Due diligence is the part of selling a business that nobody enjoys but everybody has to get through. It's where the buyer (and their accountant, solicitor, and sometimes a specialist adviser) go through your business with a fine-tooth comb, verifying that what you've represented is accurate and looking for risks you may not have disclosed.
Most guides on due diligence are written for buyers. This one is written for sellers, because sellers who go in prepared close faster, negotiate from strength, and avoid the surprises that kill deals. If you haven't read it yet, my guide to selling a small business in Sydney covers the full process end to end.
1. What due diligence actually is
Due diligence is the buyer's investigation of your business between signing a Letter of Intent (or Heads of Agreement) and completing the sale. It's their chance to verify your financials, inspect your operations, review your legal position, and satisfy themselves that the business is what you've said it is.
Think of it as the buyer lifting the bonnet. They've already decided they like the car based on the listing and the test drive (your Information Memorandum and initial conversations). Now they want to check the engine, the service history, and whether anything's been patched over.
For small businesses in Australia, due diligence typically runs 30 to 90 days, though more complex deals can stretch to 120 days. PieLAB's guide to due diligence in Australian business sales describes it well: it's like taking on a second full-time job for a couple of months.
2. Why sellers should do their own due diligence first
Here's an idea most sellers don't consider: do your own due diligence before the buyer does theirs.
This is called vendor due diligence, and it's one of the smartest moves you can make. You (or your accountant and solicitor) review your own business the way a buyer would, identify any issues, and either fix them or prepare explanations before they surface in negotiations.
The benefits are significant. You control the narrative: when a buyer discovers an issue themselves, they assume the worst, but when you disclose it proactively with context, it's a non-event. You avoid surprises that derail the deal at the worst possible moment. And you speed up the process because your documents are already organised.
Corestone's vendor due diligence guide and Sprintlaw's guide for small business sellers both walk through how to approach this.
3. The five areas buyers investigate
Due diligence is a structured investigation across several domains. Here's what a buyer and their advisers will look at, and what you should have ready.
Financial. The most intensive area. The buyer's accountant will want three years of P&L statements, balance sheets, and cash flow statements, plus BAS statements, tax returns, bank statements (12-24 months), aged debtors/creditors, loan details, and your full SDE or EBITDA calculation with supporting evidence for all add-backs.
They're checking whether the earnings in your Information Memorandum match the underlying records. Any discrepancy between your P&L, BAS lodgements, and bank statements raises red flags. Get your accountant to reconcile everything before you go to market. My valuation guide explains how SDE and EBITDA work and why accurate financials are the foundation of your sale price — you can also run the numbers yourself with the business valuation calculator.
Legal. The buyer's solicitor will request business registration documents, all customer and supplier contracts, employment agreements, the commercial lease, IP registrations, insurance policies, PPSR search results, and details of any legal disputes or regulatory actions.
The key question is whether your contracts actually transfer to the new owner. Many contracts have change-of-control clauses or require the other party's consent before assignment. The lease is often the single most important document: fewer than three years remaining or a landlord who won't consent to assignment can kill the deal. Sprintlaw's guide to lease assignment and LegalVision's overview of commercial lease transfers cover the process. Read every contract you have and flag any with assignment restrictions or expiry dates within 12 months.
Operational. This is where the buyer assesses whether the business can run without you. Owner dependence is the single biggest factor that pulls a multiple down. They'll look at your org structure, SOPs, technology systems, supplier relationships, equipment condition, and key person risk.
If you don't have written SOPs, start creating them now. Even basic documents covering "how we quote a job," "how we onboard a new client," and "what happens when someone calls in sick" dramatically increase buyer confidence. If you're selling a cleaning business, my guide to selling a cleaning business covers the operational documentation that matters most in that sector.
Employee and HR. Buyers need to understand who works for them after settlement, what those people cost, and what liabilities come with them. They'll request employee lists with roles and pay rates, contracts, leave balances, workers comp history, Fair Work complaint history, and award coverage.
They're checking whether the workforce is compliant. Missing payroll records, unclear leave balances, or inconsistent pay practices create exposure. The Fair Work Ombudsman's transfer of business page explains what happens to employee entitlements when a business changes hands. Audit your employment records: make sure every employee has a current contract matching the relevant award, leave balances are accurate, and any contractor arrangements are genuinely independent.
Customer and revenue. This is about the quality and sustainability of your revenue. Buyers will look at revenue breakdown by customer, customer tenure, contract terms and renewal dates, churn rate, pipeline, and pricing history.
The core question: will the revenue still be there after you leave? If your top client is 35% of revenue on a handshake deal, that's a significant risk. If you have 50 clients and none exceeds 5%, that's a resilient business. Build a spreadsheet showing each client's annual revenue, contract status, and tenure. If you have clients on informal arrangements, now is the time to formalise them into written agreements.
