Before you sign anything, legal due diligence is the process that separates a smart business purchase from an expensive mistake. It covers 10 core areas, from financial records and tax compliance to employee entitlements, property leases, intellectual property and pending litigation. Skip any one of them and you risk inheriting debts, disputes or regulatory problems that were never disclosed during negotiations.
You have found a business that looks like the right fit. The financials seem healthy, the owner is keen to sell, and the price feels fair. But what you see on the surface is rarely the full picture.
Legal due diligence is the structured investigation that happens between agreeing on a deal in principle and signing on the dotted line. It is the buyer’s opportunity to verify every claim the seller has made, uncover risks that have not been disclosed, and confirm that the business is actually worth what you are about to pay for it. If you are considering a business purchase in Western Australia or anywhere in Australia, our team at DFG Legal can guide you through the process. To learn more about our commercial law services, click here.
Think of it this way. You would not buy a house without a building inspection. Buying a business without proper legal due diligence is the commercial equivalent of skipping that step, except the financial consequences can be far greater.
Quick Reference: The 10 Areas of Legal Due Diligence
| Due Diligence Area | What You Are Checking | Key Risk If Missed |
|---|---|---|
| Business structure and ownership | Who actually owns the business and its assets | Buying from someone who does not have authority to sell |
| Financial records and tax | Accuracy of accounts, ATO compliance, outstanding liabilities | Inheriting unpaid tax debts or inflated revenue figures |
| PPSR and security interests | Whether assets are used as security for existing loans | Losing equipment or stock to a third-party creditor |
| Contracts and agreements | Customer, supplier and service contracts | Key contracts that cannot be assigned or are about to expire |
| Employees and entitlements | Awards, leave balances, unfair dismissal risks | Unexpected payouts for accrued leave or redundancy |
| Premises and lease | Lease terms, rent reviews, make-good clauses | Being locked into an unfavourable lease or losing the premises |
| Intellectual property | Trademarks, patents, domain names, trade secrets | Discovering the brand name is not actually owned by the business |
| Licences and permits | Industry-specific regulatory compliance | Operating illegally because a licence cannot be transferred |
| Litigation and disputes | Current or threatened legal proceedings | Inheriting a lawsuit that costs more than the business is worth |
| Insurance | Coverage gaps, claims history, policy transferability | Being uninsured for existing risks from day one |
Each of these areas can reveal issues that change the purchase price, the deal structure, or whether you proceed at all.
Business Structure and Ownership
Start with the most basic question. Who owns this business, and do they have the legal authority to sell it?
This sounds straightforward, but it is where problems often begin. A sole trader selling their business is relatively simple. A company with multiple shareholders, a trust structure, or a partnership arrangement is more complex. You need to confirm that every party with an ownership interest has consented to the sale.
What to check:
- The business’s ABN and ACN registration on the ASIC register
- Shareholder agreements, trust deeds, or partnership agreements
- Minutes of any board or shareholder resolutions authorising the sale
- Whether any shareholders or partners have pre-emptive rights or first-refusal clauses
- The seller’s authority to bind the entity to a sale agreement
If the business operates through a company, you should obtain a current company search from ASIC. This will show you the directors, shareholders, registered charges, and whether the company is subject to any external administration.
Asset Sale vs Share Sale
The structure of the deal itself matters enormously. There are two main ways to buy a business in Australia, and each carries different legal and tax consequences.
| Factor | Asset Sale | Share Sale |
|---|---|---|
| What you buy | Selected assets (equipment, stock, goodwill, IP) | Shares in the company that owns the business |
| Liabilities | Generally only those you agree to assume | All liabilities transfer with the company |
| Stamp duty | Payable on dutiable assets (varies by state) | Payable on share transfer in some states |
| GST | May apply unless going concern exemption met | Generally not subject to GST |
| Employee transfer | Employees must be offered new employment | Employment continues automatically |
| Contracts | Each contract must be assigned or novated | Contracts remain with the company |
| Complexity | More selective but more administrative work | Simpler transfer but higher risk exposure |
In most small to medium business purchases, an asset sale gives the buyer more control over what they are taking on. A share sale is cleaner on paper but means you inherit everything, including problems you may not have discovered.
