Business Due Diligence in Australia: A Complete Legal Guide

What Is Business Due Diligence?

Business due diligence is the buyer's structured investigation of the target business before completion. It tests the seller's representations against verifiable evidence, identifies risks material to the buyer's investment decision, and shapes the contract terms that will allocate those risks. It is normally documented in written legal, financial and tax due diligence reports, supplemented by specialist workstreams where the target's industry warrants them.

Due diligence has three commercial functions. First, it informs the price — material undisclosed liabilities discovered in review become price reductions, escrow holdbacks or specific indemnities. Second, it informs the contract — findings become warranties, indemnities, conditions precedent and disclosure schedules. Third, it informs the go/no-go decision — some risks cannot be priced or indemnified and the only rational response is to walk away.

Why Due Diligence Matters

Once the sale agreement is signed and completion has occurred, the buyer's contractual recourse against the seller is limited to the warranties and indemnities in the agreement, subject to caps, baskets, time limits and the seller's ongoing solvency. The buyer cannot 'unwind' an Australian business acquisition simply because something material was missed. Even rescission for misrepresentation under the Australian Consumer Law requires the buyer to prove misleading or deceptive conduct, to establish loss caused by that conduct, and to bring proceedings within a limitation period — a long and expensive path that no buyer wants to be on.

Pre-completion due diligence is therefore the only practical opportunity to discover what is actually being bought. It is also where the leverage to renegotiate sits. Once the buyer has signed and paid, the seller's incentive to cooperate falls away. The work done in the due diligence window determines what the buyer owns the morning after settlement.

Asset Sale vs Share Sale Due Diligence

The structural choice between a share sale and an asset sale drives the scope and depth of due diligence. On a share sale the buyer acquires the company and inherits every asset, contract, liability, tax position and historical exposure of that company. Due diligence is correspondingly wide and deep. On an asset sale the buyer acquires only the specified assets (and any specifically assumed liabilities); due diligence focuses on title to those assets, transferability of key contracts, PPSR clearances, employee entitlements and stamp duty exposure. The structural analysis is set out in our companion guide on Share Sale vs Asset Sale in Australia.

Legal Due Diligence

Legal due diligence is the lawyer-led review of every legal aspect of the target — corporate structure, share capital, material contracts, leases, intellectual property, employment, regulatory licences, litigation, security interests, environmental compliance, privacy, cyber, WHS and insurance. The deliverable is a written legal due diligence report organised by workstream, identifying issues by risk rating (red / amber / green) with recommended action — re-warrant, price adjust, specific indemnity, condition precedent, or withdraw.

The legal due diligence report is the single most important input into the negotiation of the sale agreement. Every red and amber issue should map to either a specific warranty, a specific indemnity, a condition precedent or a specific disclosure. Issues that cannot be addressed by contract — for example, undisclosed environmental contamination of unknown extent — should be flagged as candidates for walking away.

Financial Due Diligence

Financial due diligence is normally led by an experienced corporate accountant. It tests the financial information presented in the data room — the audited or reviewed accounts, the management accounts, the working capital position, the debt and debt-like items, the quality of earnings, key contract revenue, gross margin, fixed and variable costs, and cash flow conversion. The deliverable is a Quality of Earnings report and, on larger transactions, a Sources & Uses model and a Working Capital Peg that mechanically adjusts the purchase price at completion to reflect the working capital position on the day.

Financial due diligence routinely identifies EBITDA normalisations the seller has not made — owner-related personal expenses, one-off gains or losses, related-party charges below market, deferred capital expenditure and unsustainable working-capital releases — and adjusts the implied multiple accordingly. Pricing follows the independent business valuation (see Business Valuation in Australia) and is calibrated against the financial due diligence findings.

Tax Due Diligence

Tax due diligence reviews the target's income tax, GST, FBT, PAYG withholding, payroll tax, stamp duty, superannuation guarantee and any state-specific taxes. It examines past returns, ATO correspondence, any prior reviews or audits, the consolidation position, transfer pricing, R&D claims and any aggressive positions taken. On a share sale this work is critical — the buyer takes every historical tax position with the company. On an asset sale the focus narrows to GST (including going-concern eligibility under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)), stamp duty, payroll tax and superannuation guarantee for transferring employees.

This guide is general legal information only and is not tax advice. Coordinated legal and tax advice is essential — the tax outcome of the structural choice (and of specific clauses in the sale agreement) often determines whether a deal is commercially viable for the seller, the buyer or both. Engage a qualified tax adviser or accountant early.

