Buying an Existing Business in Australia: Due Diligence Checklist

Buying a business is one of the biggest financial decisions you will make

Buying an operating business (rather than starting from scratch) can dramatically shorten the path to steady revenue — but it also brings along every problem the seller is trying to walk away from.

Due diligence (checking carefully before you buy) is not about distrusting the seller — it is the standard process any smart buyer follows, and a serious seller will understand that. Failing to do thorough due diligence is one of the most expensive mistakes in any business sale.

Before you start: ask why the business is being sold

The first question is not “how much is this business selling for?” but “why is the owner selling?”

Reasonable reasons: retirement, a wish to move into a different field, family or health pressures, or wanting to free up capital. These reasons do not tell you whether the business is good or bad — but they are not problems with the business itself.

Reasons to worry about: revenue is falling with no convincing explanation, the industry is being squeezed by technology or shifting trends, the lease is about to expire and the landlord has other plans, or there is an active legal dispute.

Your job is to understand the real reason — not the reason you are told.

Checking the finances

Ask for at least three years of accountant-prepared financial statements. Don’t just look at the totals — read the detail:

Revenue: Is it stable? Is the trend up or down? How many customers does it come from — if more than 30% of revenue comes from one or two customers, where does a business that depends on them go when those customers leave?

Costs: Are there any “owner-style” expenses — that is, personal costs the previous owner has been running through the business? After you buy, those costs disappear, making the true profit higher than reported — but conversely, are there real costs the previous owner hasn’t recorded (such as the owner working without paying themselves a wage)?

Cash flow: Profit on paper and cash actually received are different things. Look at the actual bank statements, not just the accounting reports.

Debts and obligations: What does the business owe, and to whom? Money owed to suppliers, tax owed to the ATO, unpaid employee super? This affects the true value of the business.

Have your own accountant (not the seller’s accountant) review these documents.

Checking the legals

Deal structure: Are you buying assets or buying shares? This is an important decision with different legal and tax consequences. Buying assets is usually lower risk because you do not take on the entity’s hidden liabilities — but there are situations where buying shares is a better fit. Your solicitor and accountant will advise based on the specifics.

Existing contracts and commitments: What contracts does the business have with customers and suppliers? Can these contracts transfer to you? Which clauses allow a counterparty to cancel a contract when ownership changes?

Active legal disputes: Are there any lawsuits or complaints pending? These must be disclosed and either resolved, or clearly understood as a risk, before you sign.

Permits and licensing: What licences does the business hold? Can a licence be transferred, or must you apply for one from scratch? In some industries a licence cannot be transferred — your business cannot operate until you hold your own licence.

Non-compete: After the sale, is the seller restricted from working in the same industry? If the seller can immediately open a new business in direct competition, the value of the business you are buying drops significantly.

Checking the premises (if any)

If the business is tied to a physical location, the lease is one of the most important factors:

• How long is left on the lease?
• Is there an option to renew, and on what terms?
• Will the landlord agree to let you take over the lease (assignment of lease)?
• If there is no renewal option, will the landlord sign a new lease with you, and on what terms?

A business that depends on its premises without a secure lease is a business you do not really own — you are renting your own future from the landlord. See the related guide on commercial leases in Australia for more.

Checking the staff

• How many employees does the business have? What are their contracts?
• Will key staff want to stay after the change of ownership?
• Are there any outstanding super obligations?
• Are there any pending employment disputes?

If the business depends heavily on a few specific employees and they leave after you buy, you have bought a different business from the one you saw.

The role of professionals in the buying process

This is where you must have:

• Your own accountant: to review the financial statements and confirm fair value
• Your own commercial solicitor: to check the legals and draft the sale agreement

“Your own” — not someone referred by the seller or the broker. Conflicts of interest are a real feature of business sale transactions.

The cost of proper due diligence is usually small compared with the value of the deal — but more importantly, it can help you avoid a bad decision.