Buying an existing business can be one of the most rewarding — and riskiest — decisions you’ll ever make. A landmark study by NYU Stern professors Baruch Lev and Feng Gu, analysing over 40,000 acquisitions across four decades, found that 70–75% of acquisitions fail to deliver their intended value (Fortune, 2024). McKinsey & Company’s own research echoes this: 42% of the time, pre-merger due diligence failed to provide an adequate roadmap for capturing the expected value (McKinsey).

The common thread? Inadequate due diligence. Whether you’re purchasing a café in Melbourne, a trades business in Brisbane, or an NDIS provider in Sydney, the due diligence process is your single biggest safeguard against buying someone else’s problems.

This guide provides a comprehensive, evidence-based checklist tailored specifically for the Australian market — covering every financial, legal, operational, and regulatory area you need to investigate before committing your capital.

What Is Due Diligence, and Why Does It Matter?

Due diligence is the systematic investigation and analysis of a business before you complete a purchase. It’s your opportunity to verify everything the seller has told you, uncover hidden risks, and confirm the business is worth what you’re paying.

According to the KPMG 2025 M&A Deal Market Study, 41% of dealmakers cite completing due diligence as the top obstacle in closing deals — ahead of even agreeing on valuation (44%). This tells us something important: due diligence is hard, it takes time, and the temptation to rush it or cut corners is real.

But the cost of skipping it is far greater. As one Australian advisory firm documented, a seemingly straightforward $6 million acquisition uncovered $600,000 in hidden payroll tax liabilities during due diligence — a discovery that dramatically changed the deal’s economics (Salt Financial Group).

How Long Does Due Diligence Take?

For most small-to-medium business acquisitions in Australia, due diligence takes 30 to 90 days, with 45–60 days being typical for well-organised businesses. More complex transactions — those involving multiple locations, significant employee numbers, or regulatory considerations — may require three months or longer (DueDilio).

Don’t rush this process. The research is clear: Lev and Gu found a “reverse learning curve” in acquisitions, where failure rates have actually increased over time despite growing experience. Overconfidence and time pressure are among the leading culprits (BCG Henderson Institute).

1. Financial Due Diligence

Financial due diligence is where most buyers start — and rightly so. You need to verify that the revenue, profit, and cash flow figures the seller has presented are accurate, sustainable, and not artificially inflated.

Documents to Request

  • Profit and loss statements for the last 3–5 years
  • Balance sheets for the same period
  • Cash flow statements — actual, not projected
  • Business Activity Statements (BAS) — lodged with the ATO for the last 2–3 years
  • Tax returns — business and, if a sole trader or partnership, personal
  • Aged receivables and payables — who owes the business money, and who does the business owe?
  • Debt schedule — all loans, leases, hire purchase agreements, and credit facilities
  • Bank statements — at least 12 months to verify cash flow patterns

Key Questions to Investigate

  • Revenue concentration: Does more than 20–30% of revenue come from a single customer? If so, that customer’s departure could devastate the business. This is one of the most commonly overlooked risks in small business acquisitions.
  • “Adjusted” or “normalised” EBITDA: Sellers often present adjusted earnings that remove personal expenses, one-off costs, and owner salary. Verify every single adjustment independently. What the seller considers a one-off, you may find is a recurring pattern.
  • Working capital trends: Is the business holding more inventory or receivables than it should? This can mask cash flow problems.
  • Seasonality: Understand the seasonal revenue pattern. A business sold during its peak season can look much healthier than its annual average.

2. Legal Due Diligence

Legal due diligence protects you from inheriting disputes, non-compliant contracts, or regulatory problems that could cost you dearly after settlement.

