Due diligence is one of the most critical processes in any mergers and acquisitions (M&A) deal. It's the point at which the buyer takes a magnifying glass to the company it wants to acquire to identify risks, validate the information received and, in many cases, adjust the final price of the deal.
In this guide, we explain exactly what due diligence is, the seven types that exist, the stages of the process, and the keys to carrying it out successfully when buying or selling a business.
What is due diligence?
Due diligence —known in Spanish as diligencia debida— is a thorough analysis of the state of a company, usually carried out by an external auditor or a specialized advisor. Its goal is to give the buyer or investor a real and complete view of the target company before closing a transaction.
It's a mandatory process in any serious M&A deal, because it lets you:
- Validate the financial, tax, and legal information provided by the seller.
- Identify hidden risks that could affect the value of the company or the viability of the deal.
- Adjust the purchase price based on the findings.
- Negotiate warranties and protective clauses in the purchase agreement.
- Make an informed decision about whether to move forward with the deal or walk away.
Due diligence usually takes place after signing the LOI (letter of intent) and before signing the share purchase agreement (SPA). It's the moment of greatest risk for the buyer and, at the same time, of greatest exposure for the seller, who has to open their books and hand over sensitive information.
Why due diligence is critical in M&A
A deal without rigorous due diligence is like buying a business "blind." The risks are huge: from hidden debt or undisclosed tax liabilities to pending litigation, intellectual property issues, or EBITDA inflated by non-recurring revenue.
Well-executed due diligence lets the buyer negotiate with data, not assumptions. And it lets the seller anticipate problems and resolve them before they become obstacles to closing the deal.
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The 7 types of due diligence
There isn't just one kind of due diligence, but several types applied depending on the characteristics of the deal. These are the seven most common:
1. Financial due diligence
It analyzes the company's real financial position: annual accounts, revenue and margin trends, debt structure, quality of EBITDA, working capital, projections, and more. It's the most common type and is usually the foundation on which the entire deal is built. If you want to go deeper, we have a dedicated guide on financial due diligence.
2. Legal due diligence
It reviews the company's legal position: articles of association, contracts with customers and suppliers, employment matters, licenses, intellectual property, open litigation, and regulatory compliance. It detects legal risks that could invalidate the deal or create future contingencies. More details in our post on legal due diligence.
3. Tax due diligence
It focuses on tax matters: compliance with tax obligations, potential contingencies with the Agencia Tributaria (Spanish Tax Agency), tax optimization applied by the company, and risks arising from the corporate structure. It usually goes hand in hand with financial and legal due diligence.
4. Commercial due diligence
It analyzes the business model from a market perspective: competitive position, quality of the customer portfolio, dependence on key customers, industry trends, and sustainability of revenue. It's especially relevant for private equity firms seeking growth.
5. Employment due diligence
It reviews the organizational chart, employment contracts, terms, salaries, collective bargaining agreements, potential labor disputes, and the organizational culture. In deals where the team is key (services, technology), it usually carries a lot of weight.
6. Technology due diligence
It analyzes the company's systems, digital infrastructure, cybersecurity, software ownership, technology dependencies, and level of digitalization. It's increasingly relevant in every industry, not just in tech companies.
7. ESG due diligence
This is perhaps the least known type so far, but with the shift toward sustainability driven by climate change, it will become increasingly prominent. It assesses the company's environmental, social, and governance risks: carbon footprint, waste management, equality policies, transparency, and corporate governance practices. It's growing in importance due to European sustainability regulations.
Stages of the due diligence process
Although complexity varies with the size of the deal, a typical due diligence follows four stages:
- Planning and scope: the parties define which types of due diligence will be carried out, who will perform them (internal advisors, external advisors, or both), and the timeline. The non-disclosure agreement (NDA) is also signed.
- Information gathering: the seller provides the documentation through a virtual data room. This includes annual accounts, contracts, deeds, employment records, and more.
- Analysis and verification: the advisors review the documentation, ask questions (Q&A), request additional information, and validate that the data matches the company's operational reality.
- Final report and negotiation: a report is delivered with the findings and the risks detected. These findings translate into price adjustments, warranties, or protective clauses in the SPA.
🎙️ Want to learn from an expert with more than 200 M&A deals under her belt? In this episode of our Rainmaker podcast, we talk with Cristina Almeida (Managing Director at Alvarez & Marsal), one of Spain's leading due diligence experts, about what a deal looks like from both sides, what makes the difference when structuring a transaction, and how the advisor's role is changing.
Frequently asked questions about due diligence
How long does due diligence take?
It depends on the size and complexity of the company. For an SME, it usually takes 4 to 8 weeks. For midsize companies or those with several subsidiaries, it can stretch to 2–3 months. What matters most isn't the duration but that it's rigorous: rushed due diligence often leaves risks undetected.
Who pays for due diligence?
It's usually paid for by the buyer, since the buyer is the one who needs the information to make the purchase decision. In some deals, the seller commissions a vendor due diligence beforehand to anticipate problems and speed up the negotiation; in that case, the seller pays for it.
Can a deal fall through during due diligence?
Yes, and in fact it happens often. If the findings are serious —hidden liabilities, major litigation, heavily inflated EBITDA, serious legal issues— the buyer can walk away or renegotiate the price downward. That's why it's so important for the seller to prepare the documentation well before the process.
Is due diligence the same as an audit?
No. An audit is a formal, regulated examination of the annual accounts that follows a standard methodology. Due diligence is an ad hoc analysis focused on a specific transaction (acquisition, merger, investment), with a scope defined by the needs of the parties and that goes far beyond pure accounting analysis.
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