Financial Records and Tax Compliance
This is where many buyers focus most of their attention, and for good reason. The financial health of the business is the foundation of the purchase price.
Request at least three years of financial statements, including profit and loss statements, balance sheets, and cash flow statements. Compare these against the business’s tax returns lodged with the ATO. Any significant discrepancies between internal records and tax filings are a red flag.
What to check:
- Profit and loss statements for the last three to five years
- BAS lodgements and GST compliance
- Outstanding ATO debts or payment arrangements
- Superannuation compliance for all employees
- Any ATO audit activity, current or historical
- Accounts receivable ageing reports (how much is actually collectible)
- Accounts payable (what is owed to suppliers)
One area that catches buyers out is the difference between reported profit and actual cash flow. A business can show a healthy profit on paper while struggling to collect payments from customers. The ageing of accounts receivable tells you how much of the reported revenue is actually coming in.
Since 1 July 2026, the Payday Super reforms require employers to pay superannuation at the same time as wages. If the business you are buying has not updated its payroll systems to comply, that is an immediate cost you will need to factor in.
PPSR Searches: Who Has a Claim on the Assets
The Personal Property Securities Register (PPSR) is a national register of security interests over personal property. Before you pay for business assets, you need to confirm that nobody else has a claim over them.
A PPSR search will reveal whether any equipment, vehicles, stock, or other assets are being used as collateral for existing loans. If a security interest is registered against an asset, the creditor’s claim generally takes priority over yours, even if you have paid for it in good faith.
What to check:
- PPSR searches against the business entity (ABN/ACN)
- PPSR searches against key individual assets (vehicles, equipment by serial number)
- Whether any registered security interests will be discharged at settlement
- Retention of title clauses in supplier agreements
This is a non-negotiable step. The PPSR search costs very little, but failing to do one can cost you the assets you thought you were buying.
Contracts and Agreements
A business is only as strong as its relationships, and those relationships are governed by contracts. You need to review every material contract the business holds.
Key contracts to examine:
- Customer and client agreements (especially long-term or high-value ones)
- Supplier agreements and credit terms
- Franchise agreements (if applicable)
- Licensing agreements for software, technology, or intellectual property
- Service agreements and maintenance contracts
- Distribution or agency agreements
Pay particular attention to change of control clauses. Many commercial contracts include a provision that allows the other party to terminate if the business changes ownership. If your biggest customer can walk away the day you take over, that changes the value of the business significantly.
Also check the term and renewal provisions. A contract that expires in three months without an automatic renewal is very different from one that runs for another five years.
Restraint of Trade
Ensure the sale agreement includes a reasonable restraint of trade clause preventing the seller from setting up a competing business immediately after the sale. Without this protection, the seller could take the goodwill you paid for and use it to compete directly against you.
In Australia, restraint of trade clauses must be reasonable in scope, duration, and geographic area. A clause that is too broad may be unenforceable. Your lawyer should draft this carefully to ensure it provides genuine protection.
Employees and Entitlements
If the business has employees, you are potentially taking on significant obligations. Under the Fair Work Act 2009, employees who transfer with a business sale are entitled to have their service recognised for the purposes of leave entitlements and redundancy.
What to check:
- The number of employees and their employment status (full-time, part-time, casual)
- Applicable modern awards or enterprise agreements
- Accrued annual leave, personal leave, and long service leave balances
- Any pending or recent workers’ compensation claims
- Unfair dismissal or general protections claims
- Employment contracts, including any termination provisions or restraint clauses
- Compliance with the National Employment Standards
The cost of accrued employee entitlements is frequently underestimated by buyers. A business with 20 employees who have each accrued several weeks of annual leave and long service leave represents a substantial liability. This should be reflected in the purchase price or addressed as a condition of the sale.
Premises and Lease
If the business operates from leased premises, the lease is one of the most important documents you will review. The terms of the lease can make or break a business, particularly in retail and hospitality.