Accounting Records

The starting documentary set for financial due diligence includes:

• audited or reviewed financial statements for the last three to five years;
• monthly management accounts for the last two years and the latest year-to-date;
• the current budget and the prior-year budget variance analysis;
• the most recent BAS lodgements and the ATO Integrated Client Account and Income Tax Account;
• payroll registers and superannuation guarantee compliance records;
• the asset register and depreciation schedule;
• debtors and creditors ledgers and aged balances;
• stock-on-hand reports and stock-take procedures;
• the related-party loan account and intercompany schedule;
• any management letter from auditors or accountants identifying control weaknesses or accounting policy issues.

Company Searches

A current company search confirms the basic corporate information about the target — the registered office, the current directors, the ultimate holding company, the share capital and any historical changes. It is the first document ordered on every share sale and is normally pulled within hours of the Heads of Agreement being signed. Discrepancies between the search and the seller's statements need to be resolved before the agreement is signed.

ASIC Searches

ASIC searches go beyond the basic company extract. On any material share-sale transaction the buyer should order:

• current and historical company extracts for the target and every related entity;
• document orders for the constitution, the most recent annual review, the most recent change of officeholders and any unusual lodgement (capital reduction, selective buy-back, scheme of arrangement, voluntary administration);
• director searches for every current and former director — these identify other directorships, disqualifications and prior involvement with insolvent entities;
• insolvency notices searches for the target and the principals;
• an AFSL or ACL register check where the target is regulated by ASIC for financial services or credit.

PPSR Searches

The Personal Property Securities Register (PPSR) is the national register of security interests in personal property under the Personal Property Securities Act 2009 (Cth). On a share sale every existing registration continues against the company; on an asset sale releases must be obtained for each affected asset. Grantor searches against the target and every related entity, serial-number searches for vehicles and other serial-numbered goods, and a review of every registration's collateral description and end date are non-negotiable. See our companion guide PPSR Explained.

Particular attention is required where the target has plant and equipment subject to chattel mortgage, finance lease or hire purchase. Those registrations must be released at completion or the assets cannot pass clear of the financier's interest. See Buying Plant and Equipment in Australia.

Litigation Searches

Litigation searches identify proceedings to which the target (or its principals, on a share sale) is a party. Standard searches include:

• Federal Court of Australia;
• Federal Circuit and Family Court of Australia;
• Supreme Court of Victoria (and Supreme Courts of any other relevant State);
• County Court of Victoria;
• Magistrates' Court of Victoria;
• Victorian Civil and Administrative Tribunal (VCAT);
• Fair Work Commission;
• Australian Financial Security Authority bankruptcy register (for individual sellers).

Industry-specific regulators add to this set. A pending proceeding identified in searches is a red-flag finding — it must be disclosed, valued and addressed by indemnity or condition precedent. See Resolving Business Disputes Before Court for the dispute-resolution context.

Employment Due Diligence

Employment due diligence verifies the headcount, individual employment contracts, awards and enterprise agreements that apply, accrued annual leave, long-service leave (under the Long Service Leave Act 2018 (Vic)), personal leave, parental leave, superannuation guarantee compliance, payroll tax position, redundancy and termination exposures, restraint enforceability, sham contractor risk, workers' compensation premiums, current grievances and Fair Work Commission proceedings.

Underpayment exposures discovered in due diligence — often the result of incorrect award classification, missed allowances or unpaid overtime — can run into seven figures on businesses with even modest workforces. The buyer should require a full underpayment review as part of the seller's disclosure obligations and treat any unresolved issue as a specific indemnity.

Contractor Arrangements

A worker engaged as an independent contractor who is in substance an employee creates exposure for underpayment of wages, leave, superannuation guarantee, payroll tax, and potentially penalties under the Fair Work Act 2009 (Cth) for sham contracting. The 2022 High Court decisions in CFMMEU v Personnel Contracting and ZG Operations v Jamsek refocused the test on the terms of the written contract, but the 2024 closing loopholes amendments have re-broadened the inquiry and introduced a multi-factor 'whole of the relationship' test for many purposes. Misclassification is one of the most common findings in Australian SME due diligence and should be reviewed by experienced employment counsel.

Intellectual Property

Identify every item of IP used in the business — registered trade marks, patents, designs, domain names, copyright works, business names, trade secrets and confidential information, software licences and open-source dependencies. Verify ownership (the IP must actually be owned by the entity being sold or, on an asset sale, properly assignable to the buyer), confirm registration and renewal status, review assignment chains, review licences in and out, check IP-related litigation and confirm employee and contractor IP assignment clauses have been signed.

