Buying an existing business can be a faster path to profitability than starting from scratch — but only if you know what you're buying. In Australia, businesses are sold "as is" in most cases, and undisclosed liabilities can turn a bargain into a nightmare. Here's your financial due diligence checklist.
1. Financial Statements (3 Years)
Request and review the last 3 years of:
- Profit & Loss statements — look for trends. Is revenue growing, stable, or declining? Are margins improving or compressing?
- Balance Sheets — check for hidden debts, large creditor balances, or unusual related-party loans.
- Cash flow statements — a business can be profitable but cash-poor. Check operating cash flow vs reported profit.
- BAS lodgments — compare reported GST turnover with the P&L. Discrepancies are a red flag for unreported cash income or inflated revenue.
2. Tax Compliance Check
- ATO portal check: Request the seller's ATO Integrated Client Account to verify all BAS, income tax, and super obligations are up to date.
- Outstanding ATO debts: Any existing debt may transfer with the business (in a share sale) or affect the seller's ability to settle.
- Tax returns: Ensure all company/trust/partnership returns are lodged and assessed.
- Payroll tax: Verify registration and compliance in every state the business operates.
3. Employee and Payroll Review
- Employee entitlements: Annual leave, long service leave, and personal leave balances all transfer with the business. Calculate the dollar value of these liabilities — they can be significant.
- Award compliance: Has the business been paying employees correctly? Underpayment liabilities can transfer to the new owner.
- Super compliance: Check that all super guarantee charges have been paid on time. Late super incurs the non-deductible SGC.
- Contractor arrangements: Are any "contractors" actually employees? Misclassification liabilities transfer.
4. Assets and Liabilities
- Asset register: Verify all claimed assets physically exist and are in working condition.
- Leases: Review property leases, equipment leases, and vehicle leases. Check terms, assignment clauses, and remaining obligations.
- Stock valuation: Do an independent stocktake. The seller's claimed stock value may include obsolete or expired items.
- Intellectual property: Trademarks, domain names, social media accounts — ensure these transfer with the sale.
- Debtor quality: Review the aged receivables. Are major debtors actually collectible, or are they bad debts being carried on the books?
5. Legal and Regulatory
- Licences and permits: Can they be transferred to you? Some require new applications.
- Pending litigation: Any current or threatened legal actions against the business.
- Customer contracts: Review key contracts for change-of-ownership clauses that allow termination.
- Supplier agreements: Ensure critical supplier relationships will continue post-sale.
6. Structuring the Purchase
| Structure | What You Buy | Key Risk |
|---|---|---|
| Asset purchase | Equipment, goodwill, stock, IP | Employee entitlements still transfer |
| Share purchase | The entire company (Pty Ltd) | All liabilities transfer — including hidden ones |
Key Takeaways
- Review 3 years of financials and cross-check P&L against BAS turnover.
- Verify ATO compliance — outstanding debts and unlodged returns are deal risks.
- Calculate employee leave liabilities — they transfer to you on purchase.
- Do an independent stocktake and asset verification.
- Asset purchases are generally safer than share purchases for limiting liability.