Due Diligence in Serbia: What Is Checked Before Buying a Company or Equity Stake

Buying a company or an equity stake may look like a good business opportunity. The buyer sees existing business, revenues, clients, contracts, employees, equipment, brand and market position. However, what is not immediately visible is often the most important legally: previously assumed obligations, disputed claims, unresolved relationships among company members, encumbrances on equity interests or assets, tax risks, employment law issues, unregistered intellectual property or contracts that may cease to apply after a change of ownership.

That is why due diligence in Serbia is not just a formal review of documentation. It is a process through which the buyer tries to understand what it is really acquiring. When an equity stake in a company is purchased, the buyer does not only acquire the company’s future potential, but also enters into its business, legal, financial and contractual history.

Good due diligence does not serve only to determine whether the company is “in order”. Its true value is that it shows which risks exist, how serious they are, whether they affect the price and how they should be regulated in the share purchase agreement or other transaction documentation.

What Is Due Diligence and Why Is It Important?

Due diligence is a systematic review of a company that is the subject of an acquisition, investment or other transaction. In practice, it includes legal, financial, tax, employment, regulatory and business review. In acquisitions of companies in Serbia, legal due diligence of a company is particularly focused on company status, ownership structure, contracts, obligations, disputes, employees, assets, intellectual property and permits necessary for business operations.

The basic legal framework for analysis of the company’s status and corporate position is found in the Company Law, which regulates the legal position of companies, their incorporation, governance, status changes, changes of legal form, termination and other issues relevant to their position.

Legal review of a company before acquisition is particularly important because documentation often shows more than the financial picture itself. A company may have stable revenue, but also a contract that the buyer will not be able to continue after the change of ownership. It may have a known brand, but without a registered trademark. It may use office space, software or a domain, but without a clear legal basis. It may have employees who actually work in one way, while the documentation shows something entirely different.

In other words, the buyer does not check only documents. The buyer checks whether the value it is paying for really exists legally and whether it is protected.

When Is Due Diligence Conducted?

Due diligence is most often conducted before the purchase of an equity stake in a company, before the purchase of an entire company, in M&A transactions in Serbia, mergers and acquisitions, investor entry, capital increase, joint ventures and strategic partnerships.

Before sensitive documentation is exchanged, a confidentiality agreement is often concluded in practice. This is particularly important when the seller gives the buyer access to data on clients, suppliers, prices, business models, financial results, employees, technology, intellectual property and other commercially valuable information. Due diligence therefore does not mean uncontrolled opening of the business, but regulated and confidential exchange of information in a clearly defined transaction phase.

It is particularly important to distinguish between asset purchase and purchase of equity interests. When a buyer purchases individual assets, the transaction subject may be more specific: real estate, equipment, vehicle, software, inventory or certain rights. When purchasing an equity stake, the buyer enters the ownership structure of the company and indirectly takes over everything connected to that company: contracts, employees, debts, disputes, tax history, regulatory obligations and business risks.

That is why buying an equity stake in a company without prior review may be riskier than it looks. It is not enough to know that the company operates and generates revenue. It is important to know on the basis of which contracts it operates, whether those contracts are transferable, whether hidden debts exist, whether the company’s rights are protected and whether there are obligations the buyer will discover only after the takeover.

Status and Corporate Documentation

The first step in a legal due diligence process is usually review of status and corporate documentation. This includes data from the Serbian Business Registers Agency, the articles of association, decisions of the assembly or company members, capital structure, ownership structure, powers of representatives, history of changes and internal acts of the company.

The Serbian Business Registers Agency enables search of data on companies, including search of companies, registration applications, announcements and notices. This check is basic, but it is not sufficient on its own. Data from the BRA should be compared with the articles of association, internal decisions, members’ agreements and documentation showing how the company actually operated.

In a limited liability company, it is particularly important to check whether there are restrictions on transfer of equity interests. This may include a right of first refusal, the need for consent of other company members, special conditions from the articles of association or earlier disputes among members. If these issues are not checked in time, the buyer may find itself negotiating over an equity interest that cannot be freely transferred or whose transfer requires additional legal steps.

It should also be checked whether equity interests or company assets are encumbered by pledge. The BRA enables searches of pledges by object, pledgor, owner of the pledged object and other criteria. This is particularly important when the buyer counts on specific company assets, and it later turns out that they are encumbered in favor of a creditor.

In practice, it is also useful to check the Central Register of Beneficial Owners, especially when the ownership structure is more complex or when other domestic or foreign legal entities stand behind the domestic company. The BRA maintains the Central Register of Beneficial Owners, and a beneficial owner may be, among other things, a natural person who directly or indirectly owns 25% or more of equity interests or voting rights, or a person who has a dominant influence on management and decision-making.

The purpose of this review is not only to formally determine who is registered as a company member, but to understand who actually controls the company and whether there are relationships that may affect the transaction, negotiations, seller warranties or buyer obligations after takeover.