Business Structure and Registration

  • Verify the business’s ABN and ACN through the Australian Business Register
  • Check ASIC records for the company’s registration status, directors, shareholders, and any regulatory actions
  • Confirm the business name registration is current and transferable
  • Understand whether you’re buying via an asset sale or share sale — this has significant tax, liability, and employment law implications

Contracts and Agreements

  • Review all customer contracts — especially any with change-of-ownership clauses that could allow termination on sale
  • Review supplier agreements — are terms favourable? Are there exclusivity arrangements?
  • Review the property lease — this is critical. How long is remaining? Can it be assigned or renewed? What are the rental increase terms?
  • Check for any non-compete or restraint of trade clauses that apply to the seller

Intellectual Property

  • Confirm ownership of trademarks, patents, and domain names
  • Verify the business actually owns (not just licences) any proprietary software, processes, or content
  • Check IP Australia records for registered trademarks

Litigation and Disputes

  • Request disclosure of any current, pending, or threatened legal proceedings
  • Search court records for any history of disputes
  • Check for WorkCover or workers’ compensation claims

3. Tax Due Diligence (Australian-Specific)

Tax due diligence in Australia involves several layers that are unique to our regulatory environment. Getting this wrong can be extraordinarily expensive.

ATO Compliance

  • Verify the business is up to date with BAS lodgements and payments
  • Check for any outstanding ATO payment plans or disputes
  • Confirm PAYG withholding has been correctly calculated and remitted
  • Verify superannuation guarantee obligations have been met — the ATO has significantly increased enforcement in this area

GST Considerations

If you’re buying the business as a going concern, the sale may qualify as GST-free under ATO guidelines. For this to apply:

  • The business must be operating and profitable at the time of sale
  • Both buyer and seller must be registered for GST
  • The sale must include everything needed to continue operating the business
  • The parties must agree in writing that the sale is of a going concern

Capital Gains Tax (CGT)

Sellers will be thinking about CGT — and you should understand the implications too, as they affect negotiation dynamics. Australia offers four small business CGT concessions that may reduce the seller’s capital gain to zero (business.gov.au). These concessions are available when the business has an aggregated turnover under $2 million or net CGT assets under $6 million.

Payroll Tax

Payroll tax is a state-based tax with different thresholds and rates in each state. The $6 million acquisition case study mentioned earlier discovered $600,000 in payroll tax exposure because employees had been misclassified as contractors. Have your accountant specifically investigate contractor vs employee classifications (Salt Financial Group).

Stamp Duty

Transfer duty on business purchases varies by state:

  • NSW: No transfer duty on business asset sales (since 1 July 2016), except for land and leases
  • VIC: No stamp duty on business asset transfers (other than real property)
  • QLD: Stamp duty is payable on certain dutiable property within 30 days of transfer

Always get state-specific advice from your solicitor (LegalVision).

4. Employee and HR Due Diligence

This is an area where Australian buyers are particularly vulnerable — and where many get caught out. The Fair Work Act 2009 (Part 2-8) has specific provisions around the transfer of business that differ significantly from other jurisdictions.

Transfer of Business Provisions

Under the Fair Work Act, a transfer of business occurs when an employee terminates with the old employer and starts with the new employer within three months, performing substantially the same work. When this applies:

  • Personal/carer’s leave balances ALWAYS transfer — there is no option to avoid this
  • Long service leave ALWAYS transfers — it cannot be paid out by the seller and zeroed
  • You may choose whether to recognise prior service for annual leave and redundancy, but you must inform the employee before their employment commences

The Long Service Leave Trap

This is a particularly costly area that NRA Legal describes as “alarmingly common”. When you purchase a business, you inherit employees’ prior service for long service leave purposes. If an employee with eight years of service reaches ten years shortly after you take over, you — not the seller — bear the full long service leave liability. This can amount to over two months’ wages per qualifying employee (NRA Legal).

Other Employment Checks

  • Review all employment contracts and any applicable enterprise agreements or modern awards
  • Check for any underpayment risks — the Fair Work Ombudsman has been increasingly active in enforcement
  • Identify key person dependency — if the business relies on one or two critical employees, what happens if they leave post-acquisition?
  • Review workers’ compensation history and any outstanding claims

5. Operational Due Diligence

Operational due diligence looks beyond the financials to understand how the business actually runs day-to-day. As Zimsen Partners notes, focusing only on financial due diligence is one of the most common mistakes buyers make.

