By the time a buyer reaches due diligence, they are usually interested in the business.
They may like the industry, understand the opportunity and believe the asking price is within reach. They may have already spent weeks reviewing an Information Memorandum, speaking with the broker and meeting the owner.
But due diligence changes the mindset. The buyer is no longer asking, "Why should I buy this business?" They start asking, "What could go wrong if I do?" This is an important distinction for sellers to understand.
Due diligence is not simply an accounting exercise where the buyer checks that the revenue figure in the Information Memorandum matches the profit and loss statement.
A serious buyer is trying to work out whether the business they have been shown is really the business they are going to own after settlement.
Will the customers stay? Will the employees stay? Are the profits sustainable? Are there hidden tax liabilities? Does the business actually own its intellectual property? Can the lease be transferred? Is expensive machinery still under finance? Does the business rely heavily on the owner? Are there employment liabilities that have not been recognised?
Most buyers do not expect a perfect business. What concerns them is uncertainty.
A problem that is identified, quantified and explained can often be dealt with. A problem discovered unexpectedly halfway through due diligence can damage confidence in everything else the seller has said.
The best way to prepare for due diligence is to stop thinking like the seller for a moment and look at the business through the eyes of someone about to invest a large amount of their own money.
Australian Government guidance for buyers recommends reviewing financial records, business operations and legal documents, including several years of financial statements, tax returns, BAS records, contracts, licences, leases, liabilities, inventory and plant and equipment.
But the documents themselves are only part of the process.
The real purpose is to answer a much broader series of questions.
This is usually one of the first questions.
A seller may present an adjusted profit of $1.5 million, but the buyer will want to understand exactly how that figure was calculated.
They will compare:
They will also look closely at any adjustments or add-backs used to arrive at maintainable earnings.
Some adjustments are perfectly reasonable. An owner may employ family members who will not remain after settlement. There may have been a genuine one-off legal expense. The company may own a vehicle used mainly for the owner's private purposes.
But buyers become cautious when the list of adjustments starts getting longer and more creative.
If reported profit is $600,000 but the seller wants the buyer to value the business on an adjusted profit of $1.2 million, every additional $600,000 needs a convincing explanation.
One of the quickest ways to lose credibility during due diligence is to present normal operating expenses as though they are one-off costs.
A buyer may question:
Sellers should be conservative.
A smaller number of well-supported adjustments usually creates more confidence than an aggressive attempt to maximise EBITDA on paper.
Historical profit matters, but the buyer is purchasing future profit.
A company may have had an exceptional year because of one large project, temporary supply shortages affecting competitors, a government contract, unusual demand or a short-term surge in pricing.
The buyer will try to understand whether the current earnings represent a normal year or an unusually good one.
They may analyse:
A seller who can explain the drivers of profit is in a much stronger position than one who simply points to the bottom line.
Strong growth is generally positive, but buyers naturally investigate sudden changes.
If revenue grew from $8 million to $12 million in the twelve months immediately before the business went to market, expect questions.
Was the growth caused by a major new customer? A price increase? An acquisition? A large project? Additional salespeople? New locations?
Most importantly, is it likely to continue?
Buyers are often more comfortable with growth they can understand than growth they cannot explain.
Customer concentration is one of the most common areas of concern.
A business may be highly profitable, but if one customer represents 40 percent of revenue, the buyer will immediately start modelling what happens if that account disappears.
They will want to know:
A large customer is not automatically a problem.
A 15-year relationship supported by contracts, multiple management relationships and high switching costs is very different from a major customer acquired six months ago through the owner's personal friendship.
This question can be just as important as customer concentration.
Imagine the owner personally handles the ten largest customers, knows every decision-maker, sets all pricing and resolves every dispute.
The buyer is not simply buying customer relationships. They are buying relationships that may walk out the door with the seller.
Before going to market, key relationships should gradually be shared with other people inside the business.
The buyer wants to see that customers trust the company, not just its founder.
Sellers often describe themselves as working "strategically" in the business.
Buyers tend to dig deeper.
Who prices major jobs?
Who hires managers?
Who negotiates with the largest suppliers?
Who deals with the bank?
Who knows the production schedule?
Who responds when something goes wrong?
If the answer to almost every question is the owner, the business carries significant owner dependency.
That does not necessarily stop a sale, but it may affect the valuation, handover period and type of buyer interested in the business.
A management team on an organisational chart is not necessarily a management team in practice.
Buyers will often meet senior managers and quickly work out whether they actually manage anything.
They will look for people who understand their numbers, make decisions, manage staff and solve problems independently.