What to check:
- The remaining term of the lease, including any options to renew
- Rent amount, frequency, and method of rent review (CPI, market, or fixed percentage)
- Whether the lease can be assigned to a new owner
- The landlord’s consent requirements for assignment
- Make-good obligations at the end of the lease
- Outgoings and who is responsible for them
- Any breaches or disputes between the current tenant and the landlord
In Western Australia, commercial leases are governed by the Commercial Tenancy (Retail Shops) Agreements Act 1985 for retail premises. This legislation provides certain protections for tenants, including limits on rent increases and requirements for disclosure.
If the lease has a short remaining term with no option to renew, you could find yourself without premises shortly after purchasing the business. This is a risk that must be addressed before settlement.
Intellectual Property
Intellectual property (IP) can represent a significant portion of a business’s value, especially if the business relies on a recognisable brand, proprietary technology, or creative works.
What to check:
- Registered trademarks and their status on IP Australia’s database
- Patent registrations and whether they are current
- Domain name ownership and registration details
- Copyright ownership for websites, marketing materials, and creative works
- Trade secrets and confidential information protections
- Any IP licensing agreements (both granted and received)
A common trap is assuming that the business owns its own brand. In some cases, the trading name or logo may not be registered as a trademark, or it may be registered in the personal name of the founder rather than the business entity. If the seller retains ownership of the trademark after the sale, you could lose the right to use the brand you paid for.
Licences, Permits, and Regulatory Compliance
Many industries in Australia require specific licences or permits to operate. These can range from liquor licences and food safety certificates to building and construction licences, transport permits, and environmental approvals.
What to check:
- All licences and permits currently held by the business
- Whether each licence is transferable to a new owner
- The process and timeline for transferring or applying for new licences
- Any conditions attached to existing licences
- Compliance history and any enforcement actions
- Environmental compliance and any contamination issues
Some licences cannot be transferred at all. In those cases, the buyer must apply for a new licence, which can take weeks or months. If the business cannot legally operate without the licence, this creates a gap that needs careful planning.
Litigation and Disputes
Nobody wants to buy a lawsuit. A thorough due diligence process includes checking whether the business is involved in any current, pending, or threatened legal proceedings.
What to check:
- Current court proceedings (plaintiff or defendant)
- Pending or threatened claims
- Regulatory investigations or compliance notices
- Past litigation and settlement history
- Any disputes with customers, suppliers, employees, or government bodies
- Warranty claims or product liability issues
The seller should provide a full disclosure of all litigation matters. You should also conduct your own searches of court records, ASIC, and relevant regulatory bodies. What the seller does not tell you can be just as important as what they do.
Insurance
Review the business’s current insurance coverage and claims history. This tells you two things: what risks the business faces and how those risks have materialised in the past.
What to check:
- Public liability, professional indemnity, and product liability policies
- Workers’ compensation insurance
- Property and business interruption insurance
- Claims history for the past five years
- Whether policies are transferable or need to be replaced
- Any gaps in coverage that need to be addressed
A history of frequent claims may indicate underlying operational problems. Conversely, inadequate insurance coverage means you could be exposed to risks from day one.
Deal Protection Mechanisms
Once you have completed your due diligence, the findings should be reflected in the sale agreement. There are several mechanisms that protect the buyer.
| Mechanism | How It Protects the Buyer |
|---|---|
| Price adjustment clause | Allows the purchase price to be adjusted if due diligence reveals issues that reduce the business’s value |
| Warranties and representations | The seller warrants that specific statements about the business are true and accurate |
| Indemnities | The seller agrees to compensate the buyer for losses arising from specific risks |
| Conditions precedent | The sale does not complete until certain conditions are satisfied (e.g., landlord consent, licence transfer) |
| Escrow or retention | A portion of the purchase price is held in escrow for a period to cover warranty claims |
These mechanisms only work if they are properly drafted. Generic templates downloaded from the internet are unlikely to provide adequate protection for your specific transaction.
Your Due Diligence Checklist: Questions to Work Through
Before you finalise any business purchase, work through these questions:
- Have you confirmed who legally owns the business and all its assets?
- Have you obtained and reviewed at least three years of audited financial statements?
- Have you conducted PPSR searches against the business and its key assets?
- Have you reviewed all material contracts for change of control clauses?
- Do you know the total value of accrued employee entitlements?
- Have you reviewed the lease terms, including assignment provisions and make-good obligations?
- Have you confirmed that all trademarks and IP are owned by the business entity?