Due Diligence Document List

Although the scope of review differs from transaction to transaction, the basic due diligence document list most often includes status documentation, articles of association, decisions of corporate bodies, BRA data, contracts with key clients and suppliers, loan documentation, pledge documentation, employment documentation, tax certificates, financial statements, asset documentation, data on disputes, permits, licenses, intellectual property documentation and data on beneficial owners.

This list is not the same for every company. For an IT company, software, copyright, licenses, domains and relationships with developers are particularly important. For a manufacturing company, equipment, real estate, permits, occupational safety and supplier contracts may be more important. For a company dealing with consumers, compliance with consumer protection rules and personal data protection is important.

Contracts and Business Obligations

One of the most important parts of legal review of a company is analysis of key contracts. These include contracts with customers, suppliers, landlords, banks, distributors, partners, related parties, consultants, IT suppliers and other creditors.

Special attention should be paid to clauses that are triggered in the event of a change of ownership or control. For example, a key client may have the right to terminate the contract if there is a change in company members. A landlord may require prior consent for a change of control. A bank may provide that a change in ownership structure is a basis for additional consent, negotiations or even acceleration of certain obligations.

Exclusivity provisions, high contractual penalties, non-compete restrictions, long-term obligations limiting business and dependence of the company on one key client or supplier may also be problematic.

The buyer should therefore not check only whether contracts exist. It must understand how stable they are, whether they can continue after the transaction and whether they contain obligations that may limit future business.

Debts, Claims and Financial Risks

Due diligence should identify existing and potential obligations of the company. This includes loans, borrowings, sureties, guarantees, pledges, mortgages, overdue debts, disputed claims, obligations to suppliers, obligations to related parties and all other relationships that may affect the value of the company.

It is important to understand that financial statements are not enough. They may show a certain picture of business operations, but they do not always reveal legal risks hidden in contracts, disputes, pledges, guarantees or relationships with related parties.

For example, a company may have a claim that is formally recorded but practically difficult to collect. It may have an obligation based on a surety for another person. It may have a dispute with a supplier that has not yet become a court proceeding. It may have a contract under which it assumed a long-term obligation that reduces the value of future business.

That is why legal and financial due diligence must be connected. An accounting picture without legal analysis may be incomplete, while legal analysis without understanding financial consequences may remain too formal.

Employment Law Review

If the company has employees, employment law due diligence is necessary. Employment contracts, annexes, rulebooks, salary calculations, working time records, annual leave, dismissals, contracts outside employment, engagement of directors, non-compete obligations, obligations to employees and potential labor disputes are reviewed.

The Labor Law is the basic regulation governing rights, obligations and responsibilities from employment and based on work in Serbia. Therefore, in a due diligence process it is necessary to check whether the company’s employment documentation is aligned with the law and the actual manner of work.

This part of the review is particularly important for companies that have a larger number of employees, engagement outside employment, shift work, field work, bonuses, management agreements, confidential information, non-compete clauses or frequent personnel changes.

Special attention should be paid to situations where persons in fact work as employees, but are formally engaged through other contractual models. Such relationships may raise the issue of disguised employment, additional obligations to employees and possible proceedings before competent authorities.

Tax and Accounting Aspects

Tax due diligence is usually conducted by tax advisers and accountants, but the legal team must understand its findings. Tax risks often directly affect the share purchase agreement, seller warranties, price, closing conditions and indemnity mechanisms.

In practice, tax debts, VAT treatment, transfer pricing, transactions with related parties, tax certificates, payment documentation, potentially hidden obligations and proceedings before tax authorities are reviewed.

If a significant tax risk exists, the buyer may request a price reduction, special representations and warranties of the seller, retention of part of the purchase price or a special indemnity clause. Tax risk does not always mean that the transaction should be abandoned, but it must be known, assessed and contractually covered.

Court, Enforcement and Administrative Proceedings

Review of disputes and proceedings is one of the key elements of a due diligence process. It is necessary to check whether the company participates in civil, enforcement, arbitration, administrative, inspection or other proceedings.

Even a proceeding that has not been finally completed may significantly affect the value of the company. A dispute with a former business partner may lead to a large damages award. Enforcement proceedings may indicate a liquidity problem. An inspection procedure may raise the issue of compliance with regulations.

The buyer should not check only whether a proceeding exists. It is important to understand the subject matter of the proceeding, the company’s potential exposure, the stage of the proceeding and whether the cost may arise after takeover.

Intellectual Property, Brand and Digital Assets

For many companies, value is not only in equipment, inventory or contracts. Value may be in the brand, trademark, name, software, domains, copyright, licenses, databases, trade secrets and digital channels.

Therefore, due diligence must answer a simple question: does the company really own what it uses in its business?

The Intellectual Property Office of the Republic of Serbia maintains an E-register of trademarks, which contains data on trademark applications and registered trademarks, as well as data on changes relating to applications and registered trademarks. The trademark register enables searches by criteria such as application number, registration number, sign, class and applicant or rights holder.

Risk arises when a company uses a name or logo that is not registered as a trademark, when a domain is registered in the name of a founder or employee, when software formally belongs to an external associate or agency, or when there is no contract transferring copyright to the company.

