Due diligence is the critical audit process that precedes any business acquisition. Discover what areas it covers, how long it takes, and the most common mistakes that can derail your deal.
In any business acquisition, due diligence is the moment when reality replaces expectation. It is the phase where buyers stop seeing what they want to see and start discovering what actually exists — the contracts, the liabilities, the dependencies, and the risks that no information memorandum ever fully captures.
At Fundenza, we have accompanied dozens of M&A transactions across Spain. The quality of due diligence is one of the most reliable predictors of deal success. Sellers who arrive prepared close faster and at better prices. Buyers who invest properly in due diligence sleep better after closing. This article shares what we have learned about what due diligence really covers, how long it takes, and the mistakes that most frequently derail deals.
What due diligence in M&A actually means
Due diligence is the comprehensive audit process conducted by the buyer — typically with a team of financial advisors, lawyers, and tax specialists — before formally acquiring a company. Its purpose is to verify that what the seller presented during the commercial phase of the transaction matches the documentary and operational reality of the business.
It is not a bureaucratic formality or a negotiating tactic to chip away at the price. It is a risk management tool that protects both parties: the buyer from paying for something that does not exist, and the seller from having liabilities claimed back after closing. A complete due diligence process covers five major areas:
- Financial: analysis of financial statements, EBITDA quality, working capital, and cash flows.
- Legal and contractual: review of customer and supplier contracts, litigation, intellectual property, and corporate structure.
- Tax: verification of tax obligations, ongoing inspections, and latent tax contingencies.
- Operational and commercial: assessment of the business model, customer base, suppliers, technology, and competitive positioning.
- Human resources: analysis of the workforce, employment agreements, and key-person dependencies.
Financial due diligence: where the numbers meet reality
Financial due diligence is the cornerstone of the entire process — not because the other areas matter less, but because it translates all other findings into their impact on price and deal structure.
The financial review goes far beyond reading annual accounts. Buyers and their advisors work to determine whether the EBITDA presented is real, recurring, and maintainable. This means identifying adjustments: non-recurring expenses that artificially inflate earnings, owner compensation not at market rates, revenues that will not repeat, or contracts about to expire.
The gap between headline EBITDA and adjusted EBITDA is one of the most impactful findings in any transaction. In our experience, this gap typically ranges from 15% to 30% depending on sector and company size — a difference that, multiplied by the valuation multiple, can represent millions of euros.
Legal and tax due diligence: where hidden liabilities live
Legal due diligence reviews the contracts underpinning the business: with customers, suppliers, and key employees. One of the most disruptive findings is the presence of change of control clauses — provisions that allow the counterparty to terminate or renegotiate an agreement if ownership of the business changes.
Consider a scenario where 40% of revenue comes from a corporate client whose contract includes such a clause. The due diligence identifies it; the buyer recalibrates their valuation. In some cases the deal does not proceed. In others, it is restructured with protective mechanisms — earn-outs, price retentions, specific warranties in the purchase agreement.
Tax due diligence searches for fiscal contingencies that do not appear on the balance sheet: differences of interpretation with tax authorities, questionable deductions, VAT regularisations. In Spain, the tax statute of limitations is four years, meaning that in a share purchase the buyer also acquires the company's tax history.
How long does due diligence take?
A standard due diligence for a mid-market company in Spain typically takes between four and eight weeks. It can extend to three or four months for more complex transactions or when the data room is poorly organised.
The single biggest factor affecting duration is not the size of the company — it is the quality of information provided by the seller. A company that enters the process with audited accounts, organised contracts, a clear corporate structure, and no undocumented contingencies can complete due diligence in four weeks. A company that scrambles to produce documentation on the fly can take twice as long — and in the process, create significant anxiety for the buyer.
The most costly due diligence mistakes
After accompanying many transactions, certain mistakes appear with striking consistency:
- Treating due diligence as a superficial accounting review. Buyers who underinvest in the process often miss contingencies that surface after closing, when the price has been paid and the seller has moved on.
- Not reviewing customer contracts before signing the LOI. The Letter of Intent typically locks the buyer into an exclusivity period. Discovering change-of-control clauses at that stage leaves little room to manoeuvre without cost.
- Underestimating HR due diligence. In service businesses, retaining key talent is as critical as any tangible asset. Buyers who fail to analyse retention agreements and management team dynamics may find their best people have left within months of closing.
- Ignoring working capital. The working capital adjustment is one of the most common sources of post-closing disputes. Not defining it properly during due diligence — and in the SPA — is an expensive oversight.
- Failing to coordinate the due diligence team. Without effective coordination through the M&A advisor, findings are not integrated, timelines slip, and risks are not accurately reflected in the final contract.
Vendor due diligence: preparing your own audit
An increasingly common practice in Spain is vendor due diligence (VDD): an audit that the seller commissions on its own business before launching it to market. The logic is straightforward — identifying issues before buyers do allows the seller to address contingencies or document them with a clear narrative. It also accelerates the buyer's due diligence, since a significant portion of the analysis is already prepared and verified.
Vendor due diligence is particularly valuable in competitive processes with multiple buyers running in parallel, in regulated sectors, and in family businesses where historical information may be dispersed or insufficiently systematised.
Frequently asked questions about due diligence in M&A
How much does due diligence cost?
For mid-market companies in Spain (enterprise values between 5 and 30 million euros), combined fees for legal, financial, and tax advisors typically range from 80,000 to 250,000 euros. This should be viewed in proportion to the deal value — it represents a small fraction of the amount at stake.
What happens when due diligence uncovers problems?
Not every finding kills a deal. The most common outcome is that issues translate into price adjustments, escrow retentions, additional seller warranties, or specific clauses in the purchase agreement. Only the most serious findings — fraud, large undisclosed liabilities, or unresolvable contingencies — typically lead buyers to walk away.
Can the seller refuse to provide information during due diligence?
Technically, yes. But in practice, unreasonably withholding information sends a red flag that experienced buyers will interpret as a sign of hidden problems. Sellers can set reasonable limits around highly sensitive information, but should do so transparently and with clear justification.
What is a virtual data room?
A virtual data room (VDR) is the secure digital platform where the seller deposits all documentation for the buyer and their advisors to review. The most widely used platforms in Spanish M&A include Datasite, Intralinks, and ShareVault. A well-organised data room is correctly indexed, comprehensive, and allows precise control over who accesses what information.
When should a seller start preparing for due diligence?
Ideally, preparation should begin at least six months before launching the sale process. This window allows time to identify and resolve contingencies, reorganise the corporate structure if needed, and potentially complete a vendor due diligence. The earlier preparation begins, the stronger the seller's negotiating position.
