Buying A Business: A Buyer’s Legal Due Diligence Checklist

Prepared by Gable Lawyers
How to use this checklist. Due diligence is the investigation you carry out before committing to buy. The goal is simple: confirm that what you are buying is what you have been told you are buying, that it can be transferred to you and that no undisclosed liabilities come with it. Work through each section below, record what has been provided and reviewed, and note any item that is missing, unclear, or a concern. Anything you cannot verify should be addressed in the sale contract through warranties, conditions, price adjustments, or a holdback.

Structure matters. An asset sale (you buy the assets and goodwill) the items below are relevant.

General checklist. This checklist is a starting point only and is not in any way a comprehensive checklist in every situation.
Allow four to twelve weeks for thorough due diligence and engage your lawyer and accountant before you sign anything binding.

Disclaimer. This checklist is general information only and is not legal, financial or tax advice. It is intended as a starting point for buyers and does not cover every issue relevant to a particular transaction. Every business and every deal is different. You should obtain specific legal and accounting advice before buying a business. Gable Lawyers would be glad to assist.

1. Deal structure and preliminaries
Get the basic shape of the deal right before spending money on detailed investigation.
☐ Confirm that you are buying a business or assets and not shares in the seller’s company.
☐ Identify the correct legal seller (individual, company or trust) and confirm their authority to sell.
☐ Confirm the buyer entity and structure with your accountant (asset protection and tax).
☐ Obtain and review any heads of agreement, term sheet or letter of intent before signing and obtain advice.
☐ Check whether a non-disclosure agreement is in place before confidential information is exchanged.
☐ Clarify the proposed purchase price, deposit, where the deposit is payable (make sure it is a trust account and not the seller’s account) and how the price is allocated across assets.
☐ Identify any earn-out, vendor finance, retention, or deferred payment and how it is secured.
☐ Confirm whether the sale is a going concern for GST purposes (and the conditions for that).
☐ Agree an exclusivity period so the seller does not negotiate with others during due diligence.
☐ Set the due diligence timetable and a list of documents required from the seller.

2. Financial due diligence
Usually led by your accountant. Confirm the business actually earns what is claimed.
☐ Audited or reviewed financial statements for the last three financial years.
☐ Year-to-date management accounts and the most recent balance sheet.
☐ Business Activity Statements, income tax returns, and PAYG records.
☐ Verification of revenue, recurring income and any one-off or non-recurring items.
☐ Add-backs and normalisation adjustments to profit reviewed and substantiated.
☐ Aged debtors (receivables) list and the realistic recoverability of those debts.
☐ Aged creditors (payables) and any overdue or disputed accounts.
☐ Bank loans, overdrafts and equipment finance.
☐ Details of any charges, mortgages, or security interests registered on the PPSR.
☐ Working capital required to run the business and what is included in the sale.
☐ Stock or inventory levels, valuation method, and treatment of obsolete stock and whether any stock is included in the purchase price.

3. Tax
☐ Confirm superannuation guarantee contributions for employees are fully paid and current.
☐ Confirm payroll tax obligations (and any grouping issues) are met in each relevant state.
☐ Consider stamp duty (transfer duty) payable on the transaction and who bears it, if any.
☐ Confirm GST treatment, including any going concern exemption requirements.
☐ Discuss CGT outcomes and any small business CGT concessions with your accountant.
☐ Allocate the purchase price across assets in a way that is defensible for tax and duty.

4. Corporate structure and ownership
☐ Company extract (ASIC) of the seller confirming directors, shareholders and registered office.

5. Material contracts and commercial agreements
Confirm the contracts the business depends on exist, transfer to you, and remain workable.
☐ Schedule of all material contracts with customers, suppliers, and service providers.
☐ Check each key contract for assignment (consent to transfer).
☐ Identify contracts that automatically terminate or reprice on sale.
☐ Review key terms: duration, exclusivity, minimum volumes, pricing and termination rights.
☐ Identify any contracts on unfavourable terms or that lock the business in long term.
☐ Confirm distribution, agency, licensing or franchise agreements and their transferability.
☐ Identify any guarantees, indemnities or warranties the business has given to third parties.
☐ Confirm finance and equipment leases and whether they can be assigned or must be paid out.

