David Olivares Martínez
Managing Partner, Kreston Iberaudit
M&A and due diligence in Spain
December 4, 2024
Mergers and Acquisitions (M&A) and due diligence in Spain are essential components of corporate transactions, particularly in the context of structural changes like mergers and acquisitions. As David Olivares Martínez, Managing Partner at Kreston Iberaudit in Spain, explains, conducting a thorough due diligence process is vital for both buyers and sellers to identify and mitigate potential risks. This process ensures smooth transactions and prevents unforeseen contingencies during the buying and selling of companies
The term “due diligence” refers to a thorough investigation conducted by one party on the other. In the legal context, this involves a legal audit—a preliminary review of a business to assess risks before establishing an economic relationship. This process ensures no violations have been committed, no events occur that could reduce the business’s valuation, and no unforeseen costs arise for either party.
Buyer’s due diligence procedure
For buyers, the due diligence procedure typically begins with an initial request for information and documentation from the seller. This step allows the buyer to conduct a comprehensive analysis of the target company or business, often referred to as the “Target.” The required documents vary by industry, but the analysis generally focuses on four main areas:
- Financial area: Evaluates the company’s financial health, growth potential, debt levels, liquidity, and profitability.
- Legal area: Covers corporate structure, contractual relationships, intellectual property rights, and ongoing or potential legal proceedings.
- Labour area: Ensures compliance with labour laws, compensation systems, and social security regulations while verifying employee conditions.
- Tax area: Assesses tax compliance, fiscal adjustments, and potential liabilities, ensuring obligations to tax authorities are up-to-date.
A virtual “data room” is often used to share this documentation securely, enabling advisors from both sides to review and request clarifications through a “Questions and Answers” (Q&A) document. The process culminates in a final Due Diligence report, which identifies risks, provides mitigation strategies, and includes a “Red Flag Report” summarising key findings.
This detailed analysis helps buyers determine whether to proceed with the transaction and prepares them to negotiate exceptions or guarantees in transaction documents, ensuring risks are managed effectively.
Seller’s due diligence procedure
To avoid a failed sale, sellers are encouraged to conduct a “vendor due diligence” before taking the company to market. This involves hiring independent experts to review the business’s financial and legal status, identify potential risks, and provide an objective assessment.
Benefits of seller’s due diligence:
- Facilitates accurate company valuation by providing credible, professional analysis.
- Reduces risks identified during the buyer’s Due Diligence by addressing them proactively.
- Increases transparency and trust in the transaction process.
- Strengthens the negotiation position by showcasing a clear and accurate picture of the company’s status.
A seller’s Due Diligence report increases the transparency of the process, addressing uncertainties early and improving the chances of a successful transaction.
Why M&A and due diligence are crucial in Spain
In Spain’s competitive market, due diligence plays a pivotal role in M&A transactions. For buyers, it ensures informed decision-making and risk mitigation. For sellers, it streamlines the process, maximises valuation, and builds trust with potential buyers. Both parties benefit from the transparency and foresight a robust due diligence process offers.