If every manager says, "You would need to ask the owner about that", the buyer receives a very different impression.
Strong second-tier management can be one of the most valuable features in a privately owned business.
Buyers pay close attention to the people they cannot easily replace.
This may include:
The buyer may investigate remuneration, length of service, notice periods, employment agreements and whether those employees know about the proposed transaction.
If a business depends heavily on three key employees who all intend to leave shortly after settlement, that can materially change the acquisition.
This is particularly important in Australia.
Buyers may review modern award classifications, salaries, overtime, penalty rates, allowances, casual arrangements, leave balances and payroll records.
Intentional wage underpayment has been a criminal offence under federal workplace laws since 1 January 2025, although honest mistakes are treated differently.
A historical payroll problem can therefore become much more than an accounting adjustment.
Sellers should consider reviewing employee classifications and payroll compliance before going to market, particularly where the workforce is covered by awards or complicated rostering arrangements.
Employee liabilities can become complicated because the treatment depends partly on how the transaction is structured.
Under Australia's Fair Work transfer-of-business rules, service with the previous employer may need to be recognised for various employee entitlements where the legal requirements for a transfer of business are met.
Some entitlements can be treated differently depending on whether the businesses are associated entities and the circumstances of the transfer.
Annual leave, long service leave, redundancy, notice, personal leave and other employee matters should therefore be properly analysed as part of the transaction rather than simply assuming everything transfers automatically.
For sellers, accurate leave and entitlement records make this process considerably easier.
Buyers do not only want to see that superannuation has been recorded as an expense.
They may want comfort that it has actually been paid correctly and on time.
This has become particularly important following the introduction of Payday Super from 1 July 2026.
Under the new system, super guarantee payments are linked much more closely to each payday, with contributions generally needing to reach employees' super funds within the required timeframe after payday.
Historical super issues can create liabilities for the company and, in some circumstances, director penalty and regulatory exposure.
If the seller says, "Our accountant handles that", expect the buyer's accountant to verify it anyway.
Australian buyers will often review tax compliance carefully.
This can include:
Business.gov.au specifically recommends that buyers examine several years of tax returns and BAS records as part of financial due diligence.
A payment arrangement with the ATO does not necessarily make a business unsaleable, but the buyer needs to understand why the debt arose and whether it indicates a broader cash flow problem.
This distinction matters enormously.
In an asset sale, the buyer generally purchases selected business assets, rights and operations.
In a share sale, the buyer acquires the company itself.
That means the company continues to carry its history.
The ATO specifically notes that when a purchaser buys shares in an existing business, they may also be accepting risk associated with the company's historical tax position.
This is one reason share-sale due diligence can be considerably more detailed.
The buyer may investigate tax, employment, legal, environmental and contractual matters going back years because those liabilities may remain inside the company after ownership changes.
The structure of an Australian business sale can also affect GST.
Some asset sales may qualify as a GST-free supply of a going concern where the relevant legal requirements are satisfied.
Among other requirements, the purchaser must be registered or required to be registered for GST, the parties must agree in writing that the sale is of a going concern, the seller must supply what is necessary for the continued operation of the enterprise and continue operating it until the day of supply.
This should be addressed properly in the sale documentation.
Neither the buyer nor seller wants an unexpected GST dispute after settlement.
A balance sheet may show $2 million of plant and equipment.
That does not necessarily mean all of those assets are owned outright and free of security interests.
Australian buyers may conduct PPSR searches to identify registered security interests over assets.
This is particularly relevant for:
A buyer does not want to pay for a machine only to discover that a financier has an enforceable security interest over it.
Sellers should understand what security interests exist and which registrations need to be released at settlement.
Stock can become a surprisingly contentious part of a transaction.
A seller may say there is $800,000 of inventory at cost.
The buyer may discover that $200,000 consists of slow-moving items that have not sold for four years.
Buyers may review:
Clean up obsolete stock before the sale rather than expecting the buyer to pay full value for it.
A profitable business can require substantial cash to keep operating.
A buyer wants to understand how much working capital needs to remain in the business after settlement.
They may review:
This can become a major negotiating point in larger transactions.
A seller who aggressively collects debtors, delays supplier payments and runs stock down immediately before settlement may temporarily improve cash but leave the buyer with an underfunded business.
Sophisticated buyers will usually identify this.
A large accounts receivable balance is not necessarily valuable.
Buyers will often look at ageing.
There is a significant difference between $1 million of debtors that are mostly less than 30 days old and $1 million where half has been outstanding for six months.
Old debtors can suggest:
Sellers should resolve old accounts wherever possible before due diligence.
