Published: January 2026
When someone wants to buy your business or invest significant capital, they will examine your finances in detail. This process, called due diligence, determines whether the deal proceeds and at what price.
Many business owners underestimate what this involves. They assume their tax returns and bank statements tell the story. But buyers and investors dig deeper, looking for issues that affect value and risk.
This guide explains what finance due diligence covers, what red flags cause problems, and how to prepare your business.
Due diligence is the investigation a buyer or investor conducts before committing to a transaction. For finance, this means verifying that:
The goal is to confirm that the business is what it appears to be. Buyers want to avoid paying for value that does not exist. Investors want to ensure their capital is deployed wisely.
Finance due diligence typically covers these areas:
Not all revenue is equal. Buyers examine:
- Recurring vs one-off. Subscription revenue is worth more than one-time sales. Repeat customers are worth more than first-time buyers. The mix affects valuation.
- Customer concentration. If one customer represents 40% of revenue, that is a risk. Losing them would be catastrophic. Diversified revenue is more valuable.
- Contract terms. Long-term contracts with locked pricing are more valuable than month-to-month arrangements customers can cancel.
- Revenue recognition. Is revenue being recorded when it is actually earned? Aggressive recognition overstates current performance.
Buyers focus on whether current profit will continue:
- Trend analysis. Is profit growing, stable, or declining? What explains the trajectory?
- Margin analysis. Are gross and net margins healthy for the industry? Are they improving or deteriorating?
- Seasonality. How does performance vary through the year? Is there holiday dependency or cyclicality?
- Non-recurring items. One-off gains or losses should be identified and excluded from sustainable earnings.
EBITDA (earnings before interest, tax, depreciation, and amortisation) is a common starting point for valuation. But raw EBITDA rarely tells the full story.
Buyers calculate "normalised EBITDA" by adjusting for:
- Owner compensation. If the owner pays themselves below market rate, add back the difference. If above market, reduce accordingly. The goal is to show profit after paying a manager to run the business.
- One-off expenses. Legal fees for a specific dispute, redundancy costs from a restructure, or unusual repairs should be added back.
- Related party transactions. Rent paid to the owner for property, payments to family members, or purchases from related companies need scrutiny. Are these at market rates?
- Non-business expenses. Personal expenses run through the business should be added back.
- Synergies (for buyers). Some buyers adjust for savings they expect to achieve, though sellers prefer to exclude these.
Normalised EBITDA becomes the valuation base. A multiple is applied to this number to determine price.
Working capital (current assets minus current liabilities) represents the cash needed to run day-to-day operations.
- Working capital analysis. Buyers examine average levels and trends. They want to understand how much capital is required.
- Working capital target. Deals typically include a mechanism to adjust price if working capital at completion differs from an agreed target.
- Inventory. Is inventory valued correctly? Is any obsolete or slow-moving?
- Receivables. What is the aging profile? Are old debts actually collectible?
- Payables. Are payments current or is the business stretching suppliers?
- Existing debt. All loans, facilities, and financing arrangements need disclosure. Buyers typically assume a business is acquired debt-free, with debt repaid from proceeds.
- Contingent liabilities. Potential obligations that may arise from disputes, warranties, or other commitments.
- Tax liabilities. Are all tax obligations current? Any disputes or outstanding positions?
- Employee liabilities. Leave accruals, long service leave, and any termination obligations.
Buyers review:
Outstanding tax issues can reduce purchase price or even kill deals.
Issues that cause concern or reduce value:
1. Inconsistent records. When different reports show different numbers, or records cannot be reconciled, buyers lose confidence.
2. Owner expenses through the business. Personal expenses recorded as business costs create legal and tax issues. They also raise questions about what else might be hidden.
3. Related party transactions. Payments to family members, rent to owner-controlled properties, or purchases from connected parties need clear justification at market rates.
4. Overdue tax obligations. Outstanding BAS, super, or income tax creates liability and suggests cash flow problems.
5,.Customer concentration. Heavy reliance on one or few customers is a risk factor.
6. Revenue recognition issues. Recognising revenue before it is earned overstates performance.
7. Unusual margin trends. Declining margins signal problems even if revenue grows.
8. Inventory concerns. Obsolete stock, valuation issues, or unexplained growth.
9. Litigation. Active or threatened disputes create uncertainty.
10. Key person dependency. If the business relies heavily on the owner or specific individuals, value is at risk.
Due diligence requires documentation. Buyers typically request:
Organised, complete documentation speeds the process and builds confidence. Gaps and delays create suspicion.
Poor financial records have real consequences:
1. Reduced valuation. Buyers discount for uncertainty. If they cannot verify claims, they assume the worst.
2. Extended timelines. More time spent investigating means higher costs and greater chance of deal fatigue.
3. Renegotiation. Issues discovered in due diligence lead to price reductions or deal restructuring.
4. Failed deals. Some transactions collapse when problems emerge that cannot be resolved.
5, Escrow and holdbacks. Buyers may insist on holding back portion of price pending resolution of identified issues.
The benefits of preparing your business for due diligence extend beyond transaction time:
- Better management. Clean records and clear reporting improve decision-making throughout the business.
- Stronger negotiating position. Well-prepared sellers negotiate from strength. They can answer questions quickly and confidently.
- Faster process. Organised documentation reduces the due diligence period and associated costs.
- Higher valuation. Confidence in the numbers supports higher multiples.
- Fewer surprises. Issues identified and resolved before marketing the business are better than issues discovered by buyers.
Ideally, start preparing 12 to 24 months before a planned sale. But any improvement helps, even if a transaction is imminent.
Normalised EBITDA is earnings before interest, tax, depreciation, and amortisation, adjusted for one-off items, owner compensation, and non-business expenses. It represents sustainable earnings and forms the basis for valuation.
Typically three years of financial statements, tax returns, and BAS lodgements. Some buyers request more for larger transactions or complex businesses.
Depending on severity: price reduction, deal restructuring, additional warranties or indemnities, escrow arrangements, or deal termination. The impact depends on what is found and how material it is.
Two to eight weeks is typical for SME transactions. Complex businesses or those with poor records take longer. Well-prepared sellers can compress the timeline.
Yes. Cleaning up records before marketing improves valuation, reduces deal risk, and shortens the process. Start as early as possible.
An audit provides assurance that financial statements are materially correct. Due diligence is investigative, looking for issues that affect value and risk. They serve different purposes and are conducted differently.
Scale Suite helps Australian businesses prepare for sale or investment. Our services include:
We work with businesses 12 to 24 months before planned exits to maximise value and minimise transaction risk.
If you are thinking about selling your business in the next few years, we are happy to discuss preparation strategies. Contact us at hello@scalesuite.com.au or visit scalesuite.com.au.
This article provides general information about finance due diligence. Individual circumstances vary, and you should engage appropriate professional advisors for specific transactions.
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