Due Diligence when Purchasing a Business

1 November 2025 in Business Law | 4 min read | skip to FAQs

This brief article discusses due diligence when purchasing a business.

What is Due Diligence?

Due diligence refers to the process of making enquiries and investigations regarding a business in order to evaluate the financial value and assets of a business and assess and minimise the risks associated with a purchase by uncovering potential problems. The scrutiny includes financial, legal and market aspects of the business. Conducting effective due diligence investigations may also allow the purchaser to lower their offer to reflect problems or issues discovered in the due diligence findings. The process of due diligence will vary depending on the business being acquired and the circumstances of the transaction. The business lawyers at BSM can explain to you the matters that should be investigated during the process of due diligence. These include;

The Vendor

The purchaser should conduct relevant searches in relation to the vendor, including searches of ASIC records and bankruptcy searches. It is important to confirm that the vendor has the correct and current licences and permits required to run the business. It’s also sometimes helpful to understand why the vendor is selling the business. Assessing the day-to-day running of the business, including supplier and customer relationships also provides valuable information. This can include supplier and client feedback or complaints, online reviews and website statistics.

Employees

The purchaser should carry out enquires in relation to the business’ employees. For instance, in relation to employment contracts and the terms and conditions of these contracts. It is also prudent to be aware of existing entitlements of employees such as annual leave and long service leave. Interviewing employees can also provide valuable insight into the company culture and sometimes potential problems with the business.

Assets

Purchasers should carry out appropriate enquires into business’ assets, including;

1. Real estate owned.
2. If there is a lease of property, whether this is automatically transferred to the purchaser.
3. Intellectual property such as patents and trade marks.
4. Plant, equipment and fixtures. Furthermore, confirmation that they are licensed and in good working order.
5. Goods and is there an inventory that specifies what is included in the sale.
6. Domain names and social media accounts.
7. The business’ registered name.
8. Customer relationship management (CRM) systems and reward program data.

Formal Valuation

The purchaser may want to seek a professional valuation of the business. Conducting a formal valuation can assist the parties in determining an appropriate purchase price for the business. This is often conducted by an accountant or business lawyer.

Books and Records

It is essential for purchasers to peruse the business’ books and records. This is an effective way to verify the financial position of a business and identify any financial liabilities. It is important to review the past 3-5 years of financial statements, BAS, sales records and tax returns to assess the earnings of the business. It is prudent to check if the business has any outstanding refunds and warranties for goods and services. Confirming the cash flow and liabilities and debts is important to confirm the general health and growth potential of the business. 

Contracts

The purchaser should identify and examine all existing contracts, in particular crucial terms and conditions. This includes current agreements between the vendor and suppliers. The highly experienced business and commercial lawyers at Brander Smith McKnight are proficient at reviewing contracts and explaining any onerous or unusual clauses. For a detailed discussion on business contracts, see our related article on business sale and purchase agreements.

Legal Proceedings

It is important to ascertain whether there are any legal proceedings affecting the business and to assess the business’ susceptibility to future litigation. It is useful to assess issues of intellectual property ownership, regulatory compliance, and the seller’s right to sell the business. A lawyer specialising in business and commercial law is able to scrutinise business contracts and provide an assessment of this.

Licences

The purchaser should also check for licensing requirements associated with the business. This may involve reading specific legislation which creates business licensing requirements. This legislation can be reviewed and explained to you in simple language by BSM Sydney Lawyers.

Taxation

Due diligence also includes a consideration of the business’ tax obligations. This includes, income tax, GST, CGT, land tax and payroll tax. A business and commercial lawyer or accountant is able to assist you with this.

Stakeholders

Where appropriate, purchasers can discuss issues of concern with the business’ stakeholders. Stakeholders such as employees, customers and business contacts can provide a unique insight into the value of a business.

Markets and Competitors

It is also prudent to research the industry that the business is associated with to understand current market trends, competition, business location and customer demographics. Speaking with existing customers, suppliers and competitors can assist in this regard. Researching current and potential competitors is important to exclude an already saturated market or conversely a gap in the market. It is also useful to consider the success of of current competitors and how their marketing strategies operate.

Why Due Diligence is Important?

1. It minimises risks by exposing potential problems such as legal issues, potential future litigation, undisclosed debts and liabilities.
2. It provides an objective valuation of the business thus confirming if the asking price is reasonable.
3. It may provide the purchaser the ability to reduce their offer if the valuation is lower or unexpected problems are discovered.
4. It provides the purchaser with the confidence to make an informed decision about the current and potential future business opportunities and risks.

How can BSM Sydney Lawyers assist you?

BSM Sydney Lawyers can advise you on due diligence when making a business purchase. We have well informed, highly responsive and very experienced lawyers who pride themselves on giving premium legal advice to business clients. BSM Sydney Lawyer has over 3 decades of experience dealing with a wide range of business clients ranging from large corporations to sole practitioners. We deliver the same attention to detail and high quality service to all of our clients. The senior business lawyers at Brander Smith McKnight Sydney law firm offers a free 20-minute consultation.

FAQs

BSM Lawyer Sydney have offices conveniently located in Sydney CBD, Sutherland, Parramatta, Shellharbour and Wollongong.