Buying a company, investing in one, or partnering with someone are decisions made with enthusiasm. There’s a clear opportunity, good chemistry with the owners, and numbers that look great in the pitch. The problem is that what doesn’t show up in the pitch is exactly what can turn a good opportunity into a bad deal: tax debts, labor lawsuits, customers who leave with the previous owner, or contaminated land.
Due diligence exists to see those things before you sign. In this article we explain what it is, which areas to review, which red flags to look for, and how to use what you find to negotiate.
What is due diligence?
It’s an in-depth review of a company before a major transaction, to confirm that what you were shown is real, identify risks and contingencies, and have a basis for setting the price and terms.
It’s done, for example, before:
- Buying a company or part of one.
- Investing as an equity partner.
- Forming a partnership or joint venture.
- Merging with another company.
- Signing with a distributor, franchisee, or high-stakes strategic supplier.
It isn’t just for large corporations. In an SME, where the money invested is often a significant share of the buyer’s wealth, a review proportional to the size of the deal matters even more.
The areas it should cover
| Area | Key question |
|---|---|
| Financial | Are the profits real and sustainable? |
| Tax | Are there unpaid taxes or risks the authority will assess them? |
| Legal and corporate | Who owns what, and which contracts, permits, or lawsuits exist? |
| Labor | Are there liabilities to employees or lawsuit risks? |
| Commercial | Do customers and the market support the projected sales? |
| Operational | Can operations grow, or do they need unplanned investment? |
| Environmental | Are permits missing, or are there environmental liabilities? |
| Technology and information | Are the systems and information reliable, and who owns them? |
What to review in each area
Financial
- At least three years of financial statements, ideally audited, reconciled against tax returns.
- Quality of earnings: one-off income and expenses, owners’ personal expenses run through the company, family salaries out of line with the market.
- Working capital: receivables (aging and concentration), inventory (turnover and obsolescence), and payables.
- Debt, guarantees given, and off-balance-sheet liabilities.
- Profitability by customer and product, to understand where profit really comes from. We explain how in our profitability analysis guide.
Tax
- Tax returns for the last five years, estimated payments, and withholdings.
- The SAT’s (Mexico’s tax authority) tax compliance opinion, the document that shows whether the company is up to date; it’s based on Article 32-D of the Federal Tax Code.
- Ongoing tax audits or assessments.
- That neither the company nor its main suppliers appear on the SAT’s published lists of taxpayers with presumed non-existent transactions.
Legal and corporate
- Articles of incorporation, bylaws, shareholder meeting minutes, powers of attorney, and an up-to-date ownership structure.
- Key contracts with customers, suppliers, landlords, and banks, especially change-of-control clauses that allow the contract to be terminated if ownership changes.
- Current or foreseeable lawsuits.
- Trademarks, patents, and licenses: registered in the company’s name, not the owner’s.
Labor
- Headcount, contracts, payroll, and proper registration with Mexico’s social security (IMSS) and housing fund (INFONAVIT).
- Labor lawsuits and dismissal-related contingencies.
- Accumulated seniority, benefits, and seniority premium liabilities.
- Dependence on key people and the risk that they leave with the business.
Commercial and operational
- Customer concentration: how much the top five account for, and whether the relationship depends on the previous owner.
- Customer contracts, sales trends, and order backlog.
- Equipment condition, installed capacity, and deferred investments.
- Dependence on single-source suppliers.
Environmental
- Current permits, licenses, registrations, and reports. Our environmental permits checklist is a good starting point.
- Waste management and potential soil contamination liabilities.
This point is often underestimated. Under Articles 70 and 71 of Mexico’s General Law for the Prevention and Comprehensive Management of Waste, owners or possessors of contaminated land are jointly liable for remediation, and ownership of a site contaminated with hazardous waste can’t be transferred without SEMARNAT’s express authorization.
Red flags
- The company doesn’t provide information, provides it partially, or with long delays.
- The pitch numbers don’t match the financial statements or the tax returns.
- A large share of sales depends on one or two customers, or on the owner’s personal relationships.
- There are related-party transactions without contracts or market prices.
- Key assets (real estate, trademarks, equipment) are in the owners’ names, not the company’s.
- There’s pressure to close quickly without a review.
How to run the process
- Sign a confidentiality agreement and a letter of intent with the general terms and the review timeline.
- Request the information with a list organized by area, and keep the documents in one place (a physical or virtual data room).
- Review, interview, and visit. Documents don’t tell the whole story: talk with managers, visit the facilities and, when possible, speak with key customers and suppliers.
- Rank the findings by severity: deal-breakers, those that affect price, and those resolved through conditions or guarantees.
- Use the findings to negotiate: a price adjustment, holding back part of the payment, seller warranties, conditions to be met before closing or, if necessary, walking away.
In deals where a partner joins or a family business is sold, this process connects with succession planning: putting ownership and information in order makes any future transaction easier.
Frequently asked questions about due diligence
How long does due diligence take?
For an SME, anywhere from a few weeks to two or three months, depending on the company’s size, the scope of the review, and how quickly information is provided.
Who should do it?
Usually a multidisciplinary team: financial, tax, and legal specialists and, depending on the industry, labor, operations, and environmental experts. What matters is that someone coordinates and translates findings into business decisions.
Is it worth it if the deal is small?
Yes, with a proportional scope. A review focused on the highest-risk areas for that business costs far less than inheriting a tax, labor, or environmental contingency.
Can the seller do due diligence too?
Yes, and it’s good practice. Vendor due diligence lets the owner spot and fix problems before going to market, and usually leads to a better price and a faster process.
Conclusion
Due diligence isn’t meant to kill the deal, but to let you do it with your eyes open. Reviewing finances, taxes, contracts, people, operations, and environmental issues in an orderly way lets you confirm the company’s real value, negotiate with information, and avoid inheriting problems that aren’t yours.
At Total Consulting we perform the financial, profitability, operational, and environmental assessments that are part of due diligence, and coordinate the review with legal and tax specialists, through our Strategy and Finance service. If you’re about to buy, invest, or partner, schedule a free diagnostic session.
This article is for informational purposes and does not replace legal, tax, or accounting advice. For a specific transaction, consult specialists.
