When you’re buying a small or mid-sized Italian company as a foreign investor, most problems don’t come from fraud. They come from what’s hiding in plain sight: tax liabilities that weren’t properly recorded, employment arrangements that look informal but carry legal weight, property records that don’t match reality.

The goal of due diligence isn’t just checking boxes. It’s figuring out what could reduce your company’s value after you own it, then building protections into your purchase agreement that actually work.

Why Italian Due Diligence Requires a Combined Approach

In Italy, business problems don’t stay neatly separated. A legal issue becomes a financial statement problem. A tax matter turns into a legal dispute. An employment practice shows up as an unrecorded liability.

Here’s a common scenario: The seller assures you “everything is under control.” But after closing, you discover a pending tax audit, an employee reclassification claim, or a property irregularity that was never in the books. Now you’re paying in cash, time, or operational headaches.

That’s why adequate due diligence in Italy means your legal, tax, and accounting advisors work from one shared risk assessment, not three separate reports that don’t talk to each other.

The Due Diligence Process: Key Steps

Before diving into detailed reviews, understanding the overall process helps you allocate resources efficiently and avoid costly surprises.

Step 1: Decide Between a Share Deal and an Asset Deal

Before you even look at documents, clarify what you’re actually buying. In a share deal, you step into the company as it exists, including all its known and unknown liabilities. In an asset or business transfer, you try to cherry-pick what you want and leave the rest behind. But Italian law can still attach certain liabilities to you, particularly around employment and specific taxes.

This structural decision shapes everything: what you review, how you price the deal, and which protections you negotiate.

Step 2: Run Initial Screening Checks

Before you spend serious money on full due diligence, do a quick health check. Pull basic corporate information from Italy’s Companies Register: ownership structure, filed documents, current directors, and signing authority. Look for obvious warning signs, such as ownership changes, merger history, registered pledges, or insolvency signals.

Step 3: Sign a Letter of Intent with Real Teeth

A good LOI isn’t ceremonial. It should lock in exclusivity, define the due diligence process, set clear timelines, and specify precisely what the seller must provide. If the seller resists structured document sharing or won’t give access to critical information, that’s your first red flag.

For Italian SMEs, consider including management interviews in your scope. Many business practices go undocumented, and those informal arrangements often pose the greatest risks.

Step 4: Build Your Document Request and Open the Data Room

Your advisors create a comprehensive request list covering corporate documents, material contracts, employee files, tax returns, and financial statements, plus any sector-specific requirements.

In Italian SMEs, the hidden risk usually isn’t fraud. It’s informality: missing board minutes, outdated internal registers, undocumented related-party transactions, and incomplete employee paperwork.

Legal Due Diligence: What It Reveals

Legal due diligence forms the foundation of understanding what you’re buying and whether the seller can deliver what they promise.

Corporate Structure and Ownership

Legal due diligence starts by confirming the seller can actually sell what you think you’re buying. That means verifying the corporate chain, transfer restrictions, approval requirements, and whether past corporate actions were recorded correctly.

Red flag example: Share transfers that were informally agreed but never properly registered. Or shareholder arrangements that exist “in practice” but not on paper. These lead to post-closing disputes over control and governance.

Contracts and Change-of-Control Clauses

Your lawyers examine contracts that keep the business running: customer and supplier agreements, distribution deals, leases, and financing arrangements.

Valuation scenario: The target company’s largest customer has a change-of-control termination clause. You buy the company, disclose the ownership change, and that customer walks away. Revenue drops immediately. This isn’t a “legal issue”; it’s a pricing issue.

Litigation and Pending Disputes

You’re not just looking for active lawsuits. You’re hunting for brewing disputes or credible threats, because Italian litigation costs and timelines can derail your post-closing plans.

Tax Due Diligence

Tax due diligence tests whether the company has complied with Italian tax rules and identifies open audits, assessments, or patterns suggesting future exposure.

The biggest mistake foreign investors make is assuming that Italian taxes work the same way as those in their home country. In specific transaction structures, particularly business transfers, Italian law creates statutory joint liability for specific pre-transfer tax periods, including penalties.

Red flag scenario: VAT treatments that look standard but show inconsistencies across invoices and filings. When the tax authority reviews this, it gets expensive fast. It also signals weak internal controls, which means other problems likely exist.

Employment Due Diligence

When you acquire an Italian company, you are not simply taking over a workforce. You are stepping into an existing legal employment system that transfers to you by operation of law. This happens in both share deals and in most asset or business transfers. The legal framework is designed to protect workers, not buyers, and it makes no distinction between “old” and “new” ownership when it comes to past mistakes.

This means that any employment irregularity that existed before closing becomes your responsibility the moment you acquire the company. It does not matter whether the issue was visible in the accounting records, whether the seller disclosed it, or whether the risk was intentional. From the perspective of Italian labor law, the employer has changed, but the obligations have not.

For foreign investors, this is often the first area where a financially attractive deal turns into a structurally expensive one.

