The comprehensive investigation and verification process carried out by a buyer on a target company before formalising its acquisition.
If the letter of intent is the buyer’s declaration of interest, due diligence is the moment of truth. It is the process in which the buyer opens the bonnet of the company, looks inside, and verifies that everything works as described. For the seller, it is the most demanding test their business will face — and the outcome will determine whether the deal advances, is renegotiated, or is called off entirely.
Due diligence is the formal investigation process that a buyer carries out on the target company before closing an acquisition. Its purpose is threefold:
Due diligence is not a bureaucratic formality. It is the buyer’s main tool for protecting against surprises after closing. A hidden tax liability, a key contract about to expire, an ongoing labour dispute — any of these discoveries can modify the price, the warranties in the SPA, or even the viability of the entire transaction.
A thorough due diligence in the Spanish mid-market typically covers the following areas:
Financial. Detailed analysis of the financial statements for the last three to five years: quality of earnings, sustainability of margins, normalised EBITDA, working capital, net financial debt, maintenance vs. growth capex, seasonality, and concentration of customers and suppliers. This is performed by auditors (Big Four for larger transactions, boutique firms in the mid-market).
Tax. Review of all tax obligations: corporate income tax, VAT, withholding taxes, related-party transactions, prior tax inspections, and potential tax contingencies. This is particularly relevant in family businesses where the boundary between personal and corporate can be blurry.
Legal. Analysis of the corporate structure, material commercial contracts (customers, suppliers, leases, licences), intellectual and industrial property, current or potential litigation, regulatory compliance, and administrative permits.
Labour. Review of employment contracts, collective bargaining agreements, labour litigation, pension plans or employee commitments, salary structure, key-person risk, and relations with union representatives.
Commercial. Assessment of market positioning, sales pipeline, key customer relationships, commercial dependencies, sector trends, and sustainable competitive advantages. This sometimes includes interviews with customers (with the seller’s consent).
Technology and operations. State of IT systems, technology infrastructure, production processes, certifications (ISO, environmental), condition of assets, and investment requirements.
Environmental. Particularly relevant for industrial companies: environmental liabilities, regulatory compliance, and current permits and authorisations.
For the buyer, due diligence is the primary protection mechanism. Its findings directly determine:
For the seller, preparing for due diligence is as important as the due diligence itself. A company that presents its information in an organised, transparent, and professional manner inspires confidence. One that takes weeks to locate basic documents raises alarms that can destroy the deal or, at the very least, erode the seller’s negotiating position.
Blue Mountain is evaluating the acquisition of an industrial cleaning services company in Valencia with 20 million in revenue and a declared EBITDA of 2.8 million. The due diligence, which lasts six weeks, reveals:
Result: the price is adjusted downward by 8% (reflecting the actual normalised EBITDA), 350,000 euros are held in escrow to cover the tax contingency, and the seller specifically represents in the SPA the temporary contract situation with a capped indemnity. The positive logistics contract finding partially offsets the negative adjustments in the buyer’s perception of value.
In the Spanish mid-market, four to eight weeks is standard. Larger or more complex deals can extend to three months. Duration depends fundamentally on the quality of information the seller makes available in the data room. A well-prepared data room can shorten the process by weeks.
The buyer pays for their own due diligence advisors (financial, legal, tax). The seller pays for theirs (typically the M&A advisor and the lawyers reviewing the SPA). In the mid-market, the buyer’s due diligence costs usually range from 50,000 to 200,000 euros depending on the size and complexity of the transaction.
Not only can you — you should. Conducting a prior due diligence (vendor due diligence) is increasingly common practice. It allows the seller to identify and correct problems before the buyer finds them, prepare explanations for sensitive points, and generally project an image of professionalism that strengthens their negotiating position. The cost of a vendor due diligence pays for itself many times over if it avoids price reductions or process delays.
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