In almost every deal there comes a moment when both sides have agreed on the price and are in a hurry to sign. It is exactly the moment when stopping to review is hardest, and the moment when doing so is cheapest. What surfaces after signing is paid for in full. What surfaces before is negotiated.
Due diligence is not distrust of whoever is selling or raising money. It is the orderly way of answering, before signing the cheque, a simple question: is the business I have been told about the one that is actually there? And it is answered in a set order: first the numbers, then what holds them up.
First, the numbers
An investor does not start with the articles of association. They start by checking that the revenue and margins that justify the price exist and will recur.
- Recurring versus one-off revenue. A euro from a renewable annual contract is not worth the same as a euro from an exceptional order. The review separates the two.
- Normalised profit. What would remain if the business ran without the owner's arrangements: their own salary at market rate, rents between related parties, costs that are not the business's. It is the basis of the valuation, which we explain in detail in what your company is worth.
- Cash and working capital. A company can make money and not have it. How long it takes to collect, how long to pay and how much it needs to run a normal month say more than the profit and loss account.
- Debt that does not look like debt. Beyond bank loans: deferrals with the Tax Agency or Social Security, shareholder loans, guarantees given, amounts owed to strategic suppliers. All of it comes off the price.
- Concentration. How much of the revenue depends on a single client, a single supplier or a single person, usually the founder. The more the business relies on one piece, the more risk the investor is buying.
Then, what holds those numbers up
Good numbers resting on weak paperwork are worth less than they seem. That is why the legal review is not a separate formality but the check that the revenue is protected:
- Who owns what. That the shares belong to whoever claims to sell or issue them, free of encumbrances, and that the cap table is the real one.
- The contracts that generate the revenue. With particular attention to change-of-control clauses, which let the client or supplier terminate if the company changes hands. If the main client can walk away on signing day, that is price.
- The assets that make the business. That the trademark, software or licences are in the company's name and not the founder's.
- Employment, tax and litigation. Headcount and claims, ongoing inspections, questionable tax positions in recent years and lawsuits that are open or can be seen coming.
What is being bought matters a great deal here. If you buy the shares, the company stays the same and keeps all its debts and contingencies. If you buy the business (its assets and clients), in principle they are not inherited, but there are important exceptions: article 44 of the Spanish Workers' Statute makes the buyer of an economic unit step into the employment contracts and be jointly liable for three years for unpaid employment debts that arose before, and the General Tax Act extends to whoever succeeds in an activity liability for certain tax debts, although it can be limited by asking the Tax Agency, with the seller's consent, for a debt certificate.
If you come in as a shareholder, not a buyer
Much investment does not mean buying a whole company but taking a minority stake. In that case, besides reviewing the company, you need to review what real say the investor will have once inside, because the majority will stay in other hands.
- Information. The right to receive accounts, budgets and management data at an agreed frequency, not only what the law guarantees any shareholder.
- A veto over what matters. The articles can require reinforced majorities for specific decisions (borrowing above a certain amount, selling key assets, admitting new shareholders), short of unanimity, as article 200 of the Spanish Companies Act allows.
- Exit. What happens if the majority shareholder sells: the right to sell on the same terms (tag-along) and, where agreed, the obligation to sell (drag-along).
- Where it is written. Part of this goes into the shareholders' agreement and part must go into the articles, because article 29 of the same Act provides that private agreements between shareholders cannot be enforced against the company.
What you find becomes contract
A report is worthless if it stays in a drawer. Every relevant finding ends up in one of these tools: a price adjustment, where the problem is quantified; representations and warranties from the seller, with an obligation to indemnify if they prove untrue; specific indemnities for risks already identified; retention of part of the price for a period; or conditions to be met before closing, such as a client waiving its change-of-control clause.
If you are the one raising money or selling
Due diligence also serves whoever is on the other side, done in advance and on their own account. Arriving with reconciled numbers, signed contracts and orderly documents shortens the deal and avoids last-minute price cuts: whoever finds disorder discounts the price. We have written separately about the figures investors look at first: before you raise capital.
Where to start
Before reviewing anything, a confidentiality agreement and a letter of intent setting the indicative price, exclusivity and timetable. Then the review, and with it the contract.
If you would like to go through it with us, the initial consultation is thirty minutes, costs 60 euros plus VAT, and is there to structure the deal from the start, whether you are investing, raising money or selling.
This article contains general information for informative purposes and does not constitute legal advice or an investment recommendation. The rules cited may have been amended after publication; always check the text in force before taking a decision.