Trade Marks

Conduct an IP Australia trade marks search by owner and by mark; verify each registration is current and renewal fees are paid; confirm the registered classes cover the actual goods and services; review any pending oppositions, removals or revocations; and check that the registered owner matches the entity being sold. A common defect is that a marketing logo is registered in a director's personal name or in a marketing agency's name rather than the trading entity — this needs to be corrected by registered assignment before completion.

Copyright

Copyright is unregistered in Australia under the Copyright Act 1968 (Cth) but ownership matters. Confirm employee- generated copyright vests in the company (it does under section 35(6) where created in the course of employment) and that contractor-generated copyright has been assigned in writing (it does not vest automatically — section 35(2) places first ownership with the contractor unless assigned). Software, websites, marketing collateral, manuals and bespoke training materials all routinely throw up copyright gaps if the seller used contractors without proper assignments.

Domain Names

Run a WHOIS search on every domain used in the business; confirm the registrant is the entity being sold (or an entity that will transfer it); confirm renewal status and any auto-renewal arrangements; check for restrictive registry rules (.au domains can only be held by Australian entities with an eligible nexus); and confirm DNS, email and webhosting accounts can be transferred to the buyer at completion. Loss of a primary domain post-settlement is a routine — and avoidable — failure.

Software Licences

Schedule every software product used in the business — operating systems, finance/ERP, CRM, vertical industry software, embedded software in plant and equipment, cloud and SaaS subscriptions, and open-source components. For each, identify the licensor, the contract or click-through terms, the licence type, expiry, renewal, transferability on change of control or asset sale, audit rights, support and any usage-based pricing. Audit exposure under enterprise software licences (Microsoft, Oracle, SAP, Autodesk) is a recurring high-cost finding.

Customer Contracts

Schedule the top customers by revenue (typically the top 10 or those representing 80% of revenue); review the underlying contracts (or absence of contracts) for term, renewal, price escalation, termination for convenience, change-of-control consent, exclusivity, service levels, indemnities, limitation of liability and dispute resolution. Customer concentration above 25% with any single customer is a red flag and should be addressed in the warranty schedule and in the conditions precedent (customer consents or comfort letters).

Supplier Contracts

Identify the critical suppliers — those whose loss would materially disrupt the business — and review the contracts on the same matrix as customer contracts. Confirm exclusivity, minimum-purchase obligations, change-of-control rights, take-or-pay commitments, termination rights and pricing. For inventory businesses, verify supplier credit limits and trading terms. For franchised products, verify the supply agreement, territory and renewal.

Lease Review

Obtain the executed lease, every variation, every exercise of option and any side letters. Verify term, options, rent and rent reviews, outgoings, make-good obligations, permitted use, assignment and change-of-control clauses, security (bank guarantee or bond), holdover terms and whether the Retail Leases Act 2003 (Vic) applies. Confirm the lease is registered (if a registrable lease) and that the lessor consents to the asset-sale assignment or the change-of-control on a share sale. An expiring lease with no exercised option is a common deal blocker.

Property Ownership

For owned real property, obtain title searches, plans of subdivision, recent rates notices, planning certificates, building permits and occupancy permits, fire safety compliance, environmental reports, ATO consolidation and trust documents where the property is held in a related entity, and current insurance certificates. The conveyancing workstream may run in parallel under the Property & Conveyancing team.

Plant and Equipment

Review the asset register against physical inspection; confirm ownership against PPSR searches; review service records, warranty position, compliance with Australian Standards, OHS compliance, finance arrangements (chattel mortgage, finance lease, hire purchase), licence status for registrable plant, and embedded software licences. See our companion guide Buying Plant and Equipment in Australia.

Environmental Issues

For any business operating on, occupying or remediating contaminated land, or handling hazardous substances or waste, an environmental site assessment (Phase 1 desktop review and where indicated a Phase 2 intrusive investigation) should be conducted by an experienced environmental consultant. Review EPA Victoria licences and notices, dangerous goods storage, asbestos registers, contaminated land registrations and the post-2021 General Environmental Duty under the Environment Protection Act 2017 (Vic). Environmental liabilities can be non-transferable and an undisclosed contamination can wipe out the equity in a business.

WHS Compliance

Review the WHS / OHS management system, the safety policy, the safety committee minutes, hazard registers, incident registers, the WorkSafe Victoria claims history, the workers' compensation premium history (a high or rising premium indicates underlying issues), any enforceable undertakings, any prosecutions or notices, and the position on industrial manslaughter exposure under the Occupational Health and Safety Act 2004 (Vic). High-risk industries — construction, manufacturing, transport, mining — warrant specialist WHS due diligence.

