The information memorandum looks promising. There is an established customer base, useful equipment and an owner ready to hand over. The asking price seems manageable. The important question is what the business will require from you after the keys change hands.
Financial due diligence tests the story against evidence. It looks at what the business has earned, how reliably those earnings become cash and what resources are needed to keep operating. It should also expose what remains uncertain.
Engage your financial and legal advisers early enough for the findings to influence the decision and contract. The Australian Government’s business-buying guide recommends reviewing financial records, operations and legal documents before committing, including several years of financial information.
Establish which business you are buying
A sale of selected business assets and a purchase of shares in the operating company can expose the buyer to different rights, liabilities and tax outcomes. Have your lawyer and tax adviser confirm the structure before treating a headline price as comparable with another opportunity.
Then identify the operating perimeter. Which customers, contracts, employees, equipment, intellectual property and stock are included? Will the seller retain a revenue stream? Does the business depend on premises or a licence that requires separate approval?
A profitable set of accounts for a wider group may say little about the smaller operation being offered. Ask for a reconciliation from the legal entity’s records to the business you will actually control.
Build an evidence trail through revenue
Compare financial statements, tax returns, BAS, ledgers and bank records, allowing for legitimate differences in timing, GST and accounting treatment. Differences require explanation; they are not automatically evidence of wrongdoing.
Sample significant sales back to invoices, contracts and collections. Examine credit notes issued after the reporting date. Break revenue down by customer, service and month to see whether a strong annual result relies on one unusual contract or a short seasonal peak.
Customer concentration deserves a direct question: what happens if the largest customer leaves? A longstanding relationship may be valuable, but its durability after a change of owner needs evidence rather than reassurance.
Normalise earnings both ways
A seller may present adjusted EBITDA, meaning earnings before interest, tax, depreciation and amortisation with proposed adjustments. Ask for the bridge from the accounts and supporting documents for each adjustment.
Here is a fictional example. All amounts are annual and exclude GST. The market replacement cost includes the relevant employment on-costs.
| Adjustment | Amount |
|---|---|
| Reported EBITDA | $180,000 |
| Add back a verified, non-recurring legal expense | +$12,000 |
| Remove a grant that will not recur | −$20,000 |
| Increase owner remuneration to a realistic replacement cost | −$50,000 |
| Illustrative normalised EBITDA | $122,000 |
The final number is an analytical estimate, not a guaranteed future result or a valuation. The legal expense only qualifies for an adjustment if it genuinely will not recur. The replacement salary depends on the work the owner performs and how you intend to cover it.
Do not accept additions simply because they improve the price calculation. Equally, recognise legitimate costs that the new owner will not incur. The test should be consistent in both directions.
Work out the cash needed beyond settlement
Estimate normal working capital from monthly balances and the operating cycle. A business may need stock and wages funded well before customer receipts arrive. Clarify which receivables, payables, deposits and employee balances transfer, and how completion adjustments are calculated.
Build a funding schedule that includes the price, transaction costs, immediate repairs, required working capital and a reasoned contingency. Money spent buying the business cannot also fund its first payroll.
Stress-test a slower first quarter and a longer customer collection period. If the purchase only works when every assumption goes right, the buyer needs to know that before negotiating the final terms.
Inspect assets and obligations outside the profit report
An asset’s written-down book value is not the same as its market value, remaining useful life or replacement cost. Inspect important equipment and obtain specialist advice where condition materially affects the deal. Its tax treatment for the buyer also requires separate analysis.
Check ownership and security interests. The Personal Property Securities Register guidance explains why searches matter when acquiring business assets that may secure another party’s debt.
Have the employment arrangements reviewed as part of the transaction. Employee service and entitlements can be affected when a business changes hands, and the result depends on the circumstances. Fair Work’s transfer-of-business guidance is a useful starting point for that workstream.
Make the findings usable
A good due diligence report separates verified facts, assumptions, unresolved requests and potential deal consequences. Findings may support a price change, additional contract protection, a condition before completion, more investigation or a decision to walk away.
The purpose is to make a major commitment with a clear understanding of the earnings, obligations and cash demands you are taking on. An attractive asking price only becomes meaningful once those pieces are visible.
Target Advisory 