Due Diligence: Invest with Full Information, Zero Hidden Risks

Due diligence is the structured investigative process conducted by a prospective buyer or investor to verify the material facts of a target company before completing a transaction, providing an evidence-based foundation for the purchase price, contractual protections, and post-closing representations and warranties. In Spain, due diligence typically covers financial (quality of earnings, working capital, debt analysis), tax (review of the four non-prescribed fiscal years under the General Tax Act, LGT), legal (corporate structure, material contracts, litigation, licences), employment (contracts, social security, collective agreements), and operational dimensions, with specific regulatory review required for licensed or regulated sectors. The findings feed directly into the Share Purchase Agreement or Asset Purchase Agreement (SPA/APA), informing price adjustments, specific indemnities, closing conditions, and the representations and warranties that determine post-closing liability.

Our due diligence processes are distinguished by their practical, decision-oriented approach. We do not merely identify risks: we quantify them, prioritise them, and propose concrete solutions for the negotiation. Every report is a negotiation tool, not an academic exercise.

Why Inadequate Due Diligence Turns Acquisitions into Financial Liabilities

Hidden tax contingencies, undisclosed litigation, related-party transactions that inflate reported EBITDA, customer concentrations that disappear post-closing, and environmental liabilities that were never in the information memorandum — these are the discoveries that transform a strategic acquisition into a restructuring problem. The difficulty is that many of these issues are deliberately obscured, structured to survive superficial review, or simply not visible without deep sector experience and a forensic mindset. Standard due diligence — a financial review and a legal checklist — is not enough. In our 180+ completed due diligence processes, we have found that material issues surface in more than 60% of transactions reviewed: the question is not whether risks exist, but whether they are identified before or after closing.

Our Due Diligence Process: Financial, Tax, Legal and Operational in Parallel

We approach due diligence with the mindset of an experienced investor who has seen what goes wrong across dozens of transactions in comparable sectors. Financial due diligence begins with quality of earnings: separating normalised, recurring EBITDA from one-off items, related-party transactions, and accounting policy changes that inflate reported performance. We build a detailed working capital model that informs the price adjustment mechanism and prevents the post-closing disputes that arise from poorly defined definitions. Tax due diligence, conducted in parallel by our specialist team, examines not just filed returns but the underlying compliance quality, transfer pricing positions, and any areas where the company’s interpretation of tax law is aggressive.

Legal due diligence reviews the material contracts, litigation register, employment arrangements, intellectual property ownership, and regulatory licences. Operational due diligence assesses key customer and supplier dependencies, management team quality, and the reliability of the commercial assumptions that underpin the acquisition case. Where specific areas of concern warrant it, we deploy our forensic accounting capabilities to investigate irregularities in greater depth. Real-time reporting is part of our protocol: material findings are communicated to the client as soon as they are identified, not held until the final report.

Real Results in Due Diligence: €340M+ Contingencies Identified and Priced

• EUR 340M+ in contingencies identified and translated into price adjustments, specific indemnities, escrow mechanisms, or conditions precedent in the purchase agreement.
• 180+ processes completed across financial, tax, legal, employment, and operational dimensions.
• Reports structured as direct negotiation tools: each risk quantified into a range of outcomes with a clear recommendation for the transaction.
• Vendor due diligence commissioned to identify and resolve issues proactively — before the sale process opens — consistently generating better pricing outcomes and shorter timelines.
• Post-M&A forensic investigation capability deployed when discrepancies emerge between represented and actual financials after closing.

Due diligence in M&A transactions operates within the framework of the Companies Act (LSC) for corporate matters, the General Tax Act (LGT) and specific tax legislation for tax contingencies, the Workers’ Statute and Social Security legislation for employment matters, and the specific regulatory frameworks of the target’s sector. EU merger notification thresholds under Regulation 139/2004 require assessment for cross-border transactions. GDPR compliance status of the target is an increasingly important dimension, with data protection contingencies now regularly appearing in purchase price adjustment mechanisms. The M&A and valuations teams work in close coordination with the due diligence team to ensure that transaction structure, pricing, and contractual protections are optimised as a coherent whole.

The purpose and scope of due diligence

Due diligence is the structured investigation process through which a buyer or investor obtains sufficient information to make an informed acquisition or investment decision, price and structure the transaction appropriately, and identify the risk allocation mechanisms — warranties, indemnities, escrows, price adjustments — needed to protect against identified risks. In a Spanish context, due diligence also identifies obligations that survive the transaction, including historic tax liabilities, employment commitments, and regulatory licences.

The scope and depth of due diligence varies significantly by transaction type, size, and risk profile. A share acquisition of an unlisted family business requires a different approach from a private equity secondary buyout or a strategic acquisition in a regulated sector. Our first step in any due diligence engagement is calibrating scope to ensure that investigative effort is concentrated on the areas of highest risk and most significant value impact.

Financial due diligence: quality of earnings and beyond

Financial due diligence centres on the Quality of Earnings (QoE) analysis — the forensic assessment of whether reported EBITDA is sustainable, recurring, and fairly stated. Common QoE adjustments in Spanish private company transactions include:

• Owner remuneration normalisation: owner-managed businesses frequently under-report management costs. Replacing actual owner compensation with a market-rate management salary is a standard normalisation.
• One-off items: exceptional revenues, non-recurring costs, and restructuring charges must be separated from underlying trading to arrive at a defensible sustainable EBITDA.
• Revenue quality: concentration risk (dependence on a small number of key customers), contract terms and notice periods, and revenue recognition practices all affect the quality and predictability of the revenue base.
• Working capital analysis: the normalised working capital requirement determines the reference working capital for the locked-box or completion accounts mechanism — a figure that is frequently disputed between buyer and seller and can represent a material adjustment to the purchase price.
• Net debt definition: identifying all debt-like items (leases under IFRS 16, deferred consideration, pension deficits, unfunded liabilities) that reduce equity value from the enterprise value anchor.

Tax due diligence: AEAT exposure and structure assessment

Tax due diligence in Spain focuses on the historic AEAT audit risk of the target company — the risk that the AEAT conducts a tax inspection and assesses additional taxes, penalties, and interest for years within the general four-year statute of limitations. Specific focus areas include:

• Transfer pricing: are intercompany transactions documented and priced at arm’s length?
• IRPF/Social Security: are employment relationships correctly classified? Incorrectly classifying employees as independent contractors is a common exposure.
• VAT: has VAT been applied and reported correctly on all transactions, including cross-border services and real estate transactions?
• IS deductions: are claimed deductions (R&D, accelerated depreciation, carried-forward losses) adequately documented and legally defensible?

Our tax litigation team contributes to tax due diligence where identified exposures may require defence before the AEAT.

Legal and commercial due diligence coordination

For comprehensive transactions, financial and tax due diligence operates alongside legal due diligence (key contracts, IP ownership, litigation, regulatory licences) and commercial due diligence (market position, competitive dynamics, management quality). We coordinate the overall due diligence programme and ensure that findings across workstreams are integrated into a coherent risk picture for our client.

The due diligence report is not the end of the process — it is the input to the negotiation of the Share Purchase Agreement (SPA), the warranty and indemnity (W&I) insurance underwriting, and the final pricing decision. Our business acquisition team takes the due diligence findings through to transaction completion.

Contact our due diligence team to discuss the scope and approach for your transaction.