After signing the LOI, the most decisive moment in any M&A process arrives: due diligence. It's the stage where everything that has been said up to that point gets checked. The value of the company, the strength of its numbers, the quality of its contracts, latent legal risks, revenue recurrence, dependence on key customers. Everything is examined under a magnifying glass.
And in that check, two signals emerge that set the pace for the rest of the process: green flags that confirm the deal can move forward with confidence, and red flags that force you to renegotiate the price, rethink the structure or, in some cases, stop.
Knowing what to look for in each category — and, if you're the seller, what to have resolved before you start — is what separates a deal that closes at a fair price from one that stalls at the last minute.
What exactly is due diligence, and what gets checked?
Due diligence is the thorough review process the buyer (or its advisors) carries out on a company it is considering acquiring. It typically takes place between signing the LOI and signing the SPA, and it covers three dimensions assessed in parallel: legal, assets and liabilities, and operational and commercial.
In each of these three dimensions, there are signals that strengthen the buyer's confidence and others that erode it. The conversation between legal counsel, auditors, and operations teams during the weeks of due diligence is built, to a large extent, around these signals.
Legal: the legal structure as an enabler or a brake
A company with its legal documentation in order makes closing easier. One with loose ends can delay the deal for months, force a downward renegotiation, or block it outright.
The most underestimated signal here is usually the corporate structure. A company with qualified annual accounts, shareholders who can't be located, or poorly documented capital increases forces the buyer to request fixes before closing — and fixes cost time and money. It's best to address this before starting the process.
Assets and liabilities: the financial signals that move the price
This is where the gaps between what was promised in the teaser and what shows up in the numbers become visible. It's also where most pricing decisions are made: any red flag in this category usually translates into a valuation adjustment, a larger deferred payment, or more demanding warranty clauses.
With the same EBITDA, two companies can trade at very different multiples depending on the quality of their financial information. Having consistent historical figures, clean reconciliations, and a regularized tax position is one of the most direct valuation levers. For more on the weight of EBITDA and ranges by industry, see EBITDA multiples.
Commercial activities: the strength of the operating business
This is the dimension that usually brings the most surprises, because the accounts can be clean and the contracts signed, yet the business may have an operational dependency that only becomes visible by talking to the team and observing day-to-day operations.
A very common red flag in Spanish SMEs: founder dependency in daily operations. It isn't a stylistic detail — it affects the valuation, the post-signing commitment required from the owner, and the type of buyer that is viable. We cover it in detail in founder dependency.
Your company's diagnosis
Check off your signals in the three categories, and this block adds up the totals, identifies the priority area, and returns three specific lines of action. It isn't a substitute for a professional valuation, but it gives you a useful reference for where to start.
How to arrive with more green flags and fewer red flags
For a seller who prepares 12 to 18 months in advance, practically every red flag can be worked on. Financial ones are sorted out with a good vendor due diligence beforehand. Legal ones are resolved with the law firm. Operational ones take more time — building a second level of management or documenting processes can't be done in six weeks — but the effect on valuation is worth the effort.
For a buyer, the order of priorities is usually the opposite of what intuition suggests. Legal red flags are the ones that stop the most processes during due diligence, but operational ones are the ones behind the most deals that go wrong after signing. A company with a lawsuit gets renegotiated with its lawyers; a business that depends on its owner and loses them after the transition is a problem that shows up later and is much more expensive to fix.
Thorough due diligence — both the one the buyer carries out and the one the seller does in advance — lets the parties make informed decisions and negotiate from a position of transparency. And that's what separates processes that close in 100 days from those that drag on forever or fall apart.