For many businesses, the premises are critical.
A buyer may love the company but have no transaction if the landlord refuses to assign the lease or insists on unacceptable new terms.
Australian Government guidance specifically highlights lease transfer as a due diligence issue for business purchasers.
Before going to market, understand:
A strong business with twelve months remaining on a difficult lease may be much harder to sell than the owner expects.
Sellers frequently describe customer contracts as though they automatically become the buyer's contracts.
That may not be the case.
A buyer's lawyer will review assignment clauses and change-of-control provisions.
A major contract may require customer consent before assignment. In a share sale, the agreement may contain a clause triggered by a change in ownership or control.
If 30 percent of revenue comes from one contract, the buyer will want certainty that the transaction itself does not give that customer an opportunity to leave.
Supplier relationships also matter.
A business may depend on exclusive distribution rights, favourable pricing or access to a particular product.
The buyer may ask:
If a supposedly exclusive distribution business has no signed distribution agreement, expect that to become a discussion.
Intellectual property ownership is often less tidy than business owners assume.
The trade mark may be personally registered to the founder. The domain name may sit in an employee's account. Software may have been written by a contractor without a clear assignment of intellectual property rights.
IP Australia makes clear that transferring registered trade mark ownership requires a proper assignment agreement, with the transfer then recorded on the register.
Before sale, sellers should understand who actually owns:
A buyer cannot confidently pay for an asset if nobody can establish that the seller owns it.
Some businesses depend on licences that cannot simply be handed from one owner to another.
The licence may attach to:
The buyer will want to know whether the business can legally continue operating immediately after settlement.
This is particularly important in industries such as construction, electrical services, food, liquor, healthcare, childcare, transport and other regulated sectors.
A seller should not discover during due diligence that the licence supporting the entire operation is held personally by an employee who intends to retire.
Buyers will normally ask about more than current court proceedings.
They may also want to avoid other legal traps, including:
A dispute does not automatically destroy a transaction.
Hiding one might.
Businesses selling products and services in Australia operate within the Australian Consumer Law framework.
During legal due diligence, a buyer may examine warranty practices, refund policies, advertising claims, product representations and standard form contracts.
Particular attention may be given to businesses selling directly to consumers or small businesses.
Current Australian rules also prohibit unfair terms in covered standard form consumer and small business contracts, with the protections applying to a broader range of small business contracts since reforms commencing in November 2023.
If the seller's standard contract gives the business sweeping rights to cancel, vary pricing or impose penalties while giving customers very few corresponding rights, a buyer's lawyer may want it reviewed.
Modern due diligence increasingly extends beyond financial statements.
Buyers may ask about:
A company that depends entirely on technology but has no backup process, no incident response plan and shared passwords across the office may create concerns.
The same applies where large amounts of personal customer information are being retained without clear controls.
A business may report strong profits partly because the owner has delayed replacing equipment.
The buyer may discover that several major machines are approaching the end of their useful lives and require $1 million of replacement expenditure shortly after settlement.
That affects the economics of the acquisition.
Buyers often review:
Sellers should be transparent about known capital expenditure rather than hoping the buyer will not notice.
A forecast can help explain future opportunity, but buyers know that spreadsheets are easy to make optimistic.
If revenue has grown at 4 percent annually for five years and the seller suddenly forecasts 30 percent growth after the sale, the buyer will ask why.
Strong forecasts need evidence.
This might include signed contracts, confirmed orders, additional capacity, a recently opened location, new salespeople or demonstrated demand.
The more the forecast depends on things that have not happened yet, the less likely a buyer is to pay today for the projected upside.
This question matters more than many sellers realise.
Retirement, health, family reasons or a desire to pursue something different can all be perfectly reasonable explanations.
But buyers still ask themselves whether the seller knows something they do not.
Is the industry about to change?
Has the largest customer indicated that it may leave?
Is a competitor entering the market?
Is a major contract about to expire?
There is no need to invent a complicated explanation. A clear and credible reason for sale usually works best.
The due diligence process itself becomes part of the buyer's assessment.
If every basic question takes ten days to answer, documents cannot be located and management gives conflicting responses, the buyer may begin to wonder how well the business is actually managed.
A disorganised data room can create concern even when the underlying business is sound.
Before due diligence begins, prepare the information properly.
A buyer should not have to ask five times for the same lease or wait three weeks for last year's BAS records.
Nothing destroys buyer confidence faster than inconsistency.
If the Information Memorandum says one thing, management says another and the accounts say something different again, buyers start questioning everything.