Privacy Compliance

Confirm whether the target is subject to the Privacy Act 1988 (Cth) (turnover threshold $3 million, or below threshold if a health service provider, contracted service provider or trades in personal information). Review the privacy policy, collection notices, the position on cross-border disclosure, data-breach response plan, marketing consents and compliance with the Spam Act 2003 (Cth) and the Do Not Call Register Act 2006 (Cth). Notifiable data breaches and OAIC determinations are recoverable in searches.

Cybersecurity

Review IT systems, the cybersecurity policy and incident response plan, the most recent penetration test or security assessment, the patching status, multi-factor authentication coverage, backup and disaster recovery arrangements, the cyber-insurance policy, and any historical breach (ransomware, business email compromise, customer data loss). The 2022– 2023 wave of high-profile Australian breaches has made cyber due diligence a standard inclusion on every transaction above modest value.

Insurance

Obtain a schedule of every insurance policy held by the target — public and product liability, industrial special risks, motor, marine, professional indemnity, directors and officers, management liability, cyber, business interruption, workers' compensation. Confirm currency, premium status, claims history, sub-limits, exclusions, retroactive cover for professional indemnity, and the buyer's ability to obtain run-off cover for the seller's directors post-completion. Underinsurance is a routine finding in private companies.

Regulatory Licences

Identify every licence, registration, permit and accreditation required to operate the business — liquor licences, food premises registrations, gaming approvals, professional and trade licences (electrician, plumber, builder, real estate, financial services), Australian Financial Services Licence, Australian Credit Licence, AFSA registrations, TGA, ACMA, AHPRA, ASQA and so on. For each, verify currency, conditions, the licensee entity, transferability and post-completion application requirements. Non-transferable licences often mandate a share sale rather than an asset sale.

Franchises

If the target is a franchisee, obtain the franchise agreement, the disclosure document, the operations manual, every variation, the renewal record and the franchisor's consent to the sale (which is required under most franchise agreements and is regulated by the Franchising Code of Conduct). If the target is a franchisor, the disclosure document, franchisee compliance, franchisee disputes and the Franchising Code compliance position need detailed review.

Government Approvals

Common government approvals affecting Australian business acquisitions include:

• Foreign Investment Review Board (FIRB) approval for foreign buyers above the relevant threshold;
• ATO clearance certificates under section 14-220 of Schedule 1 to the Taxation Administration Act 1953 (Cth) where the consideration exceeds the threshold;
• ACCC merger clearance where the combined market share is material in a defined market;
• State landholder duty approvals where the target holds Victorian land above the threshold;
• industry-specific approvals (AUSTRAC for financial services, ASIC for AFS licence transfers, APRA for prudentially regulated entities, AHPRA for health, ASQA for VET, ACMA for telecommunications).

Foreign-investment screening is now actively enforced and should be considered at the structuring stage, not at completion.

Personal Property Securities Act

Every business asset other than land is potentially registrable under the PPSA. On a share sale every existing registration continues; on an asset sale the buyer needs releases for each affected asset. Defective registrations (vested in the company on insolvency under section 267) can produce windfalls for liquidators but unrecorded retention- of-title clauses can create surprise creditor claims. PPSR due diligence is a non-negotiable workstream and is often coordinated with the same lawyer running the legal due diligence.

Competition Law Issues

Two main competition-law issues arise. First, the buyer's acquisition itself may need ACCC clearance under section 50 of the Competition and Consumer Act 2010 (Cth) where it would substantially lessen competition in a market. Second, the target's own conduct may include cartel arrangements, exclusive dealing, third-line forcing or misuse of market power that creates contingent liabilities. Both require specialist competition-law review on transactions involving competitors, vertical supply chains or dominant industry participants.

Warranties

Warranties are contractual statements about the state of the target at signing (and brought down at completion) that allocate risk to the seller. On a share sale the warranty package is extensive: title to shares, capacity, no encumbrances, full disclosure, accuracy of accounts, no undisclosed liabilities, tax compliance, contracts in force, IP ownership, employee position, environmental compliance, no litigation, no material adverse change since the accounts date, and a long-form list of warranties matching the due diligence findings. On an asset sale the package is narrower: title to assets, no encumbrances (subject to PPSR releases at completion), accuracy of disclosed information, assignability or novation of contracts, employee entitlements and going-concern declaration where GST-free treatment is sought.

