Buying an existing business means trusting someone else's numbers and someone else's paperwork, often within the same few weeks. The buyers who get it right treat those as two separate checks, run at the same time, by two different advisors who talk to each other.
It's tempting to let the excitement of "I found the business" collapse into a single fast decision. The businesses that turn out to be worth what was paid are the ones where a buyer slowed down enough to run both checklists properly before signing anything binding.
Found a business you're serious about? Get both due-diligence streams started before you sign anything binding.
Book a Free Consultation →Two Due-Diligence Streams, Run in Parallel
Legal due diligence answers: what exactly am I buying, and what obligations come with it? Financial due diligence answers: do the numbers behind the asking price actually hold up? These need to happen together, not one after the other. A red flag in the financials (an undisclosed liability, an inflated add-back) is often also a legal problem, and a legal issue (a lease that can't be assigned, a key contract that terminates on change of ownership) is often also a financial one, because it changes what the business is actually worth.
The Legal Checklist: Contracts, Title, Liabilities
- Confirm what's actually being sold. Assets or shares/units, and exactly which assets, contracts and liabilities transfer.
- Check title and security interests. Search the Personal Property Securities Register (PPSR) for equipment, vehicles and stock. You don't want to discover a piece of "included" equipment is actually leased or secured against a debt that isn't yours.
- Review key contracts. Supplier and customer agreements, franchise agreements, and whether any require consent to assign or terminate automatically on a change of ownership.
- Check the lease. If the business operates from leased premises, confirm the lease can be assigned or a new lease granted, on what terms, and who is liable for make-good obligations.
- Identify existing or threatened disputes. Litigation, unresolved customer complaints, employment claims: anything that could become your problem after settlement.
- Confirm licences and permits required to operate transfer with the business, or can be reissued to you without disruption.
The Financial Checklist: What the Numbers Actually Show
- Verify the financial statements against tax returns, bank statements and BAS lodgements, not just the summary the vendor's broker has prepared.
- Scrutinise every add-back. An inflated or undocumented add-back is the single most common way an asking price gets overstated.
- Check debtors and creditors. Are debtors actually collectible? Are there creditors or liabilities that won't appear on a simple profit and loss statement?
- Model the real cash flow, not just reported profit. Profit and cash are not the same thing, and a business can look profitable while being cash-constrained.
- Confirm superannuation and payroll compliance for existing staff, since unpaid entitlements can follow the business depending on how the deal is structured.
- Get the valuation independently sense-checked against comparable transactions, not just accepted at the vendor's asking multiple.
If you're weighing up how to structure the purchase itself, our guide on selling a business covers the same ground from the other side of the table.
Selling Your Business: Getting the Numbers Sale-Ready →Employees, Leases and What Transfers With the Business
In an asset sale, employees generally need to be offered new employment by you as the buyer, and accrued entitlements (annual leave, long service leave) need to be dealt with in the contract: who pays for what, and whether prior service is recognised for future entitlement purposes. In a share sale, existing employment contracts generally continue uninterrupted. Get this settled in the contract before settlement, not worked out afterwards with staff who are understandably anxious about a change of ownership.
Earn-Outs and Vendor Finance: Read the Fine Print
Where there's a gap between what a buyer wants to pay and what a vendor wants to receive, deals sometimes bridge it with an earn-out (part of the price tied to future performance) or vendor finance (the vendor effectively lends part of the purchase price). Both can be reasonable tools, but both need careful terms: how performance is measured and by whom, what happens if you and the vendor disagree about the result, what security exists if a financed payment isn't made, and who has control of the business during an earn-out period. These terms are far easier to negotiate before a deal is agreed in principle than after.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, we run both sides of this due diligence under one roof: our commercial lawyers on the contract, title and risk, and our accounting team on the numbers behind the price. Because both teams are working from the same file, what one side finds informs the other in real time, rather than being reconciled after you've already signed.
If you've found a business you're serious about, talk to us before you sign anything binding.
Frequently Asked Questions
1. What is the difference between legal and financial due diligence?
Legal due diligence checks what you are actually buying and what obligations come with it: title to assets, contracts, leases, employment arrangements, disputes and compliance. Financial due diligence checks whether the numbers behind the asking price are accurate and sustainable: the financial statements, the add-backs, the debtors and creditors, and the cash flow. Both need to run in parallel, because a problem found in one often changes what the other should be checking for.
2. Do I need a lawyer and an accountant to buy a business?
For anything beyond the smallest transaction, yes. An accountant reviews whether the numbers support the price and structures the purchase in a tax-effective way. A lawyer checks the contract, the title to what you're buying, and negotiates protections such as warranties and indemnities. Buying without either is one of the most common ways an owner discovers a problem after settlement rather than before it.
3. What happens to employees when I buy a business?
It depends on whether you're buying the business assets or the entity that employs them. In an asset sale, employees generally need to be offered new employment by the buyer, and their entitlements (including accrued leave) need to be addressed in the sale contract: who pays for what should be settled before settlement, not after. In a share sale, existing employment contracts generally continue with the entity, ownership change notwithstanding.
4. Should I agree to an earn-out or vendor finance?
They can bridge a valuation gap and show the vendor believes in the numbers they've presented, but both need careful drafting: what happens if performance targets are disputed, what security you have if a vendor-financed payment isn't made, and who controls the business during an earn-out period. Get these terms reviewed before you agree to them in principle, since they are harder to renegotiate once a vendor believes a deal is settled.