Quick answer
Due diligence is the process of independently checking that what you've been told is true before you commit money. When buying a business, it means verifying the financials, leases, licences, staff, stock and debts. When lending, it's the lender doing the same to the borrower and the security. Done properly, it either confirms the deal, changes the price or terms, or stops a bad purchase.
Key points
- Buyers should independently check three to five years of financial records
- A PPSR search can reveal finance or security interests over the assets being sold
- Lenders run their own checks too, and will read the buyer's findings
- Due diligence findings often change the price or the loan amount, not just the decision
The phrase comes from the law, where it meant the care a reasonable person should take before acting. In business finance it’s simpler: check before you commit. In lending, two parties usually do it at once. The buyer investigates the business they’re buying, and the lender investigates the buyer and the deal.
What a buyer checks
The federal government’s business.gov.au advice is to independently collect three to five years of financial data, not just the summary in an information memorandum. Business Queensland’s checklist splits the work into financial, equipment and stock, legal, staff, regular expenses, intellectual property and software. In practice, the questions that matter most are:
- Are the profits real? Compare profit and loss statements with tax returns, BAS lodgements and bank deposits. Ask how each add-back was calculated.
- Is the lease secure? Check the term left, options to renew, and whether the landlord will assign it.
- What’s owed against the assets? Search the PPSR against the seller’s ACN or ABN, not only against individual items. A general security registration can cover equipment that isn’t listed separately.
- Who are the customers? If one client provides a large share of revenue, the price of goodwill should reflect the risk of losing them.
- Are licences and staff entitlements in order? Some licences don’t transfer, and accrued leave may come with the employees.
Our guide to due diligence before buying a business works through each area in more depth.
What a lender checks
A lender’s due diligence is part of its credit assessment. Expect ASIC company searches, director credit checks, PPSR searches, bank statement reviews and, for secured loans, a valuation. For a business purchase, the lender will also want the sale contract, the vendor’s financials and often the buyer’s own due diligence findings. A clean, well-organised report from your accountant can shorten the lender’s work noticeably.
| Buyer’s due diligence | Lender’s due diligence | |
|---|---|---|
| Main question | Is this business worth the price? | Will this loan be repaid, and is the security adequate? |
| Done by | Buyer, accountant, lawyer | Credit assessor, valuer, lender’s lawyer |
| Typical output | Proceed, renegotiate or walk away | Approve, change the amount or conditions, or decline |
A worked example
A buyer agrees to pay $480k for a suburban café in Adelaide and plans to fund it with $180k of savings and a $300k business acquisition loan.
During the 21-day due diligence period, the accountant finds the coffee machine and kitchen equipment are under a finance agreement with $38k still owing, registered on the PPSR. The figures also show the claimed profit assumed the vendor’s own long weeks behind the counter cost nothing.
- The buyer negotiates the price down to $445k and makes the vendor pay out the equipment finance at settlement.
- The lender, having seen the same report, approves $265k based on adjusted profit.
- The buyer settles with clear title to the equipment and a loan the business can carry.
Due diligence didn’t kill the deal. It repriced it, which is the most common outcome.
Buying a business and lining up the funding?
Checking the business thoroughly and arranging finance can happen side by side, and lining up funding early keeps your settlement date on track. Tell us about the purchase once you know the price and roughly how much you’ll need.
Ready to fund the purchase?
Share the asking price, your deposit and the settlement date. Expect the form to take about a minute; it doesn’t trigger any credit enquiry. We don’t auction your details off. One of our team reviews the deal and calls to discuss what fits. Accurate numbers, especially the business’s real profit, spare you wasted applications to funders that would have said no.
Frequently asked questions
How long does due diligence take when buying a business?
For a small business, often two to four weeks, set by a due diligence clause in the sale contract. Larger or more complex businesses can take longer. Agree a period long enough for your accountant and lawyer to do the work, and avoid waiving it to secure the deal.
Who pays for due diligence?
The buyer pays for their own accountant, lawyer and searches. Lenders usually pass on the cost of their own checks, such as valuations and legal fees, through application or establishment fees.
What is lender due diligence?
It's the lender's own investigation before funding: credit checks on the business and directors, ASIC and PPSR searches, bank statement analysis, verification of income, and a valuation of any property or equipment offered as security. It's part of the credit assessment.
Can I get finance to buy a business before due diligence is finished?
You can apply and often receive a conditional approval, but most lenders won't fund until they've seen key due diligence documents such as the vendor's financials, the lease and the sale contract. Starting the finance application early helps keep the settlement date realistic.
What if due diligence turns up a problem?
That depends on the contract. A due diligence clause normally lets the buyer withdraw, renegotiate the price or ask the vendor to fix the issue, such as paying out equipment finance before settlement.