Buying or selling a business? Your due diligence is a vital part of the process. Our due diligence checklist will help you tick all the boxes.

Buying a business is exhilarating. You’ll likely be excited about the opportunities for your future. You’re probably already considering how you’ll update, modernise or put your own spin on the current business plan and structure. No matter how excited you are to get started, conducting thorough due diligence before taking the plunge is an absolute must. 

But due diligence is not just for a purchaser. As a vendor, you’ll also need to be prepared, including collecting all the necessary information, ensuring it’s correct and presenting it in a way that shows your business in its best light. 

So, what is business due diligence for both a purchaser and a vendor? And what is the best way to accomplish it?

What is due diligence?

Business due diligence is the process of thoroughly investigating all relevant aspects of a business for sale. As part of it, you will review operations, financials, legal and tax compliance, intellectual property, assets, liabilities and customer and supplier contracts, among many other things. You may also look at other details that are important to the specific business you’re working through – such as shipping contracts or leasing arrangements. 

Generally, due diligence is conducted after a purchaser and a vendor have agreed to a deal in principle but before any binding agreement has been reached.

Due diligence when buying a business

When you’re buying a business, due diligence provides you with valuable information about two critical issues. First is the value of the business. Second, the risks associated with buying it. When done correctly, the purchaser’s due diligence will help you accurately determine whether the business is a good risk for you. It also ensures that you’ll be buying something that will make you money rather than just cost you money. 

Due diligence when selling a business

On the sale side, due diligence is just as important as the purchaser's, though sometimes it’s overlooked. This process includes three main elements. First, collecting and collating all the documents required for the purchaser to review. Second, ensuring that all the information is complete and correct. And third, preparing them in a way that is accurate but also presents your business in the best light. 

This third prong is also the impetus to go through your business and manage any gaps that will make your business less appealing and the transition more difficult. This might mean modernising your document management and retention system. Or it could mean negotiating your supplier contracts for a longer term. 

Ensuring that you’ve done your due diligence as the vendor will mean you’re in the best position to accurately answer and respond to any of the buyer’s questions while also presenting your business in the best light.

Business due diligence checklist

Your business due diligence checklist needs to cover all the elements here and also anything additional and specific to the business that you’re buying or selling. Use the table below as a jumping-off point and tailor it to your own needs.

DUE DILIGENCE CHECKLIST

Questions:

Notes:

Financial:

Review company financial statements for the last 3 financial years.

You want to ensure that the business is profitable and that the price reflects the position of the business. You should speak to your accountant about valuing the business.

What is the projected financial performance?

This involves assessing the business’ current profit and loss sheet, reviewing the balance sheet, and assessing the client base and the client retention. This is true mostly for the service industry but can apply to the retail industry.

Have all BAS statements been completed and paid for the last period? Are GST and tax payments up to date?

Whilst this is not a strict requirement, it will give you a good overview of the recent sales of the business.

Have you reviewed the operational expenses?

Is the business paying too much in expenses? Can you review or improve this?

Has any director provided any personal guarantees?

Personal guarantees are where the individual director guarantees the obligations of the company. If the company is unable to meet its debts than the guarantor must. Guarantors usually need to be replaced with the sale of a business.

Are all company assets free from any liability or other encumbrances?

Sometimes assets can be financed in which case the financier may register its interest on the PPSR. It is kind of like a mortgage but it secures everything other than real estate.

Perform ASIC organisation extract.

This is important to ensure that the people who say they are the directors and shareholders are actually who they say they are.

Perform a PPSR Search on the company.

This will tell you if any financier has registered an interest over any of the business assets.

Does the company hold any intellectual property rights?

It is extremely important that you ensure that the IP rights are assigned to you when the business is purchased.

Legal:

Are all relevant insurances in place for the company?

Insurance is usually a standard requirement for all businesses and industries. It can also assist you in estimating your costs of premiums.

Has the company claimed on their insurances? Have you obtained a claims history?

This will give you a good overview of the risks associated with the business and the location. Claims history can allow you to make an informed decision about the area.

Are there employees? If so, are all employee entitlements paid up to date (including superannuation)?

Some employee entitlements are not negotiable (such as super) and if an employee is transferring with the business, so do their entitlements – this means that an adjustment must be made on settlement.

Have you reviewed all employee contracts?

You need to ensure that all contracts are in line with the current award.

Have you reviewed all licenses, permits, contracts and leases required for the business operations?

You need to ensure that they meet the needs of the company.

Are all necessary supplier agreements in place and are they enforceable?

These need to be in line with operational requirements and legally enforceable.

Due diligence support

Whenever you’re considering buying or selling a business, you should conduct the entire process – including due diligence – with the help of your commercial lawyer, as well as your accountant and business adviser. 

At Patrick Dawson Law, we help you best understand every element of the business – whether buying or selling – to ensure that you’re making the best decisions for your situation. We can help you prepare your due diligence disclosures or understand the disclosures being presented to you. We’ll also be on hand to advise and assist in negotiating the purchase price and the contractual elements of your agreement once your due diligence is complete.

Patrick Dawson Law
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Get in touch with our expert team for a free initial consult. We’re here to help you with your business due diligence so you can buy or sell a business with excellent outcomes now and in the future.

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