What a due diligence should really uncover before buying a company

Due diligence in the sale and purchase of a company should not be conceived as a mere accumulation of documents and findings, but as a decision-making instrument. Its function is to identify which risks may alter the price, shape the structure of the transaction or even make it inadvisable. The value of the exercise does not lie in detecting the greatest possible number of issues, but in distinguishing which of them are material to the transaction and in translating them into specific decisions on the structure of the sale and purchase, the conditions precedent, the representations and warranties, the indemnities and the price retentions. A truly useful due diligence is one that connects the technical analysis with the drafting of the contract.

04/08/2026

Mergers and acquisitions Corporate and commercial Property and contract law

1.Due diligence as a decision-making tool, not as an inventory

Due diligence in corporate acquisitions is the process of gathering and analysing information about the target company in order to understand its business, its commercial prospects and the state of its assets and liabilities. Its purpose is to make it possible to value and objectively set the final price, to decide how to structure the transaction and to determine which warranties should be required or whether it is advisable to walk away from the purchase. A full review usually covers financial, commercial, tax, employment, environmental, contingency and litigation, and legal and corporate areas, but the focus should not be on documentary exhaustiveness, but on how material the risks are to the economic and legal equation of the transaction. Due diligence is, in essence, an acquisition audit geared towards decision-making, not a neutral inventory of issues.

2.From the risks detected to the structure of the sale and purchase

The first impact of a properly targeted due diligence is felt on the structure of the transaction itself. The identification of certain risks may lead the parties to opt for an asset purchase instead of a purchase of shares or quotas (“participaciones”), in order to ring-fence contingencies or to avoid succession to certain obligations. It may make it advisable to hive down business lines, to exclude problematic assets or to set up special-purpose vehicles. The detection of hidden liabilities, significant litigation, regulatory breaches or environmental contingencies may make it preferable to adopt a structure allowing the buyer to select what it acquires and what it leaves out, or limiting succession to particularly onerous liabilities.

Due diligence also has a bearing on the decision as to whether the transaction should be made subject to conditions precedent or conditions subsequent. Pending administrative authorisations, third-party consents needed for key contracts to take effect, ongoing administrative penalty proceedings or tax uncertainties may justify the inclusion of conditions precedent making completion dependent on obtaining certain approvals or on the favourable outcome of particular proceedings. The information obtained makes it possible to gauge whether the risk can be assumed without any condition, whether completion should be made conditional or whether it simply makes the transaction inadvisable.

3.Representations and warranties: aligning the contract with the risk map

The seller's representations and warranties are the classic contractual instrument for transposing into the contract the risk map identified in the due diligence. The seller represents and warrants a series of matters concerning the company's situation: title to assets, absence of encumbrances, performance of contracts, absence of significant litigation, its tax, employment and environmental position, regulatory compliance and the accuracy of the accounts, among others. The buyer relies on these representations in setting the price and deciding to buy, and reserves rights of indemnity in the event of inaccuracy.

Due diligence makes it possible to adjust the content and scope of these representations. Where the review has detected no issues, the warranties may be broader; where risks have been identified, the warranties may be more specific, more limited or even excluded altogether, thereby passing the risk to the buyer. The information obtained serves to gauge the need for absolute warranties as against warranties given to the seller's knowledge, the advisability of material adverse change clauses and the definition of materiality thresholds. The relationship between due diligence and warranties is a dynamic one: the review may reduce the need for broad warranties, since it allows the buyer to ascertain the company's situation at first hand, but the fact that a due diligence has been carried out does not release the seller from liability for inaccuracies in its representations, unless it is expressly agreed that certain known risks fall outside the scope of the warranties.

4.Indemnities, price retentions and warranty insurance

The risks identified also feed into the architecture of indemnities and price retentions. Tax, employment, environmental or litigation contingencies may justify setting up retention mechanisms or escrow accounts, in which part of the price is deposited for a given period to cover potential liabilities. The amount and duration of these retentions are negotiated by reference to the likelihood and the potential impact of the risks detected.

