Buying a business can be one of the fastest ways to grow your wealth or step into being your own boss. It can also be one of the quickest ways to lose a large sum of money if you don’t know what you’re buying. The difference almost always comes down to one thing: due diligence.
Due diligence is the investigation you carry out before you commit to buying a business, the process of looking under the bonnet to confirm that what you’re paying for is actually what you’re getting. Skipping it, or doing it superficially, is how buyers end up with hidden debts, overstated profits, lost customers, and contracts that fall apart the moment the previous owner walks away.
At Hills Solicitors, we’ve guided Maitland and Hunter Valley buyers through business acquisitions since 1894. This guide explains what due diligence involves, the specific things you need to investigate, the red flags that should give you pause, and how a solicitor protects you through the process.
What Is Due Diligence and Why Does It Matter?
Due diligence is the buyer’s investigation of a business before settlement. It’s your opportunity to verify the seller’s claims, uncover any problems, and confirm that the business is worth what you’re about to pay.
The principle that governs most business sales in Australia is caveat emptor, which means “let the buyer beware”. Unlike consumer purchases, the seller of a business is generally under no obligation to volunteer problems. If you don’t ask the right questions and investigate properly, you buy the business as it is, with all its hidden flaws. Once the contract settles, your options for recovering losses are limited and expensive.
This is why due diligence isn’t optional. It’s the single most important stage of buying a business, and it needs to happen before you’re contractually committed, or with appropriate conditions in the contract that allow you to withdraw if problems emerge.
Financial Due Diligence: Confirming the Numbers
The financial health of the business is usually the buyer’s first concern, and rightly so. You’re often paying a price based on the business’s earnings, so you need to verify those earnings are real and sustainable.
Key financial checks include reviewing at least three years of profit and loss statements, balance sheets, and tax returns; confirming the figures provided match what’s been lodged with the ATO; analysing the business activity statements (BAS) to verify reported turnover; examining the debtors ledger to see how much is owed and how old those debts are; reviewing the creditors ledger and any outstanding liabilities; and understanding the basis for the asking price (is it a multiple of earnings, and is that multiple reasonable for the industry?).
A common trap is a business whose profits depend heavily on the current owner working long hours for little or no wage. Once you factor in a market salary for the work the owner does, the real profit can shrink dramatically. Your accountant should “normalise” the earnings to show what the business would actually earn under normal management.
We strongly recommend engaging an accountant to conduct the financial due diligence alongside the legal investigation. The two work hand in hand.
Legal Due Diligence: What Your Solicitor Investigates
While your accountant focuses on the numbers, your solicitor investigates the legal foundations of the business. This is where many of the most serious (and most hidden) risks are uncovered.
Business Structure and Ownership
Your solicitor confirms exactly what you’re buying. Are you buying the business assets (the equipment, stock, goodwill, and customer base), or the shares in the company that owns the business? This distinction is critical, because buying shares means you inherit all of the company’s liabilities, including ones you may not know about. Most buyers are better protected by an asset purchase, but the right structure depends on the circumstances and the tax position.
Contracts and Agreements
A business is often only as valuable as its contracts. Your solicitor reviews supplier agreements (are the favourable terms transferable to you?), customer contracts (will key clients stay after the sale, and are their contracts assignable?), the premises lease (can it be assigned or renewed, and on what terms?), and employment contracts and entitlements. Many business sales fall apart because a key contract turns out to be non-transferable, or a major customer relationship is informal and walks out the door with the seller.
The Lease
For many businesses, the premises is fundamental to the value. If you’re buying a cafe, retail shop, or any location-dependent business, the commercial lease is one of the most important documents in the transaction. Your solicitor checks how much of the lease term remains, whether there are options to renew, whether the landlord will consent to assignment, what the rent review mechanism is, and whether there are any make-good or other obligations you’ll inherit. A business with only a year left on its lease and no renewal option is a very different proposition from one with a secure ten-year tenure.
Intellectual Property and Licences
Your solicitor confirms that the business actually owns the assets it claims to, including the business name, any registered trademarks, domain names, social media accounts, and any software or systems the business relies on. For regulated industries, they also verify that all necessary licences and permits are current and transferable.
Litigation and Disputes
Are there any current or threatened legal disputes involving the business? An undisclosed lawsuit, an unhappy former employee, or a brewing customer dispute can become your problem after settlement. Your solicitor investigates and ensures appropriate warranties and indemnities are built into the contract.
Operational Due Diligence: How the Business Actually Runs
Beyond the numbers and the legal documents, you need to understand how the business operates day to day and whether it can run successfully without the current owner.
Important operational questions include: how dependent is the business on the current owner’s personal relationships and knowledge? Will key staff stay after the sale, and are they on reasonable terms? Who are the major customers, and how concentrated is the revenue (if one client represents 40% of turnover, losing them after settlement would be devastating)? How reliable are the suppliers, and are there alternatives? What is the condition of the equipment, stock, and premises? Is there a documented system for how the business operates, or is everything in the owner’s head?
This last point is one of the most overlooked. A business that depends entirely on the owner’s personal involvement, relationships, and undocumented knowledge is far riskier to buy than one with established systems, trained staff, and documented processes. The handover and any agreed transition period become critical.
Red Flags That Should Give You Pause
In our experience helping Hunter Valley buyers, these warning signs warrant extra scrutiny or, in some cases, walking away:
- Reluctance to provide information: A seller who is slow, evasive, or unwilling to provide financial records or answer questions is hiding something, or simply disorganised in a way that should concern you.
