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 issues that may be material to the buyer's investment decision, and can inform the contract terms that allocate risk. It may be documented in written legal, financial and tax due diligence reports, supplemented by specialist workstreams where the target's industry warrants them.

Due diligence has several commercial functions. It can inform the price — material undisclosed liabilities identified in review may lead to price reductions, escrow holdbacks or specific indemnities. It can inform the contract — findings may become warranties, indemnities, conditions precedent and disclosure schedules. And it can inform the go/no-go decision — some issues cannot be adequately addressed by contract and may cause the buyer not to proceed.

Why Due Diligence Matters

Post-completion recourse depends on the terms of the sale agreement, applicable statute, equity and general law. Contractual warranty and indemnity claims may be subject to caps, baskets, time limits and the seller's ongoing solvency. Other claims may arise, for example under the Australian Consumer Law for misleading or deceptive conduct, in equity for misrepresentation, or under other applicable law — each with its own requirements and available remedies. Pursuit of any such claim can be time-consuming and expensive.

Pre-completion due diligence is a practical opportunity to identify issues before they are locked in. The diligence period may provide an opportunity to renegotiate. The work done in the due diligence window can materially affect what the buyer holds after settlement.

Asset Sale vs Share Sale Due Diligence

The structural choice between a share sale and an asset sale influences the scope and depth of due diligence. On a share sale the buyer acquires the shares; the company retains its assets, contracts and liabilities, and the buyer takes economic and control exposure to the company's history. Due diligence is correspondingly wide. On an asset sale the buyer acquires the agreed assets and rights and assumes any agreed liabilities, subject to statutory, employee, tax, environmental, successor and third-party issues. Due diligence focuses on title to those assets, transferability of key contracts, PPSR clearances, employee arrangements and the applicable land transfer or landholder duty position. 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 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 and, where appropriate, points for further investigation and possible contractual responses (for example a warranty, a specific indemnity, a condition precedent, a disclosure, a price adjustment or, in appropriate cases, a decision not to proceed).

The legal due diligence report is a key input into the negotiation of the sale agreement. Identified issues may map to a warranty, a specific indemnity, a condition precedent or a specific disclosure. Some issues — for example undisclosed environmental contamination of unknown extent — may not be capable of being adequately addressed by contract and can inform a decision not to proceed.

Financial Due Diligence

Financial due diligence may be undertaken by an experienced corporate accountant. It tests the financial information presented in the data room — audited or reviewed accounts, management accounts, the working capital position, debt and debt-like items, the quality of earnings, key contract revenue, gross margin, fixed and variable costs, and cash flow conversion. Scope and deliverables depend on the engagement and the transaction, and may include a Quality of Earnings report and, on larger transactions, a Sources & Uses model and a Working Capital Peg mechanism.

Financial due diligence may identify EBITDA normalisations — owner-related personal expenses, one-off items, related-party charges below market, deferred capital expenditure and unsustainable working-capital releases — that affect the implied multiple. Business valuation (see Business Valuation in Australia) and financial due diligence may inform negotiated pricing.

Tax Due Diligence

Tax due diligence reviews the target's income tax, GST, FBT, PAYG withholding, payroll tax, applicable state and territory duties (for example land transfer or landholder 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 positions taken. On a share sale this workstream is important — the buyer takes economic and control exposure to the company's historical tax positions. 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)), applicable state or territory duties, payroll tax and superannuation guarantee for transferring employees.

This guide is general legal information only and is not tax advice. Qualified tax and accounting advice should be obtained for the proposed transaction.

Accounting Records

An illustrative documentary set for financial due diligence may include:

• audited or reviewed financial statements for a relevant historical period;
• current and comparative monthly management accounts 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. A current search can be obtained at an appropriate stage, and discrepancies between the search and the seller's statements should be investigated.

ASIC Searches

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

• current and historical company extracts for the target and relevant related entities;
• 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 current and former directors — these show other current and past directorships, disqualifications and any prior involvement recorded on the ASIC register, subject to the register's limits; they do not establish personal insolvency, which is a matter for the AFSA National Personal Insolvency Index;
• 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). It is not a register of ownership. On a share sale existing registrations continue against the company; on an asset sale releases or other protections may be sought for security interests affecting transferred assets. Grantor searches against the target and relevant related entities, serial-number searches for vehicles and other serial-numbered collateral, and a review of registrations' collateral descriptions and end dates are appropriate scoping considerations. See our companion guide PPSR Explained.

