Due diligence checklist for buying a business

Published Wednesday 26 November 2025

Table of contents

• What is due diligence when buying a business?
• Why is due diligence important?
• How long does due diligence take?
• Essential due diligence checklists before buying a business
• Key documents to review during due diligence
• Red flags that should stop a deal
• Do your due diligence right
• Grow your new business with Xero
• FAQs on buying a business

Key takeaways

• Implement a systematic five-category approach to due diligence covering financial records, legal standing, operations, market position, and regulatory compliance to ensure comprehensive business evaluation.

• Allocate 4-12 weeks for thorough due diligence depending on business complexity, and engage professional accountants and lawyers to review financial statements and legal documents rather than attempting evaluation alone.

• Verify all seller claims through documentation review, examining 3-5 years of tax returns, financial statements, contracts, and operational records to uncover potential hidden liabilities or misrepresented assets.

• Recognize major red flags such as inconsistent financials, undisclosed liabilities, high customer concentration, or seller reluctance to provide information as signals to reconsider or abandon the purchase.

What is due diligence when buying a business?

Due diligence is your systematic investigation of a business before you buy it. It verifies the business’s financial health, legal standing, and growth potential so you can make an informed purchase decision, which is crucial as incoming directors have a legal duty of care and diligence under the Corporations Act.

Why is due diligence important?

Due diligence protects your investment by uncovering hidden risks before you commit to buying a business. The seller represents their business, but verifying those claims is your responsibility.

Proper due diligence helps you:

• Pay fair value: Avoid overpaying for inflated or misrepresented assets
• Identify risks: Spot potential problems before they become your problems
• Ensure compliance: Meet legal and regulatory requirements

Skipping due diligence can expose you to:

• Hidden liabilities or overstated earnings
• Unreported debts, tax implications, or unreliable revenue sources
• Legal issues or regulatory non-compliance, which might result in fines or even business closure
• Operational inefficiencies, outdated systems, or fragile supplier or customer relationships
• Hidden reputational issues or market weaknesses

Get expert advice for your due diligence checklist, especially for legal and financial matters.

How long does due diligence take?

Due diligence can take a few weeks for a small business, or several months for a larger, more complex one.

Key factors that influence the timeline include the size of the business, the complexity of its operations, and how quickly the seller provides the necessary documents. Don’t rush. Being thorough helps you make a confident, informed decision.

Essential due diligence checklists before buying a business

Due diligence checklists ensure you investigate every critical aspect of the business systematically. These five categories cover the essential areas that determine whether a business is worth buying.

Work with professionals throughout. Ask your accountant to review the finances and your lawyer to check legal documents and contracts.

Financial due diligence

Financial due diligence verifies the business’s profitability, cash flow, and financial stability. This analysis reveals whether the business can sustain operations and generate the returns you expect.

Check these key financial areas:

• review three to five years of tax returns, financial statements and profit and loss records (if accounting is incomplete at the time of purchase, standards say the post-acquisition measurement period must not exceed one year)
• check current tax status and identify outstanding liabilities
• check for hidden debts, loans and financial obligations
• analyse current cash flow patterns and growth potential
• compare revenue trends against industry projections

Legal due diligence

Legal due diligence checks the business’s legal standing, including any current or past legal issues.

• review all contracts and licences, including supply, customer, operational and employee contracts, leases and other agreements
• check for intellectual property rights, including patents, trademarks, copyrights and trade secrets
• check business name registration, domain registration and trademarks or brands
• investigate past or pending litigation, lawsuits or other legal issues (accounting professionals must follow specific procedures for responding to non-compliance with laws and regulations)

Operational due diligence

Operational due diligence checks how the business runs day to day.

• review business plans and strategy documents
• evaluate operations and processes, including management structures, staffing and human resources
• assess customer and supplier relationships and contracts
• review business assets and equipment, including age, maintenance schedules and repairs needed
• check technology infrastructure, data security and software systems to make sure they’re up to date, secure and scalable

Market position and competitive analysis

Market position analysis determines the business’s competitive strength and growth potential. This evaluation helps you assess whether the asking price reflects the business’s true market value.

Market due diligence examines:

• Competitive position: How the business compares to direct and indirect competitors
• Customer base: Who buys from the business and why they choose it over alternatives
• Market share: The business’s portion of the total market and growth trends
• Growth opportunities: Potential for expansion and revenue increases

Regulatory and compliance

Regulatory and compliance due diligence checks that the business meets all legal and industry requirements.

• review regulatory and compliance obligations for the industry
• check for issues with licences, permits, premises or government regulations
• review tax compliance status, including tax records, liabilities and compliance with local and international tax laws
• review compliance with workplace conditions, agreements and employee entitlements
• check if the business follows environmental regulations and its potential liabilities in waste management, pollution and hazardous materials

Key documents to review during due diligence

Document review provides concrete evidence to support or challenge the seller’s claims about the business. These records reveal the true financial performance, legal standing, and operational efficiency.

