Buying an established business gives you a head start in the sense that you’re inheriting a customer base, an experienced team, supplier relationships and revenue that’s already flowing. The real question is how much of that value is there when the business changes hands.
The seller’s accounts are a useful starting point, but again they don’t tell the whole story. There can be a number of things that will impact the business post-sale such as outstanding liabilities, inconsistent profits, employee entitlements, and dependence on a small number of major customers.
That’s why business due diligence is so important. It’s about looking beyond the asking price at the financial position, the tax position, and the risks.
Before you commit, get your accountant to look at these five areas.
5 Checks Your Accountant Should Make in Business Due Diligence
The five checks below cover financial reporting, cash flow, employees, customer and supplier concentration, and assets and obligations.
1. Accuracy of Financial and Tax Reporting
Start with the numbers. Reported revenue and profit should be checked against supporting records to assess whether the figures are reliable.
Your accountant should examine:
- Sales records and bank statements, to check that reported revenue can be verified.
- At least three years of profit and loss statements and balance sheets, to see performance over time.
- Business expenses, outstanding liabilities, and unusual transactions.
- Tax returns, Business Activity Statements (BAS), GST records, and ATO correspondence.
- One-off income, expenses or adjustments that distort reported earnings.
Look at the trend across financial years. A business that was performing very well three years ago may have slipped since. Your accountant can also check whether the earnings reported include any costs which won’t continue under the new ownership. That’s the concept of normalising earnings.
Why it matters: You need reliable figures to work out what the business is worth. Unexplained adjustments or inconsistencies may affect the valuation and should be investigated before agreeing on a purchase price.
2. Working Capital and Cash Flow
Profit on paper doesn’t equate to having any cash to pay the bills. A business can have very good sales and still be in a state of flux because of late paying customers, suppliers who want payment immediately or simply because too much of the money is sitting in stock that hasn’t been sold.
Your accountant should look at:
- Outstanding customer invoices and how long customers take to pay
- Supplier payments, loans and other short-term liabilities
- Inventory levels, ageing stock and items that have lost value
- Cash flow across previous periods, including seasonal swings
- The working capital needed to keep operating normally after the purchase.
Imagine a business with fairly steady sales that is reliant on a small number of customers who take 60 or 90 days to pay. Wages, rent, and supplier invoices still come due. That gap can lead to a cash shortfall even if the business appears to be profitable. Your accountant will be able to compare the forecast with past performance to work out how much cash is required to keep the business going.
Why it matters: The purchase price is only one element of the overall commitment. You’ll likely need further cash for stock, wages, and supplier invoices once settlement has occurred.
3. Employee Liabilities and Key Personnel Risks
When you buy a business, you also need to consider people who keep it running. You may have got some very experienced team on board who have the technical know-how, the ability to run the big accounts, and the long-term relationships with customers. If they all leave shortly after the sale, then the business can be in an absolute mess.
Your accountant should review the payroll and financial records for:
- Unpaid wages and superannuation.
- Accrued annual leave and long-service leave.
- Payroll records and compliance with tax and super obligations.
- Recorded employee claims, disputes, or unresolved payroll matters.
- Staff turnover and reliance on a few key people.
Ask a simple question like, could the business go on running well if the owner or a key person left? If one person is managing the vast majority of the major customer accounts, then their departure would obviously have a significant impact on future revenue. How dependent is the business on that individual? What would be the arrangements for a handover?
Employment contracts, awards and disputes will require an employment law specialist. Your accountant can of course pick up on the financial and payroll issues, and the specialist can then advise on the legal position.
Why it matters: Unpaid entitlements are an additional cost to the buyer, and the loss of key staff is going to have an impact on service delivery, customer retention and ultimately income. The way the deal is structured (as an asset purchase or a share purchase) will also have a bearing on which liabilities you take on, so raise it early with whoever provides your corporate due diligence services.