Particular attention is warranted where the target has plant and equipment subject to chattel mortgage, finance lease or hire purchase; the transaction should address treatment of those registrations at completion. See Buying Plant and Equipment in Australia.

Litigation Searches

Litigation searches identify proceedings recorded on the searched registers to which the target (or its principals, on a share sale) is a party. Standard searches may 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 personal insolvency index (for individual sellers).

These searches are not complete proof of all claims, complaints or investigations. Industry-specific regulators add to the set. A proceeding identified in searches is not automatically a "red flag"; the response depends on the proceeding, its stage and its potential effect on the business. 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, contractor classification issues, workers' compensation premiums, any current grievances and Fair Work Commission proceedings.

Underpayment exposures identified in due diligence may be significant. The buyer may consider requiring an underpayment review as part of the seller's disclosure obligations and, where appropriate, address any unresolved issue by specific indemnity or other contractual protection.

Contractor Arrangements

A worker engaged as an independent contractor who is in substance an employee can create exposure for underpayment of wages, leave, superannuation guarantee, payroll tax, and potentially penalties under the Fair Work Act 2009 (Cth) for sham contracting. From 26 August 2024, for constitutionally covered businesses, the Fair Work Act includes a "whole of the relationship" test in section 15AA that considers the real substance, practical reality and true nature of the relationship (subject to scope, transitional rules and a high-income opt-out mechanism). Other entities and other laws (for example superannuation guarantee, payroll tax and workers' compensation) may apply different tests. No single test governs all purposes. Classification questions benefit from experienced employment advice.

Intellectual Property

Identify material 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, licensing and assignability as relevant to the transaction structure, 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. Where a marketing logo is registered in a director's personal name or in a marketing agency's name rather than the trading entity, this mismatch may require assignment, licence or other transaction-specific protection.

Copyright

Copyright is unregistered in Australia under the Copyright Act 1968 (Cth) but ownership matters. Under section 35(2) the author is generally the first owner, subject to exceptions. Section 35(6) generally applies to works made in pursuance of the terms of employment under a contract of service, subject to any agreement and statutory exceptions. Copyright in works commissioned from contractors does not vest automatically in the client merely by commissioning; an assignment must be in writing signed by or on behalf of the assignor under section 196(3). Software, websites, marketing collateral, manuals and bespoke training materials may warrant review for copyright chain-of-title.

Domain Names

Run a WHOIS search on domains 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 registry eligibility, transfer and change-of-control rules for each namespace (rules for .au and other namespaces should be verified on each transaction); and confirm DNS, email and web-hosting accounts can be moved to the buyer at completion.

Software Licences

Identify material software 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.

Customer Contracts

Identify material customers by revenue and 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. Revenue concentration, contract terms and change-of-control rights may affect valuation, diligence scope and any contractual protection negotiated between the parties.

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 may affect valuation, business continuity and the conditions attached to the transaction.

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 a 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) may be undertaken by an experienced environmental consultant. Review EPA Victoria licences and notices, dangerous goods storage, asbestos registers, contaminated-land registrations and the General Environmental Duty under the Environment Protection Act 2017 (Vic). Environmental obligations and exposures are fact-specific.

WHS Compliance

Review the WHS/OHS management system, the safety policy, safety committee minutes, hazard registers, incident registers, the WorkSafe Victoria claims history, the workers' compensation premium history (a premium history may prompt further inquiry, but does not itself prove underlying issues), any enforceable undertakings, any prosecutions or notices, and the position on workplace manslaughter exposure under the Occupational Health and Safety Act 2004 (Vic). Higher-risk industries — such as construction, manufacturing, transport and mining — may warrant specialist WHS due diligence.

