We can't find the internet
Attempting to reconnect
Something went wrong!
Attempting to reconnect
Due Diligence: Look before you leap
Your opportunity to verify everything the seller has told you before you commit. Skipping or rushing this step is one of the most expensive mistakes buyers make.
What due diligence means
Due diligence is the investigation phase between agreeing on price and completing the purchase. The sale agreement usually gives you a defined period to investigate the business, during which you can walk away if you discover problems.
Verification Before Commitment
Every claim the seller has made about the business needs to be verified against actual documents and records.
Confirm Representations
Test whether the seller's representations and warranties in the sale agreement are accurate.
Find Problems Early
Once the sale completes, the business problems become your problems. Identify issues while you can still negotiate.
Financial due diligence
Verify the numbers that form the basis of your valuation. Understand not just what the business earned historically, but whether that performance is likely to continue.
Three Years of Accounts
Request full financial statements for at least three years. Look for trends, unusual items, and consistency.
Tax Returns & Compliance
Verify that tax returns have been filed and taxes paid. Outstanding tax obligations can become your liability.
Aged Receivables & Payables
Review who owes the business money and whether they are likely to pay. Old debts may be uncollectable.
Cash Flow Patterns
Profit and cash flow are not the same. Understand the timing of income and expenses, especially for seasonal businesses.
Bank Statements
Bank statements verify the cash position and show the real flow of money through the business.
Outstanding Debt
Identify all business debts including loans, equipment finance, and director loans. Understand what transfers with the business.
Consider engaging an accountant
For any significant business purchase, having an accountant review the financial records is worth the investment. They will spot issues that non-specialists miss.
Legal due diligence
Examine the business's legal structure, contracts, and compliance. Understand what rights and obligations transfer with the business.
Ownership & Title to Assets
Verify that the business actually owns the assets being sold. Check for security interests registered on the PPSR.
Customer & Supplier Contracts
Review key contracts. Can they be assigned to you? Do they contain change of control provisions?
Employment Agreements
Review employment agreements for all staff. Understand leave balances, notice periods, and special arrangements.
Intellectual Property
Verify ownership of trademarks, domain names, patents, and software. Many businesses use IP without clear ownership.
Litigation History
Check for any past, current, or threatened litigation. This includes employee claims and regulatory actions.
Regulatory Compliance
Understand what licences and consents the business needs. Verify they are current and transferable.
Operational due diligence
Look at how the business actually runs. Understand whether the business can continue to perform after you take over.
Key Customer Concentration
If one customer represents more than 20% of revenue, that is a significant risk. What happens if they leave?
Supplier Dependencies
Critical suppliers can hold significant power. Are there alternative suppliers? Could supply be disrupted?
Key Person Risk
Would the business function without the current owner? Are there key employees whose departure would be catastrophic?
Systems & Technology
What systems run the business? Are they adequate and maintained? What needs upgrading?
Physical Assets
Inspect physical assets personally. Plant and equipment may look fine in the accounts but be in poor condition.
Warranties & Returns
For product businesses, understand warranty obligations. Historical products can generate future claims.
Red flags to watch for
Some issues encountered during due diligence are serious enough to reconsider the entire transaction.
Reluctance to Provide Information
Sellers who delay, make excuses, or become defensive when asked for documents are concerning. A seller with nothing to hide makes information readily available.
Missing or Incomplete Records
Poor record-keeping may reflect bad administration, but it also makes verification impossible. If you cannot verify claims, you cannot rely on them.
Unexplained Performance Changes
Sudden improvements in profitability before sale, or unexplained drops in recent periods, need investigation.
Unusual Timing on Major Decisions
Long-term contracts signed just before sale, key staff departures, or recent equipment purchases all warrant scrutiny.
Key Relationship Instability
If major customers, suppliers, or employees are leaving or indicating they will not continue after sale, the business you are buying may not be the business you saw.
When to walk away
Not every business purchase should proceed. Due diligence exists precisely to give you the opportunity to make an informed decision.
Consider walking away if:
The sunk costs of due diligence are small compared to buying a business that turns out to be worth less than you paid. Walking away is disappointing but sometimes necessary.
Key Takeaways
Due diligence is your opportunity to verify seller claims before committing
Cover financial, legal, and operational aspects thoroughly
Red flags should trigger deeper investigation or withdrawal
The lease is often one of the most important documents to review
Engage professionals - the cost is worth it for significant purchases
Walking away from a bad deal is sometimes the right decision
Related Reading
Asset Sale vs Share Sale: Understanding the Difference
Should you buy the company's assets or its shares? We explain what transfers under each scenario and why it matters.
Warning Signs Your Business Is in Difficulty
Recognising early warning signs of business distress gives you more options. Here are the signals that should prompt immediate action.