Business Operations

  • Standard operating procedures (SOPs): Are processes documented? Can the business run without the current owner?
  • Owner dependency: How involved is the owner in day-to-day operations, sales, and customer relationships? Small businesses — and 97.3% of Australian businesses are small businesses (ASBFEO) — often have high owner dependency.
  • Supply chain: Are there alternative suppliers? What are the lead times? Are there exclusive agreements?
  • Technology and systems: What software, hardware, and IT infrastructure does the business use? Are licences transferable?

Equipment and Assets

  • Conduct a physical inspection of all equipment, vehicles, and physical assets
  • Verify ownership — search the Personal Property Securities Register (PPSR) for any registered security interests over the business’s assets
  • Check maintenance records and assess the remaining useful life of key equipment
  • Compare the asset register against what’s physically present

Licences and Permits

  • Identify every licence, permit, and registration the business requires to operate
  • Determine whether they transfer automatically or whether you need to apply fresh
  • Check for industry-specific requirements (e.g., liquor licences, food safety, building licences, financial services licences)

6. Commercial and Market Due Diligence

Understanding the business’s market position and competitive landscape is essential for assessing future viability — not just current performance.

  • Customer base analysis: How many active customers does the business have? What’s the retention rate? Is the customer base growing or shrinking?
  • Competitive landscape: Who are the main competitors? What’s the business’s competitive advantage? Is it defensible?
  • Industry trends: Is the industry growing or declining? Are there regulatory changes on the horizon that could impact the business?
  • Online reputation: Check Google Reviews, social media, and industry forums. What do customers say about the business?

7. Cultural Due Diligence

This is often overlooked entirely, but Deloitte’s research found that 30% of M&A integration failures stem from cultural clashes between the acquiring and acquired organisations (Deloitte). Companies that conduct thorough cultural due diligence are 30% more likely to achieve expected synergies.

For small business buyers, cultural due diligence means understanding:

  • How does the current team interact and make decisions?
  • What is the prevailing management style?
  • How will your leadership approach differ, and how might staff respond?
  • Are there informal systems, relationships, or arrangements that aren’t documented?

Red Flags to Watch For

During your due diligence, be especially alert to these warning signs:

  • Seller refuses to provide complete financial records or delays access to information
  • Significant discrepancies between BAS lodgements and reported revenue
  • High employee turnover or multiple recent departures
  • Declining revenue trends that the seller attributes to “temporary” factors
  • Lease expiring soon with no written confirmation of renewal
  • Customer concentration where losing one account would significantly impact revenue
  • Outstanding ATO disputes or unfiled tax obligations
  • The seller is in a rush to close — urgency often masks problems

Your Professional Team

Due diligence is not a DIY exercise. You’ll need, at minimum:

  • Accountant: To verify financials, assess tax implications, and review the business’s financial health (expect $150–$500/hour in Australia)
  • Business lawyer/solicitor: To review contracts, structure the deal, and draft the sale agreement (expect $250–$600/hour)
  • Business broker or adviser: If you’re using one, they can facilitate information exchange and help with valuation
  • Industry specialist: For sector-specific considerations (e.g., a building consultant for a construction business)

Yes, professional fees add up — but they’re a fraction of the cost of buying a business with hidden problems. Think of it as insurance for what may be the largest purchase of your life.

The Bottom Line

With over 370,500 businesses closing their doors in Australia in 2024–25 (ABS), thorough due diligence isn’t just good practice — it’s essential. The 30–90 days you invest in this process could save you hundreds of thousands of dollars and years of stress.

Remember: the seller knows more about their business than you do. Your job during due diligence is to close that information gap as much as possible before you sign. Don’t rush, don’t cut corners, and don’t let excitement cloud your judgement.

If you’re considering buying a business in Australia, get in touch with our team to connect with experienced brokers who can guide you through the process.

Sources and Further Reading