What Is Due Diligence? A Complete Guide for Australian Businesses

Due diligence is the thorough “homework” you do before buying (or selling) a business. In practice, it means systematically reviewing every aspect of the target company – its finances, contracts, assets, operations and more – before finalising a deal.

For Australian businesses, due diligence is a critical safety-check to ensure you know exactly what you’re buying and avoid hidden pitfalls. It typically uncovers the true health and value of the business, so you can negotiate a fair price and avoid nasty surprises after the sale. In short, due diligence is about informed decision-making, risk management and legal compliance in a transaction.

Businesses must usually complete due diligence before signing a binding contract. For example, many sale agreements include a short “due diligence period” (often 5–10 business days) during which the buyer can terminate the deal if serious issues emerge. This period allows you to inspect everything in detail – from tax records to machinery – so that the signed contract reflects the true state of the business.

In Australia, both buyers and sellers also have legal obligations to be truthful: the Competition and Consumer Act (via the Australian Consumer Law) prohibits misleading or deceptive conduct in a sale. In other words, due diligence isn’t just best practice – it helps you stay within the law and avoid disputes over undisclosed problems.

Why Due Diligence Matters

Skipping due diligence is risky. For buyers, due diligence reveals whether the seller’s claims hold up. It “reveals the true health and value of the business” by spotting hidden liabilities or inflated profits. You can verify revenue streams, check debts, confirm that tax and superannuation are paid, and identify any pending lawsuits or regulatory breaches before you commit. Armed with these facts, you can negotiate a fair purchase price or even walk away if the risks are too high.

For sellers, conducting due diligence in advance lets you fix potential problems and organise your paperwork so buyers see a clean, transparent business. This can maximise the sale price and speed up the deal. In either case, thorough due diligence prevents costly mistakes or disputes later on. It ensures that when you shake hands on the deal, neither side is left with unexpected debts or legal troubles.

As one Australian guide notes, completing due diligence helps you make fully informed decisions about the purchase – including setting the right price and deal terms.

• Uncover hidden risks: A proper due diligence review finds any liabilities (loans, unpaid taxes, legal claims, etc.) that aren’t obvious. This stops you from inheriting unexpected debts or legal problems.
• Verify financial claims: You confirm that profit-and-loss statements, balance sheets and cash flows are accurate. For example, check that what’s filed with the ATO (tax office) matches what’s reported to ASIC. Inconsistencies here can be red flags.
• Ensure legal compliance: You check that all licences, permits, and industry regulations have been met. Australian law bans misleading statements in sale contracts, so due diligence helps make sure the seller hasn’t omitted anything material.
• Gain negotiation leverage: Armed with factual insights, you can negotiate the sale price or contract terms more effectively. Finding an issue in due diligence might let you lower the price or insist on seller warranties.
• Build confidence: Thorough diligence makes both buyers and investors more confident in the deal. You’ll “have a full picture of what you are purchasing” and can proceed with certainty.

Key Areas to Investigate

Due diligence spans many parts of a business. A complete review typically includes several key categories:

• Financial Due Diligence: Check all financial records. Examine audited profit & loss statements, balance sheets and cash flows (usually the last 3–5 years). Reconcile bank statements, aged receivables/payables, fixed asset registers, loan documents and any management accounts or budgets. In Australia pay special attention to tax compliance: compare the business’s BAS/ATO filings with ASIC records, and look for any discrepancies in tax returns. Also review payroll and superannuation obligations – unpaid super or payroll tax is a common local liability.
• Legal Due Diligence: Review all legal and contractual obligations. This includes sales contracts, leases (for property or equipment), supply and distribution agreements, franchise or dealership contracts, and any loans or mortgages. Check for ongoing litigation or disputes, insurance policies, warranties, indemnities and credit facilities. Ensure the company’s structure, shareholder agreements, licenses and registrations (ABN/ACN) are in order. Don’t forget to inspect compliance with workplace and safety laws too, since breaches can carry penalties.
• Commercial/Operational Due Diligence: Assess the business model and assets. Verify the value and condition of physical assets (stock, plant and equipment, inventory, property) and intangibles (intellectual property like trademarks, patents, software licences). Look at customer and supplier relationships: are there long-term contracts, key customers or reliance on a single supplier? Understand the market position and competition: for example, Andersen tax consultants note that commercial due diligence “involves assessing the target’s position in the market, understanding its competitors, and evaluating its future growth prospects”. Also review operational processes and IT systems to identify any integration issues or inefficiencies.
• Human Resources: Examine employee matters closely. Review all employment contracts, consultant agreements, payroll registers and any union awards or staffing agreements. Calculate accrued entitlements (annual leave, sick leave, redundancies) and ensure superannuation has been paid up to date. In Australia, misclassification of staff (e.g. contractors vs employees) can lead to large back-pay liabilities for super and leave.
• Regulatory and Industry Compliance: Check industry-specific regulations. For example, franchises must follow the Franchising Code of Conduct (including providing disclosure documents), and regulated industries (healthcare, finance, construction, etc.) have their own licensing rules. Also ensure consumer law compliance: Australian Consumer Law bans unconscionable or misleading conduct, and there may be product safety or environmental laws to consider.
• Tax Due Diligence: Beyond current filings, analyse tax history and exposures. Review GST returns, PAYG summaries and any tax audit correspondence. Identify any potential tax liabilities (e.g. R&D tax claims under ATO scrutiny or thin capitalisation issues). For cross-border businesses, international tax issues (transfer pricing, withholding taxes) may also be relevant.

Together, these areas form a due diligence checklist. In practice, firms often use detailed questionnaires and data rooms to organise this information, inviting both internal experts and external advisers (accountants, lawyers) to review everything.

Steps in the Due Diligence Process

The due diligence process can be complex, but it generally follows a clear sequence:

1. Plan the Scope. First, decide what needs investigating. Tailor your focus to the industry and deal size. For a retail business, key areas might be inventory and customer contracts; for a tech firm, IP and software licences could be top priorities. Make a checklist of questions and documents you’ll need. (Sellers can save time by preparing these documents in advance.)
2. Gather Information. Next, collect all relevant documents. This typically includes financial statements, tax returns, bank statements, legal contracts, payroll records, corporate records, insurance policies, asset registers, and any licences or permits. Use a secure “data room” (often online) where the buyer and their advisers can access the information.
3. Review and Analyse. Go through each document in detail. Verify figures in the accounts (recompute totals, compare to tax returns), and question any anomalies. Key questions to ask include: Are revenues and profits genuinely as stated? Are debts or contingent liabilities hidden somewhere? Are contracts assignable?. Assess the quality of earnings (using ratio analysis or industry benchmarks) and stress-test assumptions. Many buyers run spreadsheets to model different scenarios. Where expertise is needed, involve accountants, financial analysts or industry experts – many issues (tax exposures, asset valuations, accounting treatments) require specialist insights.
4. Raise Issues and Negotiate. Due diligence is interactive. If something is unclear or concerning, ask the seller for clarification or additional documentation. You may issue formal requests for information (RFIs) on odd transactions or missing details. If you find problems (e.g. a big pending legal claim, or unpaid taxes), you can negotiate remedies – for instance, asking the seller to fix the issue before closing, adjusting the price, or providing warranties and indemnities in the contract. Open communication helps – note that concealing information can invalidate contracts or lead to legal claims.
5. Finalise the Deal (or Walk Away). Once all questions are addressed, decide whether to proceed. If everything checks out, you move to formalise the sale agreement. This may involve adjusting the sale price (for discovered liabilities), adding specific conditions, or structuring payments (escrow holds) to cover any risk. In some cases, due diligence uncovers a fatal flaw and the best option is to terminate the agreement. Either way, the outcome of due diligence directly shapes the final deal terms.

Throughout this process, maintaining confidentiality (via NDAs) and a cooperative tone usually yields the best results.

In Australia, it’s also common to involve professional advisers at key stages – for example, lawyers will review the legal documents and tax advisers will interpret the financials – to ensure nothing is overlooked.

