transaction.
Its purpose is not merely to compile information.
Instead, the report should help the client understand what has been identified and why it may be relevant to the decision being made.
Executive summary
It is generally useful to begin with a summary of the matters requiring the most attention.
This allows management, the buyer or the investor to understand the main issues quickly before moving into the technical detail of each area.
Findings by area
The report may then set out the financial, tax, legal, labour and commercial findings, together with any other areas included in the agreed scope.
Its precise structure will depend on the work carried out.
The report should also state when documents have not been provided or when limitations prevent a sufficiently robust conclusion from being reached.
What are red flags in due diligence?
Red flags are findings identified during due diligence that require particular attention because they could have a significant impact on the value, risks or terms of a transaction.
Not every red flag means that the acquisition should be cancelled. Its importance will depend on the nature of the issue, its probability, its potential impact and whether there is a reasonable way to resolve or mitigate it.
The key is not simply to detect the red flag. The real question is what it means for that specific transaction.
A relatively low-value risk may be perfectly acceptable in one deal. By contrast, an apparently minor issue could be critical if it affects an asset that is essential to the business.
What happens after due diligence?
The outcome of due diligence is not a simple pass or fail for the company.
Its purpose is to provide information that helps determine how the transaction should proceed. Several scenarios may arise after the review.
Proceed on the terms originally proposed
If the due diligence confirms the main assumptions and no significant risks emerge, the parties may proceed towards negotiation and closing.
Renegotiate the price
A finding may change forecasts, increase expected costs or reveal previously unknown debt or contingencies.
In that case, the buyer and seller may reconsider the economic valuation of the transaction.
Amend warranties or contractual terms
Not every risk needs to be addressed through a price reduction.
The parties may instead agree on specific warranties, conditions that must be satisfied before closing, retention of part of the purchase price or other contractual mechanisms appropriate to the transaction.
Reconsider, postpone or abandon the transaction
If a critical risk fundamentally changes the rationale for the acquisition and cannot reasonably be mitigated, the buyer may decide not to proceed.
Is due diligence the same as an audit?
No. Due diligence and a statutory audit are not the same.
Although both involve reviewing and verifying information, their purpose, scope and regulatory framework are different.
- A statutory audit reviews and verifies annual accounts and other accounting documents to issue an opinion on their reliability for third parties. It must be performed by a statutory auditor or audit firm.
- Due diligence, by contrast, is designed around the needs of a specific transaction and may cover many different areas.
Therefore, having audited accounts does not necessarily replace the need for due diligence.
| Aspect | Due diligence | Statutory audit |
|---|---|---|
| Purpose | Analyse a company or transaction and identify risks to support decision-making. | Issue an opinion on specific financial information. |
| Scope | Defined according to the transaction and its risks. | Performed in accordance with the applicable regulatory framework and auditing standards. |
| Areas reviewed | May include financial, tax, legal, labour, commercial, technological and other areas. | Annual accounts and other financial statements or accounting documents within the audit scope. |
| When it is used | Acquisitions, investments and other corporate transactions. | When an audit is legally required or voluntarily commissioned. |
| Outcome | Findings, contingencies and risks relevant to a decision. | Audit report containing the corresponding opinion. |
How long does due diligence take?
There is no single timeframe for completing a due diligence process.
Its duration depends on the scope, size and complexity of the company, as well as the quantity and quality of the information available.
In practice, business due diligence often takes several weeks. However, setting a standard timeframe without understanding the transaction can create unrealistic expectations.
A well-prepared data room and effective coordination between buyer, seller and advisers can significantly accelerate the process.
By contrast, missing information, inconsistencies between documents or issues requiring further analysis can extend it.
Frequently asked questions about due diligence
Who carries out due diligence?
Due diligence is usually carried out by professionals specialising in the different areas included in the review.
Depending on the scope, the process may involve financial, accounting, tax, legal, corporate, labour, commercial, technology or sector-specific specialists.
In complex transactions, coordination between these areas is essential. Some risks can affect several parts of the business at the same time.
Who pays for due diligence?
When due diligence is commissioned by a potential buyer or investor, that party will normally appoint and pay its own advisers.
In a vendor due diligence, by contrast, the seller commissions the review in preparation for the sale process.
The allocation of any other transaction-related costs will depend on what the parties agree.
Is due diligence mandatory?
There is no general obligation to carry out due diligence in every company acquisition.
However, deciding not to perform an appropriate review may mean making a decision without understanding certain relevant risks.
In addition, depending on the transaction, sector, parties involved or applicable regulations, specific authorisations, reviews or obligations may need to be assessed separately.
When should due diligence be carried out?
In a company acquisition, due diligence is normally performed before final closing, once negotiations have progressed enough to justify access to more detailed information about the business.
The exact timing will depend on how the transaction has been structured.
Can due diligence change the price of a company?
Yes.
Due diligence findings may affect the price or other financial terms when they change the assumptions on which the transaction was being negotiated.
However, not every risk automatically results in a price reduction.
The parties may instead agree on warranties, adjustments, conditions precedent or other mechanisms.
What happens if risks are identified during due diligence?
The first step is to assess their nature, probability and potential impact.
Depending on the findings, the parties may proceed without changes, correct specific issues, renegotiate terms, establish warranties or reconsider the transaction.
A red flag does not automatically mean that the acquisition should be abandoned.
What is the difference between financial and legal due diligence?
Financial due diligence focuses on understanding the financial position of the business, including profitability, debt, cash and other relevant indicators.
Legal due diligence examines the company’s legal position, including its corporate structure, contracts, litigation, licences, rights and other potential contingencies.
In a business transaction, the two usually complement each other.
How LEIALTA can help with due diligence
Due diligence requires more than reviewing documents independently.
- A contract may affect financial forecasts.
- A tax contingency may influence price negotiations.
- An employment issue may generate future costs.
- A corporate issue may directly affect the acquisition itself.
For this reason, coordination between different specialist areas is particularly important.
At LEIALTA, we support corporate transactions from a comprehensive perspective. Where required, we coordinate the accounting, tax, legal, corporate and labour analysis.
Company acquisitions form part of LEIALTA’s services. Our corporate approach combines financial analysis with legal and tax execution, including the coordination of the due diligence process within the transaction.
The objective is not simply to identify issues. It is to understand what they mean for the company and how they should be considered before a decision is made.
f you are considering acquiring or investing in a Spanish company, LEIALTA can help coordinate the financial, tax, legal, corporate and employment due diligence required before closing.
Our multidisciplinary team supports international investors and companies throughout the transaction, helping identify the issues that may affect the purchase price, warranties or structure of the deal.
Speak to our team about your transaction in Spain.Contact us!