The Automatic Transfer of Employment Obligations

Under Article 2112 of the Italian Civil Code, employees automatically transfer with the business. Their salary, seniority, job classification, benefits, and accrued rights remain unchanged. The buyer cannot reset contracts or change employment terms unilaterally. Any existing entitlements, including overtime, bonuses, allowances, and contractual protections, continue after the transaction.

Informal practices and verbal or undocumented agreements also transfer. Even if the payroll looks clean on paper, hidden obligations may still exist and often surface later through employee claims, sometimes months or years after closing.

Misclassification

Italian SMEs often use freelancers and consultants who in practice, work like full employees. They follow fixed schedules, use company equipment, report to managers, and work exclusively for one business. Even if their contracts call them “independent,” Italian law may treat them as employees.

If reclassified, the effects apply retroactively. The company can be required to pay years of back social security contributions, unpaid taxes, penalties, interest, severance accruals, and compensation for wrongful termination. Once you acquire the company, these liabilities become yours, making misclassification one of the most common sources of unexpected post-closing costs.

TFR or The Hidden Severance Debt

Every Italian employee accrues mandatory severance pay (TFR), a deferred salary that must be paid in cash when the employee leaves. In many SMEs, TFR is poorly tracked or underfunded, leaving significant hidden obligations off the balance sheet. After closing, this liability transfers to you and often surfaces quickly.

Informal Pay Practices and Verbal Promises

Cash bonuses, verbal overtime, family-style allowances, and off-book reimbursements are common in closely held Italian businesses. Even when undocumented, consistent practices can become legally enforceable employee rights and are rarely disclosed during a transaction.

Many labor disputes also begin quietly through informal complaints or union communications and are formalized only after ownership changes, creating long-term legal and financial exposure for the new owner.

Silent Disputes and Union Exposure

Many labor disputes in Italy begin quietly. They start with emails, informal complaints, inspectorate warnings, or union communications that never reach the courtroom until after the company changes hands. Once ownership changes, employees often formalize claims that were previously “managed internally.”

Because Italian litigation is slow and employee-protective, these disputes can result in long-term legal exposure, reputational damage, and mandatory reinstatement or compensation orders.

Financial Due Diligence

Financial due diligence turns “EBITDA” into something you can trust. The work focuses on revenue recognition, receivables collectability, inventory valuation, unrecorded liabilities, and the realism of provisions for disputes.

Common SME scenario: The company reports substantial profits, but receivables include old invoices that will never be collected. If you apply a valuation multiple to inflated earnings, you overpay.

Real Estate Checks

If the target company owns real estate or depends on leased property, verify ownership, encumbrances, and registry records. In Italy, property investigations rely on notarial searches and registry checks. Registered claims, mortgages, or cadastral problems create serious closing and financing risks.

Practical scenario: You discover the factory building doesn’t align with the cadastral or planning records. This limits financing options, affects insurability, and forces you into costly post-closing regularization.

Turning Findings Into Deal Protections

This is where due diligence becomes a strategy for the purchase agreement. The risks you identify during review must translate into specific contractual protections.

How Warranties Work

Warranties are the seller’s statements about the company’s status: that its financial statements are accurate, there are no undisclosed disputes, taxes are paid, and ownership is clean. If a warranty proves false and you suffer a loss, you can claim under the agreement, subject to negotiated limits such as time caps and minimum claim thresholds.

How Indemnities Work

Indemnities are more targeted. They allocate a specific, identified risk to the seller. If due diligence reveals a particular exposure, such as a pending employee claim or a tax audit, you negotiate a special indemnity covering that item with more precise recovery terms.

What To Avoid when You Get an Italian SME 

Even a clean-looking Italian SME can hide significant risks. Recognizing these patterns early allows you to address them before they become expensive post-closing surprises.

Red Flag Type	What It Looks Like	How to Protect Yourself
Employment misclassification	Freelancers functioning as employees	Price adjustment or special indemnity
Undocumented disputes	Supplier conflicts in emails, but no lawsuit	Disclosure-backed warranties and indemnity
Property record mismatch	Real estate with registration inconsistencies	Closing condition or escrow until resolved
Inconsistent VAT treatment	Different approaches across transactions	Tax indemnity with holdback

Priority review areas for Italian SME acquisitions:

• Corporate books and shareholder records for accuracy
• Material contracts with change-of-control provisions
• Employment arrangements, including freelancers and consultants
• Tax compliance for the past five years
• Absolute property ownership and cadastral record alignment
• Pending or threatened litigation
• Related-party transactions and documentation quality
• Financial statement reconciliations and provision adequacy

So, if You’re a Foreign Investor in Italy

Buying an Italian company as a foreign investor means understanding that risk lives in the details, and often in what’s informal, undocumented, or “understood” rather than written down.

Adequate due diligence connects legal, tax, and accounting findings into one clear picture of what you’re really buying. Then it translates that picture into contractual protections that shield you when surprises emerge after closing.

The companies worth buying are rarely perfect. The deals that succeed are those in which you spotted the imperfections early, priced them correctly, and protected yourself adequately in the purchase agreement.

Would you like to read more about similar subjects? Take a look at our related articles here: holding company in EU while residing in Italy, Italy electronic invoice requirement and partita IVA SRL.