Indemnity clauses are designed to cover damages arising from breaches of representations and warranties, from hidden liabilities or from specific contingencies. Due diligence makes it possible to identify which risks deserve particular treatment under an indemnity, with caps, de minimis thresholds or specific exclusions, and which may be covered by a general regime. Practice has also developed warranty and indemnity insurance, which allows part of the risk of inaccuracy in the warranties to be transferred to an insurer, adjusting the liability of seller and buyer. The value of due diligence can be seen in the ability to distinguish between risks that should be covered by contractual indemnities, risks that can be managed through price retentions and risks that, by their nature or magnitude, make the transaction inadvisable.

5.Due diligence and compliance: criminal and administrative liability

The attribution of criminal liability to legal persons has introduced a further dimension into due diligence. A buyer acquiring a controlling interest in a company may find itself exposed to criminal liability arising from offences committed in the name of or on behalf of the company and for its benefit, by its legal representatives or by those holding powers of organisation and control. The presence or absence of organisation and management models that are effective in preventing offences, the implementation of supervision and control measures, the monitoring of compliance and the periodic verification of the model are all factors capable of excluding or mitigating the criminal liability of the legal person.

A due diligence that overlooks compliance may leave the buyer exposed to significant criminal and administrative risks. The review must include an analysis of the existing prevention models, of client acceptance policies, of customer due diligence measures for the prevention of money laundering and terrorist financing, of the identification of beneficial owners, of the management of financial resources and of the existence of disciplinary systems and periodic verification. The detection of shortcomings in these areas may lead the buyer to require the implementation of compliance models as a condition of the transaction, to adjust the price or to set post-completion undertakings.

6.From information to contract design: distinguishing what matters

The central thesis is that a useful due diligence is not the one that identifies the most issues, but the one that makes it possible to distinguish which of them really matter to the transaction. In any company it is normal to find minor breaches, contingencies of little value, litigation carrying limited risk or formal shortcomings. The value of due diligence lies in separating these elements from the risks capable of altering the price, shaping the structure or making the purchase inadvisable. To that end, the due diligence team must work in close coordination with those negotiating the contract. It is not enough to produce technical reports; the findings must be translated into contractual decisions: adjusting the price, introducing conditions precedent, strengthening particular warranties, agreeing specific indemnities, setting price retentions, taking out warranty insurance or, where appropriate, walking away from the transaction.

7.Conclusion: due diligence as a bridge between analysis and contract

Due diligence, properly understood, is a bridge between the analysis of the company and the design of the sale and purchase agreement. It is not an end in itself, nor a race to detect the greatest number of issues, but a means of identifying which risks may alter the price, shape the transaction or make it inadvisable, and of deciding how those risks are to be allocated between buyer and seller. The quality of a due diligence is measured by its impact on the structure and the content of the contract, not by the volume of documentation reviewed. A useful due diligence is one that allows the buyer to take informed decisions on whether to buy, how to buy and at what price, and the seller to understand which risks it must assume, what information it must disclose and what warranties it can offer. Ultimately, what a due diligence should really uncover before buying a company is not everything that can go wrong, but what can go wrong in a way that is material to the transaction and how that must be reflected in the contract.

Alburquerque AbogadosJosé Manuel AlburquerqueBarcelona 04/08/2026

See all related publications

Related publications

Corporate and commercial

Multiple-vote shares: when economic interest and control of the company cease to coincide

Recent developments in European company law show a growing openness towards capital structures that make it possible to attach different voting rights to shares carrying an equivalent economic interest. Multiple-vote shares, alongside other techniques such as non-voting shares, restrictions on voting rights, shares carrying a right of veto or loyalty shares, make it possible to decouple economic ownership from corporate control. The business problem that these structures seek to solve is clear: to offer founders or core shareholders the possibility of raising capital on the markets without immediately losing control of strategic decisions. At the same time, they raise delicate questions about their limits, the protection of the remaining shareholders and the broader debate as to how far capital and power must necessarily remain linked.