6. Customers and suppliers
Goodwill often depends on a few key relationships. Test how durable they are.
☐ Customer concentration: what share of revenue comes from the top few customers.
☐ Whether key customer relationships are contractual or informal and likely to continue.
☐ Supplier concentration and whether critical suppliers can be replaced if needed.
☐ Any rebates, credits, or special terms that will not survive the sale.
☐ Outstanding customer complaints, warranty claims or disputes.

7. Premises and leases
For most physical businesses the lease is one of the most important documents. Read it in full.
☐ Copy of the lease (or licence) for each premises, including any variations.
☐ Remaining term and, critically, any options to renew and how they are exercised.
☐ Whether the lease can be assigned to you and the landlord’s consent requirements.
☐ Rent, rent review mechanism, outgoings and any percentage or turnover rent.
☐ Make-good and reinstatement obligations at the end of the lease.
☐ Any personal guarantee or bank guarantee the landlord requires from the buyer.
☐ Permitted use under the lease and whether it matches how the business operates.
☐ Compliance with the relevant Retail Leases Act, including any disclosure obligations, if applicable.
☐ Condition of the premises, fit-out ownership, and any outstanding repair notices.
☐ Condition precedent in the contract of sale that the lease is assigned on current terms without changes.

8. Employees and contractors
Employee entitlements are a common source of post-completion liability. Confirm them precisely.
☐ List of employees with roles, start dates, status (full-time, part-time, casual) and pay.
☐ Copies of employment contracts, applicable awards and enterprise agreements, if any.
☐ Accrued entitlements: annual leave, personal leave and long service leave and what percentage is adjusted against the seller at completion (the higher percentage, the better it is for you).
☐ Confirm correct classification and that no employees are underpaid against the award.
☐ Confirm superannuation is paid and up to date for all employees.
☐ Identify key personnel and the risk of them leaving after the sale.
☐ Any restraint, confidentiality or IP assignment clauses in employee contracts.
☐ Independent contractor arrangements and any sham contracting or misclassification risk.
☐ How employee entitlements are treated in the sale (transfer, payout or adjustment).
☐ Any workers compensation claims, workplace disputes or current investigations.

9. Intellectual property
Confirm the business actually owns the brand and assets it trades on.
☐ Registered trade marks, their owner, classes and renewal status.
☐ Business names, domain names and social media accounts and who controls them.
☐ Confirm the seller owns key IP and that it transfers with the business.
☐ Ownership of website, software, code and any work created by contractors.
☐ Patents, designs and registered or unregistered IP rights.
☐ Confidential information, trade secrets and customer databases.
☐ Any IP licensed in from third parties and whether those licences transfer.
☐ Any allegation that the business infringes another party’s IP.
☐ Any other IP including any manuals, policies, etc.

10. Assets, plant, equipment, and stock
Confirm the physical assets exist, are owned, and are unencumbered.
☐ Asset register listing plant, equipment, vehicles and fixtures included in the sale.
☐ Confirm assets are owned outright, not leased or subject to finance, unless disclosed.
☐ PPSR searches to confirm no security interests over the assets being bought and ensuring that the contract of sale requires all PPSR registered security interests to be removed before completion.
☐ Condition, age and maintenance records of key equipment.
☐ Stock-take process and how stock value is finalised at completion.

11. IT systems, data, and privacy
Increasingly important. Confirm systems transfer and that data is handled lawfully.
☐ Key software, subscriptions, and licences, and whether they transfer to the buyer. If not, copy of any business data to be provided at completion.
☐ Ownership and access to systems, logins, hosting and customer data.
☐ Compliance with the Privacy Act and how personal information is collected and stored.
☐ History of any data breach or cyber incident.
☐ Whether customer consents allow the data to be transferred to a new owner.

