How Small Business Owners Should Do Due Diligence

“Do your due diligence” is advice you’ll hear often in business circles - and for good reason.

Whether you’re buying a business, signing a new supplier contract, taking on a commercial lease or bringing on a co‑founder, proper due diligence helps you make confident decisions and avoid costly surprises.

In this guide, we break down what due diligence really means for small businesses in Australia, when to do it, and how to approach it step‑by‑step. We’ll also cover the key legal documents and tools that make the process easier and safer.

What Does “Do Your Due Diligence” Mean For Small Businesses?

Due diligence is a structured process of checking the facts before you commit. It’s about verifying what you’ve been told, uncovering risks, and confirming the deal (or relationship) stacks up legally and commercially.

In practice, that means asking for documents, reviewing contracts, confirming licences and compliance, testing assumptions (like revenue or margins), and ensuring you understand any obligations you’re taking on.

You’ll want to do due diligence any time a decision could materially impact your business - for example:

• Buying a business or major assets
• Signing a long‑term supplier or distribution agreement
• Entering a commercial lease or equipment finance
• Hiring senior staff or engaging key contractors
• Bringing on investors or a co‑founder
• Partnering with another brand or white‑labelling products

Done well, due diligence gives you leverage to negotiate better terms, or the confidence to walk away if the risks are too high.

A Practical Due Diligence Checklist In Australia

Every situation is different, but these core areas appear in most small business diligence exercises. Use this as a starting point and tailor it to your deal.

1) Buying A Business Or Franchise

• Financials: Review at least 3 years of financial statements, BAS lodgements, bank statements and aged payables/receivables. Reconcile revenue with source data (e.g. POS exports, invoices).
• Customers and suppliers: Identify key accounts, contract terms, notice and termination rights, any exclusivities, rebates or volume commitments.
• Employees: Confirm headcount, roles, award coverage, leave balances, any disputes or claims, and whether entitlements are up to date.
• Assets and IP: Verify ownership of equipment, domain names, trade marks, software and content. Confirm software licences are transferable.
• Compliance: Check licences and permits (industry and council), tax registrations, privacy compliance and product safety obligations.
• Contracts: Review the sale agreement and any warranties, restraints and indemnities. Confirm which contracts are assigned on completion and any required consents.

If you want a structured, lawyer‑led review, a Due Diligence Package or Business Purchase Package can cover the legal angles end‑to‑end.

2) Suppliers, Distributors And Key Contracts

• Scope and pricing: Make sure deliverables, service levels, pricing and variation processes are clear.
• Liability and risk: Compare indemnities, caps on liability, insurance requirements and any penalties or liquidated damages.
• Term and exit: Understand auto‑renewals, termination for convenience, notice periods and early exit fees.
• Assignment and change of control: Check whether you can transfer the contract if you restructure or sell (or need consent).
• Compliance: Confirm obligations tied to privacy, product safety, data security or industry codes.

Where a deal involves taking over someone else’s agreement, make sure the path is clean using an assignment of contracts approach that matches the contract’s requirements.

3) People: Hiring, Contractors And Founders

• Employment terms: Check current contracts, award coverage, leave balances and policies. Confirm there are no outstanding grievances or claims.
• Contractors: Confirm ABNs, insurances, IP ownership and post‑termination obligations are properly addressed in agreements.
• Founders/investors: Align on ownership, vesting, decision‑making, exit rights and restraints before money changes hands.

If you’re formalising ownership or bringing on a partner, a clear, tailored Shareholders Agreement will set expectations and reduce disputes down the track.

4) Data, Privacy And IP

• Privacy: If you collect personal information (website, CRM, email list), confirm how it’s collected, where it’s stored and who has access. Ensure your Privacy Policy matches reality.
• IP ownership: Confirm who owns brand assets, content, code, images and product designs. Ensure assignments are in writing and signed.
• Brand protection: Consider whether to register your trade mark for names and logos, especially before expanding or franchising.

5) Financial And Tax

• Tax status: Confirm ABN, GST registration and payroll/super obligations. Check for ATO payment plans or outstanding liabilities.
• Profitability drivers: Identify which products, clients or locations drive profit and whether they’re locked in by contract.
• Working capital: Review stock turns, debtor days and supplier terms to understand cash flow requirements post‑deal.

6) Property And Leases

• Lease terms: Rent reviews, outgoings, make‑good, option periods, permitted use and assignment rights matter a lot to resale value.
• Fit‑out and equipment: Confirm ownership and maintenance obligations, warranties, and any finance or rental agreements.
• Approvals: Ensure council approvals and business use permissions match your intended operations at the premises.

