Most buyers run due diligence in the wrong order. They engage a lawyer and an accountant on day one, spend $6,000 to $12,000 investigating the business, and discover in week three something they could have found in an afternoon for free: the lease has fourteen months to run, or 60% of revenue comes from one customer who is also the vendor’s brother-in-law.
Sequence it by cost instead. Three gates, each one cheaper than the one after it, each one with findings that should stop you paying for the next.
What is due diligence when buying a business?
Due diligence is the buyer’s investigation of a business before settlement, verifying that the earnings, assets, contracts, employees and legal position are what the seller has represented. In Australian small business sales it usually runs 21 to 45 days under a conditional contract, covers financial, legal and tax workstreams in parallel, and typically costs $5,000 to $15,000 in professional fees.
That timeframe is the contract clock, not the whole process. The work that decides whether you should buy at all happens before you sign anything.
Gate 1: The free desk check (half a day, $0)
Do this before you contact the broker a second time. Everything here is public or already in the information memorandum.
Read the P&L for the shape, not the total. Three years side by side, same line items. You are looking for a revenue line that moves without a reason, an expense line that disappears in the most recent year, and owner wages that look nothing like the cost of replacing the owner.
Count the customer concentration. Ask for revenue by customer for the last financial year. If the top client is more than 25% of revenue, the business is a job with a single employer attached, and the price should reflect that.
Check the lease term. Ask for the remaining term and the option structure before anything else. A business with two years left and no option is not sellable at a normal multiple, because you would be buying a two-year annuity. This kills more deals than any other single fact.
Search the names. ABN Lookup for registration status and GST registration, ASIC for the company and its directors, then Google the trading name with “review”, “court”, “fine” and “underpayment”. Ten minutes.
Work out who the business actually is. If the owner is the highest-billing technician, the main salesperson, or the only person the top five customers will talk to, then what is for sale is their reputation, and it is not transferable. Ask what happens to revenue in the twelve months after they leave, and watch how quickly the answer comes.
The best question at this stage is the simplest one. Why are you selling? Listen for a reason that has a date attached to it, like retirement, illness, relocation or a partnership split. Vague answers about new opportunities usually mean the numbers have peaked.
Gate 1 kill criteria: single customer over 40% of revenue, lease under 24 months with no option, owner is the product, or three years of financials that do not trend in a story you can explain.
Gate 2: Paid verification (one to two weeks, $1,500 to $4,000)
Now you spend money, but only on the numbers. Your accountant does this. It is a scoped engagement, not a full audit.
The four-number reconciliation. This catches most overstated earnings. Take reported revenue for the last full year and match it against the BAS lodgements, the tax return, and the bank statements. Four sources, one number. Anything that does not reconcile gets explained before you go further. A seller who cannot produce all four is telling you the reported figure is a management estimate.
Interrogate the add-backs. Add-backs are the expenses a seller removes from the P&L to show what the business “really” earns: their own above-market wage, the family car, personal travel, one-off legal costs. Legitimate ones exist. The test is whether the expense disappears when you take over. The owner’s car does. The $40,000 of “one-off” repairs that appear in all three years do not, and a seller who add-backs those is inflating the multiple base.
Check the tax and super position. Unpaid superannuation guarantee, payroll tax and ATO payment arrangements are the liabilities buyers most often inherit by accident, particularly in a share sale. Ask for an ATO integrated client account statement and a super clearing house payment history.
Run a PPSR search. The Personal Property Securities Register shows security interests over the plant, vehicles and equipment you think you are buying. Financed equipment that the price assumed you own is a common and entirely avoidable discovery. The search costs a few dollars.
Gate 2 kill criteria: revenue that cannot be reconciled to BAS and bank, add-backs above roughly 20% of reported profit that survive questioning, or undisclosed ATO or superannuation debt.
