Conducting due diligence when buying a small to medium business

When you’re looking to buy a small or medium business, it can be exciting. It can also be risky if you go in without proper due diligence.

Our experts in this area help you ‘measure twice so you only have to cut once’. That’s essentially what due diligence is: doing your homework properly before you commit to a deal.

We work with SMEs every day – buyers of coffee shops, real estate rent rolls, car repair workshops, curtain and blinds businesses, massage and hospitality businesses, financial services practices, and more. Across all of these, the core idea is the same: verify what you’re actually buying, uncover any risks early, and make sure the price you pay matches the true value.

What due diligence really means in practice

In a business context, due diligence is simply investigating and verifying the important information about a deal or investment before you commit.

If you’re:

• buying a company
• investing in a new venture
• entering a major partnership.

You’re effectively asking if it’s real, it’s worth what they say it’s worth and getting a grasp of what could go wrong.

Our professional accountants and advisers go through the financials and supporting information and ask the hard questions:

• Does this stack up?
• Is the income really there?
• Are the assets real and unencumbered?
• Are there debts or obligations that haven’t been fully disclosed?

With technology and AI, it’s easier than ever for information to be massaged or presented in the best possible light. It’s important to cut through that and confirm there is genuine value behind the numbers.

Skipping due diligence is risky

If you skip due diligence, you can end up buying a lemon.

We’ve seen situations where the financials for the last three years look impressive at first glance, but once you compare them with industry benchmarks and look at the geography and local market, the story changes.

Sometimes the location doesn’t support the level of revenue being claimed.

Or there might be essential costs for you as the new owner (like a manager’s salary) that haven’t been properly factored in.

If you accept the seller’s price and narrative, you’re paying for their version of reality. Due diligence allows you to come in with your own evidence-based view of value, and that’s a very different position to negotiate from.

Approaching due diligence for small to medium businesses

Due diligence is not a single step. It’s a multi‑stage, structured process. For smaller and mid-sized businesses, we typically focus on a few things.

1. Information gathering

We start by collecting and organising all the key documents, such as:

• financial statements for several years
• BAS and tax returns
• management accounts and ledgers
• employee records and wage and superannuation data
• contracts (leases, supply agreements, service contracts)
• customer lists and major client details
• asset registers (for example, plant, equipment, vehicles and intellectual property).

Sometimes when we ask for more information, the other side can feel uncomfortable or defensive, as if we don’t believe them. But this step is essential. Our job is to give you peace of mind, and that only comes from having enough proper evidence to review.

2. Financial and tax review

We then examine financial reports:

• Profit and loss: Is the revenue consistent with the story being told? Are there unusual spikes or drops?
• Balance sheet: Are accounts receivable and payable realistic? Are there old, doubtful amounts sitting there? Are assets properly recorded?
• Cash flows: Does the cash actually support the profit being claimed?
• Tax and super: Are BAS and tax returns lodged and up to date? Are superannuation obligations current? Is there ATO debt lurking in the background?

Unpaid super, ATO arrears, or poor compliance are major red flags. You don’t want the tax office or regulators knocking on your door after you’ve bought the business.

3. Legal and structural checks

We also look at other records that could raise future issues:

• Corporate records (such as ASIC): Who are the directors and shareholders? Are there any surprises there that could cause issues later?
• Contracts and leases: Are leases assignable? What are the key terms? Are there any hidden obligations?
• Title and encumbrances on assets: For vehicles, plant and equipment, and other assets, we want to know they’re truly being transferred cleanly, not still under finance or security.

If you’re buying things like vans, equipment, or vehicles as part of the deal, we need to be confident they’re not still tied up with another lender.

4. People, culture and customers

Not everything that matters will appear in a spreadsheet.

We encourage buyers to consider the people who work in and buy from the business.

• Employees: Are pay rates, entitlements, and superannuation in order? Are staff underpaid or incorrectly classified under awards?
• Customer base: Are key customers likely to stay after the sale? In many cases, 30–40% of customers can leave when ownership changes, especially if the relationship is strongly tied to the current owner.
• Culture and leadership: A business can look perfect on paper, but if there are cultural problems, poor management practices, or ethical issues, these can destroy value very quickly.

Buyers also need to consider areas like ESG and ethical practices. For example, with hospitality or massage businesses, we’d be wary of underpayment, exploitation, or ‘shadow’ labour arrangements. If you take over staff without understanding these issues, correcting them can be very costly.

Real examples from specific sectors

Every industry has its own nuances. In each case, the principles are the same, but the details we drill into will differ. That’s why a sector-aware approach matters.

We’ve supported clients on everything from small café purchases through to listed company transactions, often working alongside lawyers, valuers, and other professionals.

We know what to look for – and what to challenge. These are some quick examples of how due diligence differs across sectors.

Coffee shop, café or small goods shop

We look at typical revenue levels for that location, managers’ wages, staffing costs, equipment condition, lease terms, and whether the promised training and client lists are truly being provided.

Real estate rent roll

We review the rent roll carefully – how many properties, how long they’ve been managed, quality of the client base, and whether those owners are likely to stay with you after the transfer.

Car repair shop

We examine booking volumes, the mix of work, types of cars, recurring customers, and whether the income aligns with workshop capacity and staffing.

Curtains, blinds, and similar retail

We look at geographic catchment, local demand, margins, and whether the numbers line up with market benchmarks.

Negotiating value

Due diligence isn’t only about avoiding disaster – it also directly affects price.

Once we’ve identified risks or gaps, you can:

• renegotiate the purchase price
• adjust terms (for example, how much is allocated to stock vs goodwill vs plant and equipment)
• build in protections around training, handover periods, or vendor support
• structure the deal to balance outcomes for both seller and buyer (including tax impacts on each side).

Of course, sellers want to maximise price and minimise taxable income. Buyers want the opposite. By working through the detail, we help both parties find a structure that is defensible and fair.

In the end, due diligence is how you properly test an opportunity, so you can secure a safer and more prosperous future for your business. It’s about documenting everything, asking tough questions, and being willing to walk away if the facts don’t support the price.