A targeted Commercial Lease Review will highlight hidden costs and assignment hurdles before you sign.

7) Risk, Security Interests And Warranties

• PPSR searches: Identify any security interests over assets you’re buying so you don’t inherit someone else’s debt.
• Security position: If you’re providing credit or vendor finance, consider whether to register a security interest yourself to protect your position.
• Customer promises: Map your returns, refunds and warranty processes to Australian Consumer Law and any documented warranties.

Understanding how the Personal Property Securities Register works will help you assess these risks and protect assets and receivables.

Legal Documents And Tools That Support Due Diligence

Good contracts and processes make diligence faster and safer. Here are common documents small businesses rely on - you won’t need all of them for every deal, but many will apply.

• Non‑Disclosure Agreement (NDA): Use an NDA before you share financials, customer lists, product specs or strategy with a buyer, supplier or potential partner.
• Privacy Policy: A clear, compliant Privacy Policy helps you demonstrate good data governance to investors, buyers and enterprise customers.
• Shareholders Agreement: If you have co‑founders or investors, a Shareholders Agreement sets out roles, vesting, exits and dispute processes - critical when due diligence touches ownership and control.
• Customer Terms/Service Agreements: Strong customer contracts articulate scope, pricing, IP ownership, warranties, limitations of liability and termination rights - the first place a buyer or enterprise customer will look.
• Supplier/Manufacturing Agreements: Ensure product quality, delivery timeframes, remedies and price review mechanisms are documented and assignable.
• Warranties Against Defects Policy: If you offer your own warranties, a documented policy aligned with the ACL belongs in your pack (see Warranties Against Defects Policy).
• Assignment/Novation Documents: Where contracts need to move with a sale or restructure, plan the assignment or novation steps early (see the overview on assignment of contracts).
• Security Documents: If you’re extending credit or vendor finance, prepare terms and processes to register a security interest over goods or receivables.
• Business Purchase/Sale Documents: A well‑drafted purchase agreement, disclosure materials and completion checklist streamline the process - a packaged approach (like the Business Purchase Package) keeps everything coordinated.

Two tips to keep in mind:

• Make sure the documents match the real world (what actually happens in your business). Mismatches are a diligence red flag.
• Confirm key contracts are assignable, or plan for counterparty consent if you intend to sell or restructure later.

Common Red Flags (And What To Do Next)

Most issues are fixable - if you find them early. Here are frequent red flags and practical next steps.

• Revenue that doesn’t reconcile: If sales don’t match bank deposits or BAS lodgements, dig into the detail. Ask for POS exports and random invoice sampling. Consider retention, price adjustment, or walking away.
• Unassignable contracts: If major customer or supplier contracts can’t be assigned on a sale, negotiate consent letters or plan to use novation. Adjust price or completion conditions if consents are uncertain.
• Leases with hidden costs: Look for above‑market annual increases, high outgoings, make‑good traps and limited assignment rights. Use your findings to renegotiate terms or require landlord consent as a condition.
• Unregistered or encumbered assets: Search the PPSR for security interests. Require release at or before completion, or hold back part of the price until clear title is delivered.
• IP ownership gaps: Where contractors created brand assets or code, confirm IP assignment clauses are signed. If not, get deeds of assignment before completion.
• Employment non‑compliance: Missing contracts, misclassification or unpaid entitlements can be expensive. Seek warranties and indemnities, a price adjustment, or a remediation plan pre‑completion.
• Risky liability clauses: Contracts that impose uncapped liability or one‑sided indemnities can jeopardise a small business. Renegotiate or replace those terms before you inherit them.

If you discover a serious issue after signing, act quickly. The options depend on your contract and the facts - remedies could include renegotiation, invoking warranties or indemnities, or in some cases termination and a claim for loss. Your leverage is strongest before completion, so raise problems as soon as you find them.

Key Takeaways

• Doing your due diligence means verifying claims, uncovering risks and confirming legal compliance before you commit - it’s not just for big businesses.
• Tailor your checklist to the situation, but always cover financials, key contracts, people, IP/data, property and regulatory compliance.
• Use the right tools: NDAs, strong customer and supplier contracts, a compliant Privacy Policy, and clear ownership documents all make diligence smoother.
• Search for security interests, check assignability and watch for hidden lease costs; these issues can derail deals if left late.
• Treat red flags as a chance to renegotiate, seek protections (warranties/indemnities), or walk away - the earlier you find them, the better your options.
• A structured, lawyer‑led review (for example, a Due Diligence Package or focused Lease Review) can save time and protect you from costly surprises.

If you’d like a consultation on how to plan and run due diligence for your next deal, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.