Privacy Compliance

Confirm whether the target is subject to the Privacy Act 1988 (Cth). Small-business coverage depends on turnover against the applicable small business threshold and on statutory exceptions — coverage can arise, among other things, for health service providers, businesses trading in personal information and contracted service providers under Commonwealth contracts; current application should be verified for the specific target. Review the privacy policy, collection notices, cross-border disclosure practices, the data-breach response plan, marketing consents and compliance with the Spam Act 2003 (Cth) and the Do Not Call Register Act 2006 (Cth). There is no generally searchable public register of each Notifiable Data Breach notification; the OAIC publishes aggregate NDB statistics. Review the target's own disclosures, incident records, regulator correspondence, and any public OAIC determinations or enforcement.

Cybersecurity

Review IT systems, the cybersecurity policy and incident response plan, the most recent penetration test or security assessment, patching status, multi-factor authentication coverage, backup and disaster-recovery arrangements, any cyber-insurance policy, and any historical incident. Whether cyber due diligence is undertaken depends on the target and transaction.

Insurance

Obtain a schedule of the target's insurance policies — 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. Adequacy of cover is fact-specific.

Regulatory Licences

Identify licences, registrations, permits and accreditations 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 (AFSL) and Australian Credit Licence (ACL), TGA, ACMA, AHPRA, ASQA and so on. For each, verify currency, conditions, the licensee entity, and whether change of control or an asset sale requires notification, application or a new licence. An AFSL is generally not "transferred" by ASIC; the appropriate steps depend on the licence type and structure. Where a licence is not readily transferable, this can influence the structural choice on the transaction.

Franchises

If the target is a franchisee, obtain the franchise agreement, the disclosure document, the operations manual, every variation, the renewal record and any franchisor consent — review the specific agreement and the current Franchising Code of Conduct for the applicable consent, notice and transfer requirements. If the target is a franchisor, the disclosure document, franchisee compliance, franchisee disputes and the Franchising Code compliance position need detailed review.

Government Approvals

Regulatory steps affecting Australian business acquisitions can include:

• Foreign Investment Review Board (FIRB) rules — transaction, investor, asset and sector specific and subject to change; the applicable requirements should be verified on each transaction;
• ATO foreign resident capital gains withholding — since 1 January 2025 these rules apply to Australian real property dispositions with no monetary threshold, and the purchaser must withhold 15 per cent unless the vendor provides a valid clearance certificate (for Australian-resident vendors) by settlement or a variation applies. A clearance certificate is not generically required for every business acquisition or every asset disposition; consider it where relevant;
• ACCC merger control — from 1 January 2026 acquisitions meeting the prescribed notification thresholds must be notified under the mandatory suspensory regime and cannot complete unless and until permitted. Whether the substantive competition assessment gives rise to a concern is a separate question;
• applicable state or territory land transfer or landholder duty notification, lodgment or assessment obligations where the target holds land or a landholder interest, and any required clearances;
• industry-specific steps (for example AUSTRAC for AML/CTF-regulated business, ASIC in relation to AFSL and ACL matters, APRA for prudentially regulated entities, AHPRA for health, ASQA for VET, ACMA for telecommunications).

Foreign-investment screening is actively administered and should be considered at the structuring stage.

Personal Property Securities Act

Personal property assets used in the business may be registrable under the PPSA. The PPSR is a register of security interests, not ownership. On a share sale existing registrations continue against the company; on an asset sale the transaction should address treatment of security interests over the transferred assets, whether by release, subordination or other protection. Under section 267, on the grantor's insolvency an unperfected security interest may vest in the grantor; a "defective registration" does not itself vest an asset in the company or wipe out title. Unrecorded retention-of-title clauses can create surprise creditor claims and warrant attention.

Competition Law Issues

Two main competition-law issues arise. First, the buyer's acquisition itself may need to be notified under the mandatory suspensory merger regime that took full effect on 1 January 2026 where the prescribed notification thresholds are met — completion cannot occur unless and until permitted under the regime. The substantive competition assessment considers whether the acquisition would substantially lessen competition. 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 may benefit from specialist competition-law advice, particularly on transactions involving competitors, vertical supply chains or significant industry participants.