- Have you identified every licence and permit required to operate, and confirmed they can be transferred?
- Have you searched court records and regulatory databases for current or past litigation?
- Have you reviewed the business’s insurance policies and claims history?
- Have you obtained independent valuations for key assets?
- Have you engaged a lawyer to draft or review the sale agreement, including warranties, indemnities, and conditions precedent?
Common Mistakes Buyers Make During Due Diligence
Relying on the seller’s word instead of independent verification. Sellers have every incentive to present their business in the best possible light. That is not dishonest. It is human nature. Your due diligence process must independently verify every material claim, from revenue figures to the condition of equipment. Trust is fine. Verification is better.
Rushing the process because the seller sets a deadline. Artificial urgency is one of the oldest negotiation tactics. A seller who pressures you to skip due diligence steps or complete the process in an unreasonably short timeframe may have something to hide. If the deal is genuinely good, it will survive a thorough investigation. If it cannot, that tells you everything you need to know.
Focusing on the big numbers and ignoring the details. Revenue and profit get all the attention, but it is the details that catch buyers out. An unfavourable lease renewal clause, a key customer contract that expires next month, or an employee entitlement liability that was not factored into the price. These smaller items can add up to a very expensive surprise.
Not engaging a lawyer early enough. Some buyers treat legal advice as a final step, something to organise once the deal is essentially agreed. By that point, you have less negotiating power and fewer options. Engaging a lawyer from the outset means due diligence findings can inform your negotiation strategy, not just confirm what you have already committed to.
Ignoring the cultural and operational due diligence. Legal and financial checks are essential, but they do not tell you everything. How does the business actually run day to day? What happens when the current owner leaves? Are key relationships dependent on the seller personally? These operational questions can determine whether the business continues to perform after the sale.
Frequently Asked Questions
How long does legal due diligence take for a business purchase?
For a small to medium business, due diligence typically takes four to eight weeks. The timeline depends on the complexity of the business, the quality of the seller’s records, and how quickly both parties respond to requests. Rushing this process increases the risk of missing critical issues that could affect the value or viability of the purchase.
What does legal due diligence cost in Australia?
Legal fees for due diligence vary based on the size and complexity of the transaction. For a straightforward small business purchase, legal costs may range from $5,000 to $15,000. Larger or more complex transactions involving multiple entities, significant IP portfolios, or regulatory approvals can cost substantially more. The cost of proper due diligence is almost always far less than the cost of problems discovered after settlement.
Can I do due diligence myself without a lawyer?
You can conduct some aspects of due diligence yourself, such as reviewing financial statements and conducting basic searches. However, legal due diligence requires expertise in contract law, employment law, property law, and regulatory compliance. A qualified lawyer will identify risks that a non-lawyer is unlikely to spot. For most business purchases, professional legal advice is a worthwhile investment.
What happens if due diligence reveals a problem?
Depending on the nature and severity of the issue, you have several options. You can renegotiate the purchase price to reflect the discovered risk. You can require the seller to resolve the issue before settlement. You can include specific warranties or indemnities in the sale agreement to protect yourself. Or, if the problem is serious enough, you can walk away from the deal entirely.
Is due diligence required by law in Australia?
Due diligence is not a legal requirement for business purchases in Australia. However, the principle of caveat emptor (buyer beware) means that once the sale is complete, you generally cannot claim that the seller failed to disclose problems unless specific warranties were breached. Due diligence is your opportunity to protect yourself before you are legally committed. For more background on the concept, refer to Due Diligence on Wikipedia.
Final Word
Buying a business is one of the most significant financial decisions you will make. The due diligence process is your safety net, the step that ensures you know exactly what you are paying for and what risks come with it. Every area covered in this guide, from business structure and financials to employee entitlements, leases, IP and litigation, represents a potential cost or liability that should be identified before settlement, not after.
At DFG Legal, we have guided business buyers across Western Australia through the due diligence process for over 35 years. We know where the risks hide, what questions to ask, and how to structure a deal that protects your interests. Whether you are buying a small local operation or acquiring a larger enterprise, we can help you do it with confidence.
This article provides general information only and does not constitute legal advice. Every business purchase involves unique circumstances that require tailored professional guidance.
