If you are buying a business, you need to conduct thorough legal, financial and other due diligence. You should engage experts to help you, like a lawyer, accountant, finance broker and financial advisor, depending on the nature of your acquisition.
Here’s some tips and hints about the things you need to think about before diving in.
Financial Review (an accountant or financial advisor can help you with this)
• Examine profit and loss statements, balance sheets, tax returns, and cash flow for at least the past 3-5 years.
• Check for debts, outstanding loans, and verify the value of assets and inventory.
• Assess the sustainability of cash flow and profitability trends – including cashflow forecasts based on the business’s past performance and how you expect to add to it.
Legal Review
• Review business structure, ownership, and registration details for things like the business name, website/domain name, contact numbers and social media handles. Ask yourself, what assets do I need to run this business? Make a list to check that these items/assets are included in the sale.
• Ensure all necessary licences, permits, and intellectual property rights are in place and transferable. What you need to look for will depend on the kind of business you are purchasing. For example, if you are buying a bar, does it have a transferable liquor license? If you’re buying a mechanic’s workshop that’s run from rented premises, does the landlord agree to transfer the lease to you and is the site DA approved?
• Review contracts with suppliers, customers, and employees. You will probably want to keep the business’s existing customers and maybe its employees, so you need to work out whether or not you need to formally assign any contracts to you or enter into new ones. The way transferring employees are treated in a business purchase can get quite technical and fiddly.
Are you buying the business/asset or the entity that owns it?
There is a difference between buying a business/asset and buying the entity (for example a company) that owns it.
Buying Shares in the Company (Entity Purchase)
• You acquire the company as a whole, including all assets, liabilities, contracts, and history.
• Pros: Simpler for continuity (contracts, employees, licences stay in place).
• Cons: You inherit all past and future liabilities, including any undisclosed or unknown issues (e.g., tax debts, lawsuits, employee claims).
• Due Diligence Focus: Extra attention to potential hidden liabilities and compliance history.
Buying the Business Assets (Business or Asset Purchase)
• You buy selected assets (e.g., equipment, stock, goodwill, contracts) and can choose which liabilities (if any) to assume.
• Pros: Greater control over what you acquire; generally, you do not inherit past liabilities unless specifically agreed.
• Cons: May need to renegotiate contracts, leases, and transfer licences; some assets or relationships may not be transferable.
• Due Diligence Focus: Ensure all key assets and contracts can be transferred, and clarify which liabilities (if any) you are taking on.
Buying a business is complex.
A common mistake is to focus to heavily on how you are going to run the business and ignore the groundwork you need to do beforehand to make sure you understand the business, learn how it operates currently and ensure that whatever agreement you have reached with the seller is documented properly.
It’s like buying a house – you wouldn’t do so without inspecting it, checking for defects, making sure you can afford mortgage repayments and doing things of that nature – the same principle applies to acquiring a business.
Daniel McKinnon
Since graduating with two degrees in Law and Commerce from the University of Wollongong, Daniel’s spent over ten years solving a wide range of legal problems for the people of Western Sydney.