Australian Legal and Compliance Considerations

In the Australian context, several legal points are especially important during due diligence:

• Australian Consumer Law (ACL): Under the ACL (part of the Competition and Consumer Act 2010), a seller must not engage in misleading or deceptive conduct. In practice, this means the seller legally must disclose material issues to the buyer. Due diligence confirms that all statements made about the business are accurate and complete. If you find something the seller didn’t disclose, you may have remedies under the Act (for example, claims for misrepresentation).
• Contract Warranties and Indemnities: The sale agreement will contain warranties (promises that certain facts are true) and indemnities (promises to cover losses for specific issues). Due diligence identifies what warranties you need – for instance, the seller may warrant that there are no undisclosed debts or that employees are properly classified.
• Employee Entitlements: Australian law requires that accrued entitlements (annual leave, sick leave, long service leave, and superannuation guarantees) transfer fairly when a business changes hands. During due diligence, check that all superannuation has been paid and that payroll tax (which varies by state) is up to date. Missed super contributions or payroll tax can become the buyer’s problem after the sale.
• Intellectual Property: Make sure trademarks, patents and domain names are properly registered and owned by the company. Failing to transfer IP rights can leave you without key assets.
• Franchising and Industry Codes: If the business is a franchise, the Franchising Code of Conduct imposes strict disclosure obligations, and a franchisee must provide a disclosure document before sale. Other regulated industries (building, health, childcare, financial services, etc.) have specific licences and disclosure requirements. Check compliance with the relevant industry regulators.
• Privacy and AML Laws: If the business handles personal data or money transfers, ensure it is compliant with privacy laws and anti-money-laundering (AML/CTF) regulations. For example, customer due diligence checks may be required under AUSTRAC rules (especially in financial services).

Being aware of these obligations helps the buyer avoid legal traps. Remember that in Australia, a company’s directors are legally obliged to exercise due care and diligence in acquisitions (Corporations Act s180), so thorough due diligence isn’t just good practice – it helps satisfy director duties too.

Working with Professionals

Due diligence can be time-consuming and technical. Most buyers enlist professionals to assist. An accountant can delve into the numbers, an attorney can scrutinise contracts and corporate documents, and sometimes industry consultants can assess market or technical risks.

Business Queensland advises that “all documents should be inspected by lawyers and accountants” – covering company structure, financials, contracts and employment matters. Experienced advisers know what red flags to look for and can often spot subtle issues that laypeople miss (e.g. related-party transactions, non-arm’s-length deals, or tax “gotchas”).

Working with experts also makes the process faster and more reliable. For example, forensic accountants can automate checks on large datasets, and legal due diligence checklists ensure nothing is overlooked. Remember, while professional due diligence incurs a cost (see below), it is generally a smart investment compared to the cost of unknowingly buying a troubled company.

Timing and Cost of Due Diligence

Timeframes vary by deal size. For a simple small business acquisition, a basic due diligence might be done in a few weeks; for complex multi-million-dollar deals it can stretch to several months.

As a rule, allow at least 4–8 weeks to conduct thorough due diligence on an SME, especially if you need time for accountants and lawyers to analyse everything. Faster turnarounds are possible if the documents are well-organised and the seller is responsive.

The cost of professional due diligence also varies widely with complexity. In Australia, costs roughly scale with business size: an accounting review might run $20,000–$100,000 for a medium-sized enterprise.

Lawyers or specialists add to that. While this may seem high, consider it an insurance policy: investing in due diligence often saves far more by avoiding overpayment or unexpected liabilities. Indeed, Amplify11 estimates that small buyers typically recoup their due diligence spend many times over by uncovering issues that would have cost far more down the track.

Conclusion

Due diligence isn’t just a legal or financial formality—it’s the foundation of a smart transaction. By carefully reviewing financials, contracts, tax compliance, operations, and regulatory obligations, Australian businesses can move forward with certainty, not guesswork. For buyers, it protects against hidden risks and overpayment; for sellers, it strengthens credibility and maximises value. With professional support and a structured process, due diligence transforms uncertainty into informed decision-making, helping both sides finalise deals with confidence. At Infinity22, we see it as the safeguard that ensures every handshake closes on solid ground.