4. Customer and Supplier Concentration
A long customer list appears to be stable, but the revenue split might tell a different story. If a small number of customers are responsible for the bulk of the sales, then the loss of one of them could be very damaging. Suppliers are the same. If you’re reliant on a single supplier for your key stock, then you’re at risk of a price increase or a delay if that supplier relationship changes.
Your accountant should assess:
- The share of total revenue from the largest customers.
- How long major customer relationships have lasted and how stable they are.
- Written agreements, renewal terms, and termination conditions.
- Dependence on individual suppliers and the alternatives available.
- Changes in customer revenue or supplier costs over recent periods.
Check that the key agreements will survive the change of ownership. The customer may have had a relationship with the seller for years without any long-term contract, and that relationship won’t automatically pass to you.
Why it matters: Concentration makes future revenue far less predictable. Understanding these dependencies is the key to understanding the risks inherent in current performance.
5. Assets, Contracts and Existing Obligations
The final review is where you establish what you’re buying. Equipment, stock, vehicles, leases, software and licences are all part of the running of the business, so you need to have a good grasp of the ownership, condition and transfer of all of those before you go any further.
Your accountant should help review the records and flag matters for further investigation, including:
- Whether the assets being sold are those of the business and are in the business accounts.
- The recorded value of the plant and machinery, the equipment, the vehicles, and all the other significant assets is, of course, important.
- Existing loans, guarantees, security interests and contingent liabilities.
- The financials on the leases and other ongoing arrangements.
- Whether the sale includes stock, IP, software, and other operating resources.
An asset’s book value may differ from its market value. Equipment of conditions, maintenance requirements, and potential replacement costs should also be considered. Legal advisors will need to look at the ownership rights, the terms of the contracts, the licences and any transfer restrictions. Technical specialists may be required to assess the machinery where the condition of the machinery is relevant to the decision.
Why it matters: You need a clear picture of the assets, the rights and the obligations in the deal. Missing assets, transfer restrictions, or existing debt can all have a massive impact on the financials.
How Zimsen Partners Approaches Due Diligence
At Zimsen Partners, our business due diligence service is a blend of financial, tax, structural, and operational due diligence. We scale the scope of the work to the deal, whether that’s a very light review on a smaller purchase or a full deep dive on a larger one.
Our due diligence services cover financial and tax reviews, commercial performance testing, and risk reporting. Where a buyer is acquiring a company, our corporate due diligence will look at the structure as well as whether an asset or share purchase is appropriate for the deal.
Conclusion
Due diligence is more than confirming that a business is profitable. It helps you understand what you are buying, which obligations you may inherit, and what could affect the business after the transaction.
At Zimsen Partners, we assist buyers with financial and tax due diligence. Our business due diligence services help you identify risks early and make informed acquisition decisions.
Planning to acquire a business? Speak to Zimsen Partners before signing the deal.
Frequently Asked Questions
What is the difference between financial due diligence and a standard set of accounts?
A standard set of accounts shows what the business has reported. Financial due diligence goes further by testing how accurate those figures are, adjusting for one-off items, and identifying anything that affects the valuation.
Do I need a full review for a small business purchase?
Not necessarily. A targeted review can be focused on proof of revenue, proof of liabilities, tax compliance, and cash flow, which are the most important in a smaller deal.
The seller’s accountant did the figures. Do I still need my own review?
An independent review is advisable, even when the seller’s accountant has prepared the financial statements. Your accountant can assess the records, identify potential risks, and help you understand the assumptions behind the asking price.
How long does a review take?
The timeframe depends on the size and complexity of the acquisition, the scope of the review, and how quickly the seller provides the required documents. Zimsen Partners can discuss the expected timeframe when establishing the scope of the engagement.
When should I start?
As soon as you are given access to the business’s records. Early findings can influence the final price, the structure of the deal, and the completion timeline.
What do corporate due diligence services cover when buying a company?
They review the company’s financial and tax position, along with its structure and operations. For corporate purchases, this includes advice on whether an asset or share purchase suits the deal; any entity clean-up needed before settlement; and what to expect once the business is yours. The scope depends on the deal, and Zimsen Partners agrees with you upfront.
