What does the buyer look for in due diligence? How long does it take? Can it kill the deal? We answer every question about business due diligence in M&A transactions.
For many business owners going through a sale process, business due diligence is the most feared and least understood step of the entire transaction. What exactly is the buyer looking for? How long does it take? Can it kill the deal? This article answers — without unnecessary jargon — the questions we hear most often at Fundenza from founders, acquirers and executives navigating an M&A process.
What is due diligence in a company acquisition?
Due diligence is the thorough investigation process carried out by a buyer before completing a company acquisition. Its purpose is to verify that the information provided by the seller is accurate, identify hidden risks, and confirm that the agreed price is justified by the fundamentals of the business.
In plain terms: before committing to paying hundreds of thousands or millions of euros, any sensible buyer wants to open the bonnet and look inside. Due diligence is that inspection process.
It should not be confused with company valuation, which can take place before a Letter of Intent (LOI) is even signed. Due diligence comes later, once buyer and seller have agreed on an indicative price and a basic deal structure.
When does business due diligence take place?
The typical sequence in a Spanish company sale — which mirrors international M&A practice closely — is:
- Valuation and preparation of the business for sale
- Identification and outreach to potential buyers
- NDA signing and distribution of the Information Memorandum
- LOI signing with the selected buyer
- Due diligence — this is where we are
- Negotiation and signing of the SPA (Sale and Purchase Agreement)
- Closing and transfer of ownership
Due diligence therefore begins once a preferred buyer is in place and an indicative price agreement is on the table. The LOI typically includes an exclusivity period of 30 to 90 days during which the buyer carries out its investigation.
Who runs the due diligence: the buyer or the seller?
Primarily, business due diligence is conducted by the buyer — using its internal team and external advisers: lawyers, accountants and specialist consultants — on the target company.
However, there is also the so-called vendor due diligence (VDD): a due diligence report commissioned and paid for by the seller in advance. A VDD allows the seller to:
- Identify and resolve issues before the buyer discovers them
- Speed up the process (the buyer can rely on the report rather than repeating all the work)
- Maintain control of the timetable when multiple buyers are interested
- Enhance the credibility of information presented to buyers
VDD is particularly common in processes involving private equity funds or mid-to-large businesses. For smaller owner-managed businesses with a single buyer, the buyer typically carries out the full investigation themselves.
How long does a business due diligence process take?
Duration varies significantly depending on the size and complexity of the business:
- Small SMEs (turnover below €2m): two to four weeks
- Mid-sized SMEs (€2m–€20m turnover): four to eight weeks
- Larger businesses (above €20m): eight to sixteen weeks or more
These timelines can be extended considerably if the seller is slow to provide documentation, if complex issues arise requiring additional analysis, or if the buyer decides to expand the scope of its review.
In our experience, the most common delays come not from technical complexity but from sellers who have not organised their documentation beforehand. A well-prepared virtual data room can cut due diligence time roughly in half.
What areas does due diligence cover?
A standard M&A due diligence investigation covers several dimensions of the business simultaneously:
Financial due diligence
This is the backbone of the process. The buyer's financial team reviews three to five years of financial statements, the quality of EBITDA — distinguishing recurring items from one-offs — the debt and working capital position, historical and projected cash flows, and capital expenditure policy.
Legal due diligence
Lawyers examine the corporate structure and shareholder register, contracts with key clients and suppliers, intellectual property — trademarks, patents, domain names — pending litigation and regulatory compliance: data protection, licences, permits.
Tax due diligence
A full review of the tax position: pending enquiries, VAT, corporation tax, applied reliefs and unprovisioned tax contingencies. Undisclosed liabilities with tax authorities are among the most frequent findings in SME transactions.
Employment due diligence
Headcount, applicable collective agreements, key employee contracts, incentive schemes, hidden employment liabilities and health and safety compliance.
Commercial due diligence
Customer concentration — does 50% of revenue depend on one or two clients? — commercial pipeline, competitive positioning and barriers to entry. A business where a single customer accounts for more than 30% of revenue represents a real risk for the buyer.
Operational and technology due diligence
Internal processes, technology infrastructure, key-person dependency — the indispensable founder risk — and the true condition of productive assets.
What documents should the seller prepare?