Warranty caps, baskets, time limits and disclosure mechanics are the subject of separate detailed negotiation — see Commercial Contracts in Australia.

Disclosure Obligations

The Disclosure Letter is the seller's written disclosure of matters that would otherwise be a breach of warranty. Anything fairly disclosed is excluded from the warranty claim. The buyer's lawyer must rigorously test what is and is not 'fairly disclosed' — a generic bundle of data-room documents does not normally meet the standard. Specific disclosures are listed item by item against numbered warranties.

Material Adverse Change Clauses

A Material Adverse Change (MAC) clause is a condition entitling the buyer to refuse to complete (and in some drafts to terminate) if a defined adverse change has occurred between signing and completion. MAC clauses are tightly negotiated — sellers want narrow, objective triggers; buyers want broad, subjective triggers — and are typically restricted to specified percentage falls in EBITDA, the loss of a top customer, a major regulatory event, or an industry-wide market disruption. They are uncommon on small SME deals but standard on larger transactions.

Conditions Precedent

Conditions precedent are matters that must be satisfied (or waived) before completion is required to occur. Common conditions include FIRB approval, ATO clearance, ACCC clearance, landlord consent to lease assignment, customer consents to contract assignment, financier consent, PPSR releases, regulator approvals, satisfactory completion of due diligence, satisfactory finance, no MAC, and execution of ancillary agreements (employment agreements, restraint deeds, escrow agreements). Each condition has a long-stop date after which either party may terminate.

Completion Checklist

A completion checklist is the project-management document that lists every deliverable required at settlement — by category (corporate, legal, financial, tax, regulatory), by party responsible, by status. On a share sale it includes share transfers, share certificates, ASIC notifications, director resignations and appointments, the company seal, the constitution and minute books, the bank-mandate changes and the bring-down of warranties. On an asset sale it includes bills of sale, asset transfers, IP assignments, lease assignments, contract novations, PPSR releases, employee new-offer accept letters and physical asset delivery. See Business Sale Agreements in Victoria for the completion mechanics.

Documents to Request

Common Red Flags

When Purchasers Should Walk Away

Walking away from a bad deal is a legitimate outcome of due diligence and is far cheaper than completing. Typical triggers include:

• material undisclosed tax liabilities with no insurable coverage;
• environmental liabilities of unknown extent or non-transferable nature;
• pending criminal or regulatory prosecutions of the principals;
• customer concentration whose loss would be terminal and where the customer will not provide written consent;
• a non-transferable regulatory licence on an asset-sale structure where conversion to a share sale is unworkable;
• a pattern of conduct (sham contractors, ATO disputes, underpayments, undisclosed creditors) that indicates pervasive non-compliance;
• seller refusal to provide meaningful warranties, disclosure or specific indemnities against identified risks.

Practical Due Diligence Timetable

Role of Lawyers, Accountants and Valuers

Lawyers lead legal due diligence, draft the sale agreement, manage the warranty and disclosure process, run PPSR searches and the completion checklist. Accountants lead financial and tax due diligence, the Quality of Earnings report and tax structuring. Valuers (often the accountants on smaller deals) confirm the purchase price against an independent business valuation. Specialist consultants are added as the target requires — environmental, IT, technical, HR. The buyer must coordinate the workstreams and ensure findings are converted into contract protection.

Coordinated legal and accounting advice at the outset usually saves more than its cost on the first material issue identified in due diligence. Engage advisers before the Heads of Agreement is signed — when the structural choice can still be negotiated cleanly.

When Legal Advice Is Needed

Engage a commercial lawyer before the Heads of Agreement is signed — not after. The HoA fixes the structure (share or asset), the price, the exclusivity period, the conditions precedent and the timetable. Each of those decisions has downstream consequences for due diligence scope, warranty exposure, tax outcome and post-completion risk. Parke Lawyers acts for Australian buyers and sellers of small and medium businesses on:

• structuring advice (share sale versus asset sale, entity choice, tax planning);
• due diligence on legal, regulatory, employment, IP, contract, leasing, PPSR and litigation matters;
• sale agreement drafting, warranty negotiation and disclosure letter management;
• conditions precedent satisfaction, FIRB and ATO clearance, completion mechanics;
• post-settlement integration including new employment offers, contract novations and lease assignments;
• connected estate-planning and succession work for selling family-business principals.

See our service pages: Commercial & Business Law. Reviewed by Jim Parke, Lawyer & Chartered Accountant.

Frequently Asked Questions