The documents you need depend on your industry and location. Ask your accountant to review financial records and your lawyer to check contracts and legal documents. A business broker can help you collect everything you need.

Financial and tax

• Tax returns (3–5 years)
• Profit and loss statements (3–5 years)
• Balance sheets (3–5 years)
• Audit reports
• Business credit reports
• Bank loans or other finance
• Leases
• Sales records
• Business valuation(s)

Equipment, assets, and stock

• Plant, equipment, or vehicle leases
• Maintenance records
• Other assets owned or leased
• Outstanding debts to suppliers
• Stock
• Software licences

Legal

• Insurance contracts
• Regulations or compliance issues
• Legal proceedings
• Mandatory codes of practice
• Business standards and procedures
• Legal agreements for directors, partners, or shareholders
• Privacy requirements
• Data management processes

Operations

• Business plans and other strategy documents
• Staff contracts, awards, entitlements, and insurances
• Staff induction and training records
• Licences and permits required to run the business
• Policies and procedures
• Supplier contracts
• Voluntary codes of conduct
• Minutes of management meetings
• Marketing campaign strategy documents
• Branding strategy and guidelines

Intellectual property

• Trademarks
• Patents
• Copyright
• Branding
• Registered designs
• Business registration
• Domain registration

Red flags that should stop a deal

You may find issues that make you reconsider buying. Watch for these common red flags:

• inconsistent financials – financial statements don’t match tax returns or bank records
• undisclosed liabilities – hidden debts or legal claims not mentioned by the seller
• high customer concentration – a large portion of revenue comes from one or two clients (accounting standards include a concentration test to assess this risk)
• poor record-keeping – messy or incomplete documents can hide bigger problems (professional standards require a sufficient and appropriate record of financial procedures)
• reluctance from the seller – the owner is hesitant to provide information or answer questions

You can negotiate some issues, but a major red flag is a sign to walk away.

Do your due diligence right

Thorough due diligence protects you from costly mistakes and gives you confidence in your business purchase decision. The process requires systematic investigation and professional expertise to uncover risks you might miss on your own.

Follow these best practices for effective due diligence:

• Plan for four to 12 weeks depending on business complexity and size
• Don’t make decisions without understanding critical details
• Use professional expertise like your accountant, lawyer and broker to catch issues that could cost more than their fees
• Verify everything and don’t rely only on the seller’s claims, confirm all details with documentation
• You’ll also need financial experts to draft the purchase agreement and guide you through finance and legal technicalities. You can find financial advisors in the advisor directory.
• Make sure you think about the operational and cultural aspects when doing your due diligence. Ideally, the existing culture of the business aligns with your own values, goals, and management style.

Grow your new business with Xero

The business is yours – now make it grow. Xero gives you the small business tools to process transactions, manage cash flow and find growth opportunities.

FAQs on buying a business

Here are common questions and answers on buying a business.

How do I buy a business in Australia?

Here’s what you need to know about buying a business. Always get advice from your accountant, financial advisor or lawyer before you start.

If you're buying a business in Australia, once you've valued the business and carried out due diligence, you'll negotiate a purchase price with the seller and draw up a legal contract. You may need licences and permits depending on your business type and activities, state or territory, and local government area. There is a GST exemption in Australia for the sale of a business as a 'going concern' if the business is operational up until the day of the sale and the buyer can continue operations without pause. However, capital gains tax (CGT) may still apply to the sale of business assets acquired after 19 September 1985.

What are the advantages of buying a business?

By buying an existing business, you avoid much of the work needed to build a business from scratch.

• inherit an established customer base, brand reputation, revenue streams, supplier relationships and operational systems
• avoid high initial operating costs, finding a business location, hiring employees or buying stock
• get a proven concept, valuable intellectual property and brand recognition to build on
• have easier access to financing with an established business

What are the 4 P's of due diligence?

The four P's of due diligence is a framework used to assess a business. It stands for People, Performance, Process and Philosophy. This model helps you look beyond the numbers to understand the team, how the business operates, its track record, and its overall strategy and culture.

What should be included in a due diligence checklist?

A good due diligence checklist should cover several key areas. These include the business's financials, legal standing, operations, market position, and any regulatory compliance. It's about getting a complete picture of the business's health, from its profit and loss statements to its customer contracts and employee agreements.

How long should due diligence take for a small business?

For a small business, due diligence can often be completed in 30–60 days. However, this depends on how organised the seller's records are and the complexity of the business. The goal is to be thorough, not fast, so take the time you need to feel confident in your decision.