Due diligence checklist for buying a business in Australia
Buying a business is the largest purchase most people will make outside their home, and unlike a house it can keep costing you after settlement. A weak lease, one customer worth 40% of revenue, an owner who is the business: none of that shows up on the asking price. Due diligence is how you find it before you pay, not after.
This is the checklist we'd want in front of us before signing anything. It's organised the way risk actually presents in small and micro businesses, and it doubles as a document request list you can send straight to the seller or their broker.
Before you read on: you can run a free SMEInspect Snapshot on any named business in minutes. It screens public records (registries, insolvency and licence checks, and online reputation signals) with no documents required. Use it to decide whether a target is worth the deeper work below.
How to use this checklist
Work top to bottom, but don't expect to finish in order. Due diligence is iterative: the financials raise questions you put to the seller, the answers send you back to the contracts, and so on. Three habits keep it honest.
Request everything in writing, and keep the requests dated. If a seller is slow or evasive on a specific item, that's worth noting in itself. And keep a clear line between what you've actually verified and what you're taking on trust — the gap between the two is where most post-settlement surprises come from.
You're not trying to confirm that the business is good. You're trying to find the reasons it might not be, and put a price on them.
1. Earnings quality and financial health
The asking price is almost always built on a multiple of earnings, so the earnings figure is the foundation of everything. Test whether it's real.
Request the last three full financial years plus the current year to date: profit and loss, balance sheet, and the lodged tax returns and BAS. Reconcile the P&L against the tax returns and the bank statements — the three should tell the same story. Where they diverge, ask why before you do anything else.
Scrutinise the add-backs. Sellers normalise earnings by adding back owner's salary, one-off costs and personal expenses run through the business. Some of that is legitimate; some is wishful. For every add-back, ask whether the cost genuinely disappears under new ownership. An owner's above-market salary, yes. "Marketing we won't need to repeat," usually not.
Look at the trend, not just the latest year. A business sold on its best-ever year, with the two prior years materially lower, is being timed. Margins that are quietly compressing tell you more than a single strong number.
Documents to request: 3 years P&L, balance sheets, tax returns, BAS; current-year management accounts; aged debtors and creditors; a reconciliation of normalised earnings with every add-back itemised.
2. Revenue and customer concentration
A business doing $2m across 400 customers is a different risk to one doing $2m across four. Concentration is the single most common reason a small acquisition disappoints after settlement: the buyer inherits relationships that were personal to the seller, and they walk.
Get a revenue breakdown by customer for the last two years. Calculate what your top one, top three and top five customers represent. Anything where a single customer exceeds 15–20% of revenue needs a contract, a transfer plan, and ideally a conversation with that customer before you commit.
Ask the same of contracts. Are the key ones in writing, are they assignable to a new owner, and do any contain a change-of-control clause that lets the customer walk when the business changes hands? A handshake arrangement that's run for a decade can still end the week you take over.
Documents to request: revenue by customer (2 years), top-customer contracts, any change-of-control or assignment clauses, churn data if available.
3. Owner dependence
Ask the hardest question early: when the seller leaves, how much of the business goes with them? In micro businesses the answer is often "most of it." The owner holds the customer relationships, the supplier goodwill, the pricing knowledge and the operational detail in their head. None of it transfers on a balance sheet.
Map what the owner actually does day to day. Who do customers ask for by name? Who sets prices, wins new work, and keeps the key staff? If the answer is "the owner" four times over, the business is closer to a job than an asset, and the price should reflect that.
A reasonable handover and a sensible non-compete reduce the risk but don't remove it. We rate owner dependence as one of the highest-impact red flags in any small deal, and go into it in more depth here.
Documents to request: an organisation chart, role descriptions, the proposed handover and training period, a non-compete undertaking, a list of relationships that are personal to the owner.
4. Premises and lease risk
For a location-dependent business (hospitality, retail, a clinic, a workshop) the lease can be worth more than the goodwill, and a bad one can make the business unsaleable. The lease often outlives your interest in the business, so read it as carefully as you read the financials.
Check the remaining term and the option periods. A café with two years left and no option is a different proposition to one with five plus five. Confirm the lease is assignable, and on what terms. The landlord's consent is usually required, and it's sometimes withheld or used as leverage to reset the rent. Look for change-of-control provisions, make-good obligations at the end of term, and any rent reviews (especially market reviews) that could step the rent up sharply.
Documents to request: the full lease and any variations, the assignment provisions, the landlord's consent process, outstanding make-good obligations, the rent review history and next review date.
5. Licensing and regulatory standing
Some businesses cannot legally trade without the right permits, and those permits don't always come with the sale. A liquor licence, a food licence, trade qualifications, a credit or financial services authorisation, industry registrations — confirm what's required, that it's current, and that it transfers to you or that you can obtain it.
This is jurisdiction-specific and easy to underestimate. The cost and time to get licensed yourself can change the economics of the deal entirely.
Documents to request: all licences and permits, evidence they're current, the transfer or reapplication process, any conditions or breaches on record.
6. Litigation, judgements and insolvency
Screen the entity and the owners against the public record. Current or threatened litigation, court judgements, payment defaults, and any history of insolvency or director disqualification all change the risk, and sometimes they change the structure you'd want for the deal too (assets versus shares).
A clean record doesn't guarantee a clean business, but a messy one is a clear signal to slow down and structure carefully. This is exactly the kind of screen a free Snapshot runs from public sources before you spend a dollar on advisers.
Documents to request: director and entity searches, disclosure of any current, threatened or past litigation, ATO and creditor payment status.
7. Online reputation and trading signals
Reviews, ratings and visible trading signals are free, current and hard for a seller to dress up. A steady decline in review volume, a recent run of poor ratings, a dormant social presence, or a website that's quietly stopped being updated can all contradict a healthy P&L.
Read the last two years of reviews, not just the average score. Look for patterns — service complaints, staff turnover, a change in tone after a particular date. Cross-check trading hours, response times and recent activity against what the seller is telling you.
8. Workforce and supplier risk
Staff and suppliers carry the same concentration risk as customers. A single key employee who holds the technical skill or the client relationships is a person-shaped point of failure. A sole supplier with no alternative leaves you exposed on price and continuity.
Review the team: who's on what terms, what entitlements you'd inherit, who's essential and whether they intend to stay. Check whether employees are correctly classified and whether superannuation and entitlements are up to date — unpaid liabilities can transfer. On the supply side, identify any single-source dependencies and whether those arrangements are contracted or informal.
Documents to request: the employee list with terms, entitlement and superannuation status, key-person identification, supplier list with contract status and any sole-source dependencies.
Pulling it together
Don't treat this as a pass/fail test. Work through it and you end up with two lists, the priced risks and the questions still owed to the seller, and from those you decide whether the asking price still makes sense. Plenty of businesses with real red flags are still worth buying, just not at the asking price, or not without a different structure and a longer handover.
If you want a fast, structured read before you commit time and adviser fees, that's what SMEInspect is built for. The free Snapshot screens the public record on any named business. The Full Report runs all eight risk areas above against the documents you have, ranks the red flags by severity, gives you the exact questions to put to the seller, and produces the SMEInspect Estimate — a risk-adjusted indicative range that sense-checks the asking price.
General information only. This article is not legal, financial or tax advice, and the SMEInspect Estimate is an automated, computer-generated indicative range — not a valuation. Get your own professional advice before you transact.