Warranties

Warranties are contractual statements about the state of the target at signing (and, if agreed, brought down at completion) that allocate risk to the seller. On a share sale the warranty package can be extensive: title to shares, capacity, no encumbrances, disclosure, accuracy of accounts, no undisclosed liabilities, tax compliance, contracts in force, IP ownership, employee position, environmental compliance, no litigation, and no material adverse change since the accounts date. On an asset sale the warranty package may be narrower: title to assets, no encumbrances (subject to any agreed treatment of security interests), accuracy of disclosed information, assignability or novation of contracts, employee entitlements and the going-concern declaration where GST-free treatment is sought. Caps, baskets, survival periods and exclusions are negotiated on each transaction.

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

Disclosure Obligations

The Disclosure Letter is the seller's written disclosure of matters against the warranties. The scope of what is "fairly disclosed" is negotiated. Whether a generic bundle of data-room documents meets the standard is a matter of drafting and negotiation; specific disclosures may be listed item by item against numbered warranties.

Material Adverse Change Clauses

A Material Adverse Change (MAC) clause is a condition that may entitle 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 negotiated on a transaction-specific basis — a seller may seek narrow, objective triggers and a buyer may seek broader triggers, and any MAC may be limited to defined categories. Whether a MAC clause is included, and its scope, is transaction-specific.

Conditions Precedent

Conditions precedent are matters that must be satisfied (or waived, where drafting permits) before completion is required to occur. Common conditions may include any required FIRB, ATO or ACCC steps, landlord consent to a lease assignment, customer consents to contract assignment, financier consent, agreed treatment of security interests, regulator approvals, satisfactory completion of due diligence, satisfactory finance, no MAC (where included), and execution of ancillary agreements. Waiver rights and termination for failure are matters of drafting.

Completion Checklist

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

Documents to Request

Illustrative Issues and Possible Contractual Responses

The following are examples only. Any response depends on the facts, the transaction structure and the negotiation:

When Purchasers May Reconsider a Transaction

Not every issue can be addressed by contract. Considerations that may cause a buyer to reconsider a transaction include:

• material undisclosed tax liabilities that cannot be adequately addressed;
• environmental issues of unknown extent that cannot be adequately addressed;
• pending criminal or regulatory prosecutions of the principals;
• customer concentration whose loss would be terminal and where the customer will not confirm arrangements;
• a non-transferable regulatory licence on an asset-sale structure where conversion to a share sale is unworkable;
• a pattern of conduct indicating pervasive non-compliance;
• refusal to provide reasonable warranties, disclosure or specific indemnities.

Practical Due Diligence Sequence

A typical sequence on a private-treaty acquisition may move through the following phases. Timing varies with transaction size, data-room quality and any regulatory steps required, so no fixed timetable is provided:

• Preliminaries. Heads of Agreement, NDA, exclusivity, due diligence scope, lender approach.
• First-round DD. Data-room access, initial review, first-round Q&A, baseline ASIC/PPSR/court searches.
• Deep dive. Site visits, management presentations, environmental and IT specialist workstreams.
• Second-round DD. Second-round Q&A, draft due-diligence reports, quality-of-earnings and working-capital analysis.
• SPA negotiation. Sale agreement, warranty package, disclosure letter and conditions-precedent schedule.
• Execution and completion. Signing, satisfaction of conditions precedent (including any required regulatory steps such as FIRB, ATO and any ACCC notification), and completion.

Role of Lawyers, Accountants and Valuers

Roles depend on the scope and engagement of each adviser. Lawyers may assist with legal due diligence, sale agreement drafting, warranty and disclosure process, PPSR searches and the completion checklist. Accountants may assist with financial and tax due diligence and tax structuring, and may prepare a Quality of Earnings report where the mandate calls for one. Valuers (or accountants on smaller deals) may provide an independent business valuation to inform pricing. Specialist consultants are added as the target requires — environmental, IT, technical, HR. The buyer coordinates the workstreams and considers how findings are addressed in the contract.

Coordinated legal and accounting advice at the outset can be worthwhile. Taking advice before the Heads of Agreement is signed can preserve scope to negotiate structure, price mechanics, exclusivity, conditions and timetable.

When Legal Advice Is Needed

Taking commercial legal advice before the Heads of Agreement is signed can preserve scope to negotiate the structure (share or asset), the price, exclusivity, the conditions precedent and the timetable — each of which 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, applicable FIRB, ATO and ACCC steps, 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