4. Setting up your data room
A data room is an organised folder containing all the documents a buyer needs during due diligence. Google Drive or Dropbox works fine for small business sales.
| Folder | What goes in it |
|---|---|
| Financial | P&L statements, balance sheets, BAS, tax returns, bank statements, debtor/creditor lists |
| Legal | Contracts (customer, supplier, employment), lease, insurance policies, registrations, PPSR searches |
| Operations | Org chart, SOPs, equipment list, technology systems, supplier details |
| HR | Employee list, contracts, leave balances, workers comp history, award coverage |
| Revenue | Customer list with revenue breakdown, contract summaries, churn data |
| Property | Lease agreement, landlord correspondence, fitout details, council approvals |
| Compliance | Licences, permits, certifications, safety records, environmental compliance |
Tips:
- Name files clearly. "FY24_Profit_and_Loss.pdf" is useful. "Scan_003.pdf" is not.
- Include an index document at the top level listing everything and where to find it.
- Don't include everything at once. Start with core documents (financials, lease, key contracts) and provide additional materials as requested. This keeps you in control.
- Remove unnecessary personal information. The OAIC's guidance on selling a business outlines your privacy obligations when sharing customer and employee data.
5. The deal-killers: what makes buyers walk away
Most deals that fall apart during due diligence fail for predictable reasons:
- Financial surprises. The numbers in your IM don't match the underlying records. This is the number one deal-killer. Pitcher Partners' analysis puts it bluntly: buyers need to trust what they're buying, and that starts with verifiable financials.
- Lease problems. The lease is expiring soon, the landlord won't consent to assignment, or the rent is about to jump. A short remaining term or an uncooperative landlord can make the business unsaleable regardless of earnings.
- Undisclosed liabilities. Outstanding tax debts, pending legal claims, employee disputes, or warranty obligations not mentioned in the IM. Buyers expect imperfections. What they don't tolerate is feeling misled.
- Key person risk. The business is too dependent on you. Buyers see this as a job, not a business. The Brokerage Connection flags this as one of the most common issues.
- Compliance gaps. Sham contracting, missing licences, inadequate insurance. These create legal exposure. Sprintlaw's legal due diligence checklist shows what a buyer's solicitor will look for.
- Customer concentration. One or two clients dominating revenue, especially if those relationships are personal to you or on informal terms.
6. How to handle buyer requests
Due diligence can feel invasive. How you respond matters as much as what you disclose.
- Be responsive. Respond to document requests within 48 hours. Delays are one of the most common reasons deals lose momentum.
- Be honest. If there's a problem, disclose it with context. "We lost a client worth $40,000 in March 2025 because they relocated. We've since replaced that revenue with two new clients." That's a non-event. Hiding it and having the buyer discover it in bank statements is a deal-killer.
- Don't over-disclose. Provide what's been requested, accurately. Dumping thousands of unstructured documents doesn't make you look transparent. It makes you look disorganised.
- Keep running the business. If performance drops during the sale process, the buyer will notice and renegotiate.
- Get your advisers involved. Your accountant and solicitor should be managing the information flow. Don't handle due diligence alone.
7. The timeline, and what happens when problems surface
Here's what a typical due diligence period looks like:
| Phase | Timing | What happens |
|---|---|---|
| Document exchange | Weeks 1-2 | Buyer's advisers send a request list. You provide the initial tranche from your data room. |
| Deep review | Weeks 2-4 | Buyer's team works through documents. Expect multiple rounds of follow-up questions. Most intense period. |
| Site visits | Weeks 4-6 | Buyer visits the premises, meets key staff (under NDA), checks equipment, reviews systems. |
| Issue resolution | Weeks 6-8 | Problems identified are raised and discussed. Buyer may seek price adjustments, additional warranties, or changed terms. |
| Completion | Weeks 8-12 | Solicitors finalise the Business Sale Agreement and settlement occurs. |
Simpler deals can compress to 4-6 weeks. Complex businesses can stretch to 16 weeks or longer. My guide to selling a small business covers the contract and settlement process in detail.
When problems surface, the outcome depends on severity:
| Severity | Examples | Typical outcome |
|---|---|---|
| Minor | Missing contract, small accounts discrepancy, expired licence that can be renewed | Disclosed, corrected, deal continues |
| Moderate | Key contract hard to assign, customer concentration, insurance gap | Negotiation: price reduction, extended warranty, holdback, or specific contract conditions |
| Serious | Material financial misrepresentation, undisclosed legal proceedings, fundamental compliance failures | Deal killed. Possible legal consequences depending on IM and Heads of Agreement representations. |
The best way to avoid serious issues is to do your own vendor due diligence first and be upfront about anything less than perfect. Every business has imperfections. Buyers know this. What they're testing is whether you're honest about them.
8. What to do next
If you're planning to sell in the next 12 months, start preparing your data room now. Get your accountant to reconcile your books, review your contracts with your solicitor, and address any issues before they surface in front of a buyer. The work you do now directly affects how smoothly due diligence goes and how strong your negotiating position is.