Gate 3: Legal and operational deep dive (three to six weeks, $4,000 to $12,000)
This runs under a conditional contract with a due diligence clause, so you have walk-away rights. The structure you chose determines most of the work, so settle that first.
| Workstream | Asset sale | Share sale |
|---|---|---|
| What you acquire | Named assets and goodwill only | The company, including its entire history |
| Liabilities | Stay with the seller unless you assume them | Come with you, known and unknown |
| Contracts | Must be assigned or novated one by one | Continue, but check change-of-control clauses |
| Licences and permits | Usually reapplied for by the buyer | Generally continue with the company |
| Employees | New offers, transfer of business rules apply | Employment continues unchanged |
| Tax risk | Limited to the assets | Full: income tax, GST, FBT, payroll tax, superannuation |
| Stamp duty | On dutiable assets, varies by state | On shares in some circumstances |
| Warranty package needed | Narrower | Extensive |
Most Australian small business sales are asset sales, for the reason the table makes obvious. Sellers prefer share sales because they walk away clean and the CGT treatment can be better for them. If the seller is pushing hard for a share sale on a business under $2 million, ask what is in the company’s history that they want to keep attached to it.
Then work the substance:
The lease, properly. Get landlord consent moving early, because it is the single most common cause of a delayed settlement. Under state retail leasing legislation the assignment process has disclosure steps and timeframes that cannot be compressed, and the landlord can require financial information and personal guarantees from you. Start it the day the contract goes conditional, not the week before settlement.
Employees and the transfer of business rules. Under the Fair Work Act, when employees move to a new employer within three months and do substantially the same work, a transfer of business occurs. The new employer must recognise prior service for personal and carer’s leave, parental leave and flexible working requests. Where the buyer is not an associated entity of the seller, the buyer can choose not to recognise prior service for annual leave and redundancy, in which case the seller must pay those entitlements out at settlement. Long service leave depends on state legislation. Decide this before you price the deal, because it moves real money and it has to be communicated to employees in writing.
Contracts and change of control. Read every material customer and supplier agreement for assignment clauses, exclusivity, termination rights and change-of-control triggers. A key supply agreement that terminates on a change of ownership can remove the reason you wanted the business.
Licences, permits and the industry layer. Food, liquor, NDIS, transport, trades and childcare licensing all have their own transfer rules and their own timelines. Some cannot be transferred at all and must be reapplied for, which means a gap in trading unless you plan for it.
If it is a franchise. The Franchising Code of Conduct governs the resale. You are entitled to a disclosure document and a cooling-off period, and the franchisor must consent to the transfer. Read the franchise agreement’s remaining term. Buying a franchise with three years left and a renewal fee at the end is a different deal from the one being described to you.
Restraint of trade. The seller should be restrained from competing, by activity, geography and time. An unenforceable restraint is worse than none, because it gives you false comfort. Have the lawyer draft it in cascading tiers so a court can read down the widest version rather than strike the whole clause.
GST and the going concern. If the sale is structured as a GST-free supply of a going concern, the seller must supply everything necessary for continued operation, must carry on the business until the day of supply, you must be registered for GST, and both parties must agree in writing that it is a going concern. Miss one of those and GST applies, which you would need to fund upfront and claim back later. It is a cash flow problem, not a tax problem, but it is a large one at settlement.
Write your conditions precedent as if the deal will go wrong, because roughly one in three do. Finance approval, landlord consent, franchisor consent, licence transfer and a satisfactory due diligence clause each need their own date and their own exit.
How long does due diligence take when buying a business in Australia?
Due diligence on an Australian small business typically takes 21 to 45 days from the conditional contract, with landlord consent and finance approval usually the slowest items. Gate 1 desk checks take an afternoon and cost nothing. Financial verification takes one to two weeks. Legal and operational review takes three to six weeks and runs in parallel with finance.
Build the timeline backwards from the settlement date you want, then add two weeks. The delays are almost always third parties: a landlord’s solicitor, a franchisor’s approvals committee, a bank valuer.
What buyers miss most often
The handover is not in the contract. Agree the transition in writing: how many weeks the seller stays, how many hours a week, who they introduce you to, and what happens if they stop answering the phone. Tie part of the price to it if you can.
Working capital is not in the price. Stock, debtors and creditors are negotiated separately from the business price and often at settlement stock value. Budget for it, and count the stock yourself.
The first three months cost more than the model says. New supplier terms, a deposit for the lease bond, licence fees, and customers who take a quarter to decide whether they like you. Hold cash back for it.
Pick one business, run Gate 1 this week, and only spend money if it clears. Then get a broker who works in that industry and city to tell you what comparable businesses have actually settled at, because a checklist tells you whether the business is sound and a comparable tells you whether the price is.