This does not always mean someone has deliberately misled them.
Sometimes the seller simply has not checked the information carefully enough before going to market.
That is why preparation matters.
Know your numbers. Know your contracts. Know your employees. Know your major customers.
This may be the most important question of all.
Business acquisitions require judgement.
A buyer will never know everything about a company, regardless of how much due diligence they complete.
Eventually, they need to trust that management has disclosed the important issues.
One undisclosed problem can therefore cause disproportionate damage.
If the buyer finds something significant that should obviously have been disclosed, they may start asking what else is hidden.
Business owners sometimes become defensive during due diligence because they believe every problem will reduce the price.
That is not necessarily true.
Most experienced buyers understand that established businesses have issues.
An old employment dispute, customer concentration, a weak contract or an ageing machine does not automatically end the transaction.
The bigger concern is often whether management understands the issue and whether the financial impact can be quantified.
A known problem can usually be negotiated.
An unknown problem cannot.
Not every due diligence issue results in a simple price reduction.
Depending on the problem, a buyer may respond by requesting:
For example, if a major customer contract expires shortly after settlement, a buyer might agree to the valuation but make part of the consideration dependent on that customer renewing.
If an employee entitlement is uncertain, the parties may negotiate how that liability is treated in the sale agreement.
The best response to due diligence is not to become better at answering questions.
It is to remove as many unnecessary questions as possible before the buyer arrives.
Six to twelve months before going to market, consider conducting your own seller-side review.
Examine the business as though you were purchasing it yourself.
Have your accountant make sure financial statements, tax returns, BAS records and management accounts are consistent and understandable.
Prepare clear schedules explaining legitimate adjustments to earnings.
If there are unusual movements in revenue or margins, understand the reason before the buyer asks.
Know:
If concentration is high, prepare evidence explaining why the relationships are stable.
Check:
Fix errors before they become buyer discoveries.
Make sure ATO lodgements are current and understand any outstanding tax debt or payment arrangements.
Check BAS, GST, PAYG withholding and superannuation records.
Where relevant, make sure payroll processes have been updated for the Payday Super rules that commenced on 1 July 2026.
Ask a commercial lawyer to review the agreements that matter most.
Pay particular attention to:
Do this before buyers begin relying on those contracts in their valuation.
If premises are important to the business, understand whether the lease can be assigned and what consent is required.
Where the remaining term is short, consider whether it is sensible to address the lease before going to market.
Identify security interests over important equipment and determine what needs to be discharged at settlement.
Keep finance documents and asset registers organised.
Check that brands, trade marks, domains, websites, software and important intellectual property sit in the correct entity and can be transferred as part of the sale.
A well-organised due diligence folder might contain:
Do not necessarily give every document to every prospective buyer immediately. Confidential information should be released in a controlled manner with appropriate professional advice and confidentiality arrangements.
But have the information ready.
The most effective sellers do not wait for a purchaser to identify weaknesses.
They conduct their own review first.
That does not mean trying to hide problems.
It means identifying them early enough to fix what can be fixed, quantify what cannot, and prepare a sensible explanation.
If an employee has been underpaid, investigate and correct it.
If a trade mark is held in the wrong entity, address the ownership.
If a major contract is approaching expiry, consider whether it can be renewed.
If customer concentration is too high, start diversifying.
If the business depends on the owner, begin transferring responsibilities to management.
Every issue resolved before going to market is one less reason for a buyer to renegotiate later.
There is another part of due diligence that rarely appears on a checklist.
The buyer is evaluating the owner.
Are they organised?
Do they know their business?
Are they open about problems?
Do their answers remain consistent?
Do they provide information when promised?
If the seller appears credible and transparent, the buyer is more likely to feel comfortable when something imperfect appears.
If trust has already been damaged, even a relatively small problem can become a major issue.
Due diligence is sometimes treated as something a seller simply needs to survive between agreeing on a price and reaching settlement.
That is the wrong way to look at it.
Due diligence is the point at which the buyer decides whether the story they were originally told is supported by the evidence.
They are checking the profit, but they are also checking the people, customers, contracts, taxes, superannuation, leases, equipment, intellectual property, licences, legal risks and systems that sit behind that profit.
The strongest sellers prepare for these questions before the business goes to market.
They know where their weaknesses are. They fix what they can. They document what matters. And when there is a problem that cannot be eliminated, they explain it clearly rather than hoping the buyer will miss it.
Buyers do not necessarily walk away because they find a problem. They walk away when they lose confidence in what they are buying. Good preparation turns due diligence from an investigation into a confirmation of the value the buyer already believed was there.