In such a situation, the buyer may pay for a brand, software or digital asset that later turns out not to legally belong to the company. This is one of the most commonly underestimated risks in acquisitions of companies that rely on online sales, technology, marketing, user databases or a recognizable brand.

Real Estate, Lease and Company Assets

If the company owns or uses real estate, equipment, vehicles, machinery or other significant assets, the legal basis of use must be checked. It is not enough to know that the company uses certain premises or equipment. It should be checked whether the company is the owner, lessee, user under leasing or only a factual user without a clearly regulated legal basis.

For real estate, the cadastral status, ownership, mortgages, annotations, lease relationships and disposal restrictions should be checked. For equipment and vehicles, ownership, leasing, pledge, registration and any encumbrances are reviewed.

This part of the review is particularly important when the company’s business depends on a specific location, production facility, specific equipment or permit connected to premises.

Regulatory Permits and Business Compliance

Some activities require special permits, licenses, approvals or compliance with sector-specific rules. This may be particularly important in financial services, healthcare, pharmaceuticals, food, energy, transport, construction, IT services, personal data processing, consumer protection or activities under special supervision.

For companies that process data of customers, users, employees or business partners, compliance with personal data protection rules is particularly important. The Law on Personal Data Protection ensures protection of the fundamental rights and freedoms of individuals, especially the right to protection of personal data, and applies to processing of personal data under the conditions prescribed by that law.

In certain transactions, competition protection rules should also be considered, especially if the purchase of a company or equity stake may affect market structure. Regulatory review should not be an afterthought, but part of the initial risk analysis.

How Due Diligence Findings Affect the Transaction

Due diligence findings may directly affect negotiations. If risks are small and clearly controlled, the transaction may move toward closing. If risks are serious, the buyer may request a change in price, additional seller warranties, changes to the transaction structure or conditions that must be fulfilled before closing.

For example, if it is discovered that a key contract may be terminated due to a change of ownership, the buyer may request prior consent of the other contractual party. If it is discovered that a trademark is not registered in the company’s name, the buyer may request that the right be transferred before closing. If there is a tax, employment or litigation risk, the buyer may request a special indemnity clause.

Due diligence is therefore not only a review. It is the basis for negotiating a safer transaction. Without it, the buyer often negotiates price without knowing the full legal value of what it is buying.

The practical value of due diligence does not end with the report. Its findings should be translated into concrete contractual mechanisms: seller representations and warranties, closing conditions, indemnity clauses, retention of part of the purchase price or other forms of buyer protection. If discovered risks are not built into the contract, the buyer may have a good overview of the problems, but without sufficiently strong legal protection after closing.

Most Common Mistakes of Buyers

One of the most common mistakes is relying only on financial statements. Numbers are important, but they do not always show legal obligations, problematic contracts, encumbrances on assets or risks that have not yet been formalized.

The second mistake is signing a contract before complete review. The buyer then enters the transaction without a clear picture of what it is acquiring and often only later tries to resolve by contract what should have been discovered before signing.

The third mistake is ignoring employment and tax risks. They often do not seem dramatic in the early negotiation phase, but may become very expensive after takeover.

The fourth mistake is failing to check intellectual property and digital assets. For companies whose value depends on brand, software, user database or online presence, this may be decisive.

The fifth mistake is relying on oral information from the seller. In a serious transaction, everything important must be checked, documented and, if necessary, built into the contract through representations, warranties, conditions and protection mechanisms.

Why Legal Support Is Important

An attorney in a due diligence process does not check only whether a document exists. The attorney’s task is to understand the legal consequences of the findings and explain to the buyer what those findings mean for the transaction.

A good legal team helps the buyer distinguish a formal deficiency from a serious risk. Not every problem is a reason to abandon the transaction, but every serious problem must be identified and properly addressed. This may mean amendments to the agreement, additional seller warranties, closing conditions, retention of part of the price, indemnity or a change in transaction structure.

If you are considering buying a company, purchasing an equity stake, investor entry or another M&A transaction in Serbia, JP Law can help you conduct legal due diligence before signing the agreement, identify key risks, negotiate safer terms and protect your business interests.

FAQ

What does due diligence mean in Serbia?

Due diligence in Serbia means a review of the legal, financial, tax, employment and business condition of a company before acquisition, investment or another transaction.

Is due diligence mandatory before buying a company?

Most often, it is not legally mandatory as a formal step, but in practice it is very important because it enables the buyer to understand risks before signing the agreement.

Which documents are checked before buying an equity stake?

The articles of association, BRA data, ownership structure, contracts, financial and tax obligations, employment documentation, disputes, assets, trademarks, licenses and other relevant documents are checked.

How long does a due diligence process take?

The duration depends on the size of the company, scope of documentation, industry and complexity of the transaction. Smaller reviews may take less time, while complex M&A transactions require more detailed analysis.

What if legal risks are discovered during the review?

Discovery of risks does not necessarily mean the end of the transaction. The buyer may request a price reduction, additional warranties, fulfillment of certain conditions before closing or special protection mechanisms in the agreement.