An acquisition may require several regulatory controls before it can be closed

One and the same acquisition may be subject simultaneously to several public controls before it can be closed. Beyond the agreement between buyer and seller, certain transactions must clear merger control, the foreign investment regime and, where applicable, the new control of foreign subsidies distorting the internal market. These are not alternative regimes, but cumulative ones with different rationales. The practical result is that a sale and purchase may be perfectly agreed between the parties and yet be incapable of being completed until certain authorisations have been obtained or the corresponding regulatory procedures have concluded. Integrating these controls into the contractual structure from the outset is essential in order to manage timetables, risks and, ultimately, the viability of the transaction itself.

Buying a company in Spain as a foreign investor: when the transaction requires administrative authorisation

Not every acquisition of a company in Spain can be treated as a purely private transaction between buyer and seller. The investor's identity, its country of residence or of beneficial ownership, the target company's sector of activity, the nature of the assets acquired and the degree of control sought may trigger mechanisms for the supervision and prior authorisation of foreign investment. The “Ley 19/2003 sobre movimientos de capitales” —Law 19/2003 on capital movements— and its implementing regulations, together with specific sector-based regimes, have built a system in which certain foreign direct investments are subject to suspension of the liberalisation regime and to administrative authorisation. Identifying this issue at the initial stage of the transaction is essential, because it may determine the signing, the closing, the conditions precedent and the parties' cooperation obligations.

How merger control is changing and what it may mean for an M&A transaction

Merger control has ceased to be an almost mechanical exercise in comparing market shares and has become a far more sophisticated analysis of how a transaction may alter future competition. Competition law still starts from turnover and market-share thresholds, but the authorities have widened their focus to matters such as potential competition, innovation, access to strategic assets, effects on related markets and the capacity of an acquisition to modify the competitive structure in the medium and long term. For buyers and sellers, identifying competition risk at an early stage is no longer a formality: it may determine the timetable, the contractual documentation, the allocation of risk and, ultimately, the very viability of the transaction.

Selling the business before its value is destroyed: transfers of business units in situations of insolvency

A company's insolvency does not necessarily mean that its business has no value. An activity may be economically viable and yet be trapped in a financial structure that can no longer sustain it. Spanish insolvency law has evolved precisely in order to allow the business, in such cases, to be separated from the insolvent company and transferred as a business unit to a third party, preserving assets, contracts, activity and, where possible, jobs. The key lies in acting far enough in advance: the longer the financial deterioration continues, the more the value that could have been transferred is destroyed.

Majorities, vetoes and deadlock situations: how to allocate power among the shareholders without paralysing the company

The allocation of power in a company limited by shares is not exhausted by the percentage of capital held by each shareholder. The design of enhanced majorities, reserved matters and veto rights, the composition of the management body and the mechanisms for resolving deadlock decisively determine who really holds sway and how decisions are taken. The practical challenge lies in giving reasonable protection to majority and minority shareholders without building an architecture that makes it impossible to adopt resolutions when disagreements arise. Company law offers a flexible framework, but it also imposes limits in order to prevent abuse by the majority and by the minority and to safeguard the functioning of the legal person.

Chronicle of an executorship for the realisation of an estate: bequeathing what you do not own

There are wills that are carried out by signing a public deed of acceptance of the estate and dividing up what there is. And there are others that, in order to be carried out at all, first require the deceased's corporate structure to be dismantled and the assets he had left to third parties without owning them to be taken out of it. This is the second kind. The firm acted as universal executor for the realisation of the estate —the “albacea universal de realización de herencia”— and completed the task in little more than eleven months, well within the time limit the testator had set. But the work that made that result possible did not begin with the death of the deceased, but years earlier, on the day he was helped to draw up his will.

The price of a company cannot always be fixed at signing: locked box, completion accounts and earn-outs

In the sale and purchase of companies, the price is rarely a static figure fixed once and for all at the moment of signing. The initial financial valuation, based on assumptions as to debt, cash, working capital and results, does not always match the amount that the buyer must ultimately pay. To manage this uncertainty, practice uses various contractual mechanisms for determining and adjusting the price, chief among them locked box structures, adjustments by means of completion accounts and earn-outs. What is apparently a financial question becomes a central part of the contractual architecture of the transaction, with direct implications for the allocation of risk, for the definition of economic concepts and for the potential for subsequent litigation.