- Profits that depend on the owner: If the business only makes money because the owner works 70-hour weeks for no wage, the real profitability may be much lower than presented.
- Customer concentration: Heavy reliance on one or two clients means the business is fragile. If those relationships are personal to the seller, they may not survive the sale.
- A short or insecure lease: For a location-dependent business, a lease nearing its end with no renewal option is a serious risk to the value.
- Informal or undocumented arrangements: Handshake deals with suppliers, verbal customer agreements, and cash arrangements all create uncertainty and risk.
- A rushed timeline: A seller pushing you to commit quickly, before you’ve completed proper due diligence, is a significant warning sign. Legitimate sellers understand that a serious buyer needs time to investigate.
How a Solicitor Protects You Through the Process
A solicitor does far more than review the contract at the end. Throughout the acquisition, your solicitor structures the purchase to protect you (asset purchase versus share purchase), drafts or reviews the business sale agreement to ensure it reflects what you’ve agreed and includes appropriate protections, negotiates warranties and indemnities so the seller remains responsible for undisclosed problems, includes due diligence conditions that allow you to withdraw if serious issues emerge, advises on restraint of trade clauses to stop the seller setting up in competition next door, reviews the lease and coordinates the landlord’s consent to assignment, and manages settlement to ensure everything transfers correctly.
The warranties and restraint of trade provisions deserve particular attention. A well-drafted restraint of trade clause prevents the seller from opening a competing business nearby or poaching the customers and staff you’ve just paid for. Without one, the seller could legally set up across the road and take the goodwill with them. Restraint clauses must be carefully drafted to be enforceable under NSW law, as a poorly worded restraint can be struck down by a court.
The Importance of Conditions in the Contract
Ideally, due diligence happens before you sign anything. In practice, sellers often want a signed contract before granting full access to sensitive business information. The solution is a contract that is conditional on satisfactory due diligence.
This means you sign the contract, but it includes a clause allowing you to withdraw (and recover your deposit) if your due diligence reveals problems within an agreed period. Your solicitor drafts these conditions carefully so you have genuine protection and a clear exit if the business isn’t what it was represented to be. Getting these conditions right is one of the most valuable things a solicitor does in a business purchase.
Why Local Legal Advice Matters in the Hunter Valley
Buying a business in the Hunter Valley benefits from a solicitor who understands the local market. Hills Solicitors knows the local commercial property landscape, the typical structures of regional business sales, and the practical realities of industries that define the area, from hospitality and retail through to trades, agribusiness, and professional services.
We also coordinate seamlessly with the other professionals you’ll need, including your accountant and your finance broker, and we handle the property and lease aspects of the transaction in-house through our property law team. Our office is at 447 High Street, Maitland, and we act for buyers across Maitland, the Hunter Valley, and the wider Newcastle region.
Frequently Asked Questions
What does due diligence involve when buying a business?
Due diligence is the buyer’s investigation of a business before settlement. It covers financial checks (verifying profits, turnover, debts, and the basis for the price), legal checks (contracts, leases, business structure, intellectual property, licences, and any disputes), and operational checks (how dependent the business is on the owner, staff retention, customer concentration, and the condition of assets). It’s the most important stage of buying a business.
How long does due diligence take?
It varies with the size and complexity of the business, but a typical due diligence period in a business sale contract is two to four weeks. Larger or more complex businesses may need longer. Your solicitor negotiates an appropriate period in the contract so you have enough time to investigate properly without unnecessarily delaying the sale.
Should I buy the business assets or the company shares?
In most cases, buying the assets (equipment, stock, goodwill, and customer base) is safer for the buyer because you don’t inherit the company’s existing liabilities. Buying shares means you take on the company with all its history, including any hidden debts or legal problems. However, the right approach depends on the specific business and the tax implications, which is why legal and accounting advice is essential before you decide.
What is a restraint of trade clause and do I need one?
A restraint of trade clause prevents the seller from competing against the business after the sale, for example by opening a similar business nearby or poaching customers and staff. If you’re paying for the goodwill of a business, a restraint clause is essential to protect that value. It must be carefully drafted to be enforceable under NSW law, as overly broad restraints can be struck down by the courts.
What happens if I find problems during due diligence?
If your contract includes a due diligence condition, you can withdraw from the purchase and recover your deposit if you discover serious problems within the agreed period. Alternatively, you may be able to renegotiate the price or require the seller to fix the issue or provide warranties before settlement. This is exactly why having a properly drafted conditional contract matters, and why you should engage a solicitor before signing anything.
Do I need a solicitor and an accountant to buy a business?
Yes, ideally both. Your accountant handles the financial due diligence (verifying the numbers and tax position), while your solicitor handles the legal due diligence and the contract (structure, warranties, lease, restraint of trade, and settlement). The two work together to protect you. At Hills Solicitors, we routinely coordinate with our clients’ accountants throughout the acquisition.
Thinking of Buying a Business? Talk to Us First
The best time to involve a solicitor in a business purchase is before you sign anything, not after. Early legal advice lets you structure the deal correctly, build in the protections that matter, and investigate thoroughly before you’re committed. It’s far cheaper than trying to fix problems after settlement.
Hills Solicitors has been guiding Hunter Valley business buyers since 1894. Whether you’re buying your first business or adding to an existing one, our team will protect your interests at every stage, from due diligence through to settlement.
To learn more about how we support business purchases and sales, see our buying and selling businesses service.
Book a consultation with our business law team today, or call us on (02) 4933 5111. Check our FAQ page if you have any questions.
