Due Diligence When Buying a Business in Australia
Due diligence is the step that separates smart buyers from expensive ones.
Every business sale comes with an information memorandum that tells you what the seller wants you to know. Due diligence is how you find out what the IM didn’t mention — the revenue that’s about to walk out the door, the liabilities sitting off the balance sheet, the customer concentration that makes the whole thing fragile.
This article explains what a thorough due diligence process covers and why each area matters. For the full acquisition process, see our guide on how to buy a business in Australia. And download our free Due Diligence Checklist (free PDF) to work through the process systematically — it covers every area in a structured, practical format.
Why Due Diligence Is Non-Negotiable
The seller’s accountant prepared the financials. The broker wrote the IM. Every number in those documents puts the business in the most favorable light. That’s not dishonest — it’s how business sales work. Your job is to verify.
Due diligence is your right as a buyer. It’s the period between signing a Heads of Agreement and completing the purchase, during which you have access to the business’s records. Use it fully.
The cost of a thorough due diligence process is small relative to the cost of getting it wrong. A problem discovered before settlement gives you options — renegotiate the price, request warranties, walk away. The same problem discovered after settlement gives you nothing but regret.
Due diligence is the best investment you’ll make on any acquisition. Finding problems before settlement is far cheaper. After settlement, your options are limited and the costs are high.
Financial Due Diligence
This is the most important component. Our financial due diligence services are built specifically for buyers who need an independent review — not through the lens of the vendor, but from yours.
What we reviewed
- Three years of financial statements — P&L and balance sheet
- Tax returns — cross-checked against the reported financials
- BAS records — GST reported vs revenue claimed
- Payroll records — employee headcount, entitlements, superannuation
- Debtors ledger — age of receivables, any doubtful or written-off debt
- Creditors ledger — outstanding payables, overdue supplier accounts
- Bank statements — actual cash flows matched against reported figures
Normalisation
Before you apply a valuation multiple, normalise the earnings. Adjust them to reflect what the business would actually generate under your ownership, not the current owner’s. This means stripping out below-market owner salaries, personal expenses run through the business, one-off items, and related-party transactions.
Normalised EBITDA is the number that drives the Business Valuation. If the seller’s normalisation and yours differ, you’re negotiating from different bases. Get your own number before you make a formal offer.
What to watch for
The issues that most often change the picture in financial due diligence:
- Revenue concentration — one or two clients representing a large share of income
- Declining trend — revenue or margins moving in the wrong direction in the most recent year
- Owner salary below market rate — inflating the apparent profitability
- Superannuation or GST arrears — tax liabilities not disclosed upfront
- Aged debtors — old receivables the business is unlikely to collect
- Related-party transactions — income or expenses that won’t continue post-settlement
These are covered in depth in the free Due Diligence Checklist. For a buyer’s guide to warning signs specifically, see our article on red flags when buying a business.
Legal Due Diligence
Legal due diligence is your lawyer’s domain. It looks at the business’s legal position — what it owns, what it has committed to, and what risks sit inside its contracts.
Key areas
- Client contracts — are they transferable? Do they require consent to assign?
- Supplier agreements — terms, pricing, exclusivity, change-of-control clauses
- Leases — length remaining, renewal options, personal guarantees, assignment requirements
- Intellectual property — who owns it? Has the owner properly registered it?
- Employment agreements — contracts, restraints, entitlements, existing disputes
- Licences and permits — transferable with the business, or tied to the current owner?
- Litigation — any current, pending, or threatened claims
The structure of the sale — asset sale vs share sale — significantly affects how these legal elements transfer. In a share sale, contracts generally pass automatically. In an asset sale, you need to re-assign each one individually. Your asset protection position post-acquisition also depends on getting the structure right.
Tax Due Diligence
Tax due diligence checks the business’s historical tax compliance and identifies any outstanding liabilities that could become your problem after settlement.
What to check
- Income tax returns — lodged, up to date, and consistent with the P&L
- GST compliance — BAS lodgements, any ATO correspondence or audits
- PAYG withholding — has employee tax been properly withheld and remitted?
- Superannuation guarantee — contributions current, or arrears outstanding?
- Payroll tax — has the business met its state payroll tax obligations?
- ATO debt — outstanding tax debt, payment arrangements, or disputes on foot
In a share sale, any undisclosed tax liabilities become your problem. In an asset sale, you generally don’t inherit the company’s tax history — but the purchase price may still be affected. This is core business tax planning work that has to happen before settlement, not after.
Operational Due Diligence
Operational due diligence looks beyond the numbers at how the business actually functions — and whether it can keep functioning under your ownership.
Key questions
- Key person risk — how much of the revenue is tied to the current owner personally?
- Staff — who are the key people, are they staying, are retention arrangements in place?
- Systems and processes — are operations documented, or running on institutional knowledge?
- Customer relationships — how strong are they, and how transferable?
- Supplier relationships — are there preferred arrangements that depend on current ownership?
- Technology — is the stack current? Are there pending capital requirements?
Operational due diligence is partly about what you find in documents and partly about what you observe in conversations. Time spent with the team and the premises before settlement tells you things the IM never will.
How Long Does Due Diligence Take?
Typically 2–4 weeks for a straightforward SME transaction, longer for more complex businesses. You agree the due diligence period in the Heads of Agreement. Don’t accept a timeline that doesn’t give your advisors proper time to work through the records.
If issues emerge that need further investigation, request an extension. Treat a seller who refuses reasonable requests as a yellow flag.
What Happens If Due Diligence Turns Up Problems?
It depends what they are. Minor discrepancies are common and usually resolvable. Material issues — undisclosed liabilities, revenue that won’t survive the ownership transition, normalised earnings significantly different from the claimed figure — are grounds to renegotiate or walk away.
The outcome of due diligence should inform your final offer, not just confirm the one you already made. If the findings change the risk profile, the price should reflect that.
Common Questions
Can I do due diligence myself?
You can review documents yourself, but you need an independent accountant for the financial component. Normalisation in particular requires professional judgement — it’s not just reading numbers, it’s knowing what adjustments to make and why. Our Buying a Business service covers exactly this.
When does due diligence start?
After you sign a Heads of Agreement and the seller grants you access to records. Ideally, you’ve already done a preliminary review of the IM before making an offer — so you know the key questions going in.
What if the seller won’t provide full access?
A seller who restricts access to records during an agreed due diligence period is a serious red flag. Legitimate sellers have nothing to hide. If someone is controlling or delaying access without good reason, that tells you something. It is a signal about what full access might reveal.
Download the free Due Diligence Checklist
Our Due Diligence Checklist (free PDF) covers every area in a structured, practical format — financial, legal, tax, and operational. Use it alongside your accountant and lawyer as you work through the process.
Need an independent financial review of what you’re buying? Book a discovery call — we’ll tell you what we’d look at and how we can help.