Getting organised before receiving the buyer's data request list makes the difference between a smooth due diligence and a gruelling process. The most commonly requested documents include:
- Three to five years of annual financial statements (audited if available)
- Monthly management accounts for the current financial year
- Three years of tax returns
- Contracts with the ten largest clients and suppliers
- Articles of incorporation and subsequent amendments
- Board minutes for the last three years
- Employment contracts for key employees and senior management
- Asset register: property, plant, equipment, vehicles
- Current insurance policies
- Intellectual property and trademark documentation
- Business plan or financial projections covering three to five years ahead
All of this is uploaded to a virtual data room — platforms such as Datasite, Intralinks or even SharePoint for smaller deals — which the buyer and its advisers access in a controlled, audited environment.
What is the buyer really looking for during due diligence?
Beyond verifying numbers, the buyer is trying to answer three fundamental questions:
- Is the business what it appears to be? Does the reality match the Information Memorandum?
- Are there any surprises that should change the price? Hidden liabilities, undisclosed debt, onerous contracts or unprovisioned contingencies.
- Can the business survive without the founder or seller? Key-person dependency is the most common risk in owner-managed SMEs.
The most common red flags that raise the buyer's guard include: excessive revenue concentration in one or two clients; poorly justified EBITDA adjustments; undisclosed employment or tax disputes; margin deterioration in the year before the sale; key contracts approaching expiry without guaranteed renewal; and dependence on a key individual who will leave with the deal.
How can due diligence affect the agreed price?
This is what worries sellers most — and with good reason. Due diligence can lead to several outcomes:
- Price chip: a downward price adjustment if undisclosed contingencies are found
- Escrow arrangement: retention of a portion of the sale price for 12 to 24 months as security against future claims
- Representations and warranties: statements the seller makes in the SPA about the accuracy of the information provided, backed by indemnities
- Earn-out: part of the price contingent on future performance, if the buyer is uncertain about the projections
- Deal break: in serious cases, the buyer may exercise its contractual right to walk away without penalty
Transparency from the outset is the seller's best protection. Issues discovered during due diligence have a far greater impact on price than issues proactively disclosed before the process begins. A seller who puts their own weak points on the table builds trust; one who conceals them generates suspicion — and with it, more guarantees, more escrow and a lower price.
What is a vendor due diligence and when should you commission one?
A vendor due diligence (VDD) is a report commissioned by the seller from an independent third party — accountants or consultants — that the buyer can use as a starting point, avoiding duplication of most of the investigative work.
A VDD is worth considering when multiple buyers are expected to submit bids simultaneously, when the business has a complex structure or acquisition history, when the buyer is a private equity fund with high information standards, or when the seller wants to maintain control of the timeline and limit exposure of sensitive information to multiple parties.
VDD costs typically range from €30,000 to €150,000 depending on business size. In many cases the cost is recovered many times over through reduced price discounts and a faster closing.
Frequently asked questions about business due diligence
Can the buyer cancel the deal if they find something during due diligence?
Yes. The LOI is typically conditional on due diligence not revealing any materially adverse facts. If the buyer finds something it considers serious enough, it can withdraw. This is why the LOI must clearly specify what would constitute grounds for exit and what remedies are available: price reduction, additional guarantees or deal termination.
How much access does the buyer get to my client data?
It depends on what is agreed. It is entirely legitimate — and common practice — to anonymise client names in the first phase, revealing them only once the LOI has been signed with exclusivity. The buyer will need the actual contracts at some point, but the timing of disclosure can and should be negotiated.
Do I need to tell my employees about the due diligence?
Not necessarily, at least in the early stages. It is common for financial and legal due diligence to be completed without employees — sometimes even the senior management team — being informed. Staff interviews, when they occur, are usually reserved for the advanced stages when closing is almost certain.
What if the buyer asks for documentation I don't have?
More common than you'd think, especially in SMEs. If the documentation doesn't exist or is incomplete, the right approach is to acknowledge it straightforwardly and offer alternative information: board minutes, supplementary accounting records, relevant emails. Trying to produce documents on the fly raises suspicion and can derail the process.
How do I prepare for due diligence well in advance?
At Fundenza we always recommend beginning sale preparation 12 to 24 months before coming to market. That means organising corporate and tax documentation, resolving any minor outstanding disputes, formalising verbal agreements with key clients, and commissioning an internal audit if appropriate. A well-prepared business conveys confidence and significantly reduces the risk of price adjustment during due diligence.