12. Licences, permits, and regulatory compliance
A business that cannot legally operate after completion is worth far less than promised.
☐ Identify every licence, permit, registration and accreditation the business needs.
☐ Confirm each licence is current and can be transferred or re-applied for by the buyer.
☐ Industry-specific approvals (for example food, liquor, health, building, transport).
☐ Council approvals, planning and zoning compliance and permitted use of premises.
☐ Compliance with work health and safety obligations and any notices issued.
☐ Compliance with consumer law, advertising and industry codes.

13. Litigation, disputes, and liabilities
☐ Current, threatened, or anticipated litigation, claims or disputes.
☐ Disputes with customers, suppliers, employees, landlords or regulators.
☐ Any judgments, court orders or enforcement action outstanding.
☐ Warranty, product liability or defect claims.
☐ Any contingent or off-balance-sheet liabilities.

14. Insurance
Confirm the business has been properly covered and check for claims history.
☐ Current insurance policies, sums insured and expiry dates.
☐ Claims history over recent years and any refused or disputed claims.
☐ Gaps in cover (for example public liability, professional indemnity and business interruption).
☐ Arrange your own cover to commence from completion.

15. Franchise-specific items (if buying a franchise)
Additional protections and obligations apply under the Franchising Code of Conduct.
☐ Obtain the disclosure document and allow the full consideration period before signing.
☐ Review the franchise agreement, operations manual (even if at the premises of the franchisor) and any associated lease.
☐ Confirm the franchisor consents to the transfer and that any transfer fees payable is payable by the seller (make it condition precedent in your contract of sale).
☐ Check the remaining franchise term, renewal rights and territory (exclusive or not).
☐ Review fees: initial, ongoing royalties and marketing fund contributions.
☐ Review restraint of trade, refurbishment and termination clauses.
☐ Speak to current and former franchisees about their experience.
☐ Obtain advice from a franchise lawyer on the franchise agreement.

16. The sale contract and transaction documents
Due diligence findings should be reflected in the contract. This is where your protection is built in.
☐ Contract of sale of business agreement to be reviewed by your lawyer.
☐ Conditions precedent (for example finance, landlord consent, licence transfers etc.) included.
☐ Warranties and representations from the seller covering key risks identified.
☐ Indemnities for specific known or potential liabilities.
☐ Restraint of trade preventing the seller from competing or poaching staff and customers.
☐ Price adjustment mechanism for stock, working capital, or completion accounts.
☐ Retention or holdback for unresolved risks, and how and when it is released.
☐ Apportionment of outgoings, employee entitlements, and prepaid amounts at completion.
☐ Deposit terms and what happens if the deal does not complete.
☐ Transitional support or training from the seller after completion.
☐ The seller’s director(s) to guarantee the seller’s performance of the contract of sale.

17. Completion and post-completion
A short list of practical steps to confirm a clean handover.
☐ Agree the completion checklist and what is exchanged at completion.
☐ Transfer of leases, licences, contracts and registrations confirmed.
☐ Notify suppliers, customers and authorities as appropriate.
☐ Ensure that all employees you wanted to engage have received and signed employment agreements.
☐ Release of any security interests over the assets or company.
☐ Hand over of keys, codes, logins, records and intellectual property.
☐ Final stock-take and price adjustment completed.
☐ Lodge any required transfers and pay duty within the relevant time limit.
☐ Register business name in your entity.

18. Common red flags
If you see these, slow down and get advice before proceeding.
☐ The seller is reluctant or slow to provide documents, or gives incomplete information.
☐ Revenue depends heavily on one or two customers or on the seller personally.
☐ The lease is short, has no options, or cannot be assigned.
☐ Key licences or approvals cannot be transferred to the buyer.
☐ Unpaid superannuation, underpaid staff or outstanding tax.
☐ Undisclosed disputes, claims or security interests.
☐ Pressure to sign quickly or to skip due diligence.

If you require a sale of shares checklist, please email us at info@gablelawyers.com.au.