Ever watched one of those home renovation shows where the excited couple falls in love with a property, only to discover—
after they've signed the papers—that it has termites, foundation issues, and a roof that leaks like a sieve?
Buying a business without proper due diligence is exactly like that, except the repair bill typically has a few more zeros attached.
We've seen it countless times.
Eager buyers rush through the evaluation process, dazzled by impressive revenue figures or charming owners with convincing stories about "consistent growth" and "loyal customers."
Then reality hits around month three of ownership when they discover their biggest client is leaving, the equipment is held together with duct tape and hope,
or the books have been, shall we say, "creatively maintained."
The good news?
A few strategic questions asked early in the process can save you from becoming another cautionary tale.
Today, we're diving into the first phase of proper due diligence—what we call the "Truth Telling" phase—and the five essential questions that should begin every business evaluation.
Why "Truth Telling" Comes Before Negotiations
Before you start daydreaming about your business card title or negotiating purchase terms, you need to verify that what you're buying actually exists in the form it's being presented.
This initial phase of due diligence isn't about nitpicking every detail—it's about establishing whether the fundamental claims about the business hold water.
Think of it as a medical check-up rather than surgery.
You're not trying to perform a full colonoscopy of the business (that comes later), but you do want to check vital signs and make sure there are no glaring health issues that would make further examination pointless.
Fun fact: According to the Australian Competition and Consumer Commission, disputes related to "misleading representations" in business sales rank among the top five complaints they receive annually.
Many of these situations could have been avoided with basic initial due diligence.
The Four Ways Sellers Hide the Truth
Before diving into our questions, it's helpful to understand how sellers might obscure the real picture.
In our experience working with hundreds of business transactions, information gaps typically fall into four categories:
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Outright lies - The seller makes statements they know to be false
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Omissions - The seller conveniently "forgets" to mention important facts
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Obfuscation - The seller buries unpleasant truths in jargon or complexity
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Ignorance - The seller genuinely doesn't know the truth themselves
That last one might surprise you!
We've encountered many sellers who genuinely believed their businesses were more profitable than they actually were because they didn't understand their own financials.
One bakery owner we worked with was shocked to discover they'd been losing money on their signature product for years—they simply hadn't calculated their costs correctly.
Question 1: "Can you share three to five years of financial statements?"
This seems obvious, but you'd be amazed how many buyers skip this step or accept incomplete information. You want to see:
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Profit and loss statements
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Balance sheets
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Tax returns (these often tell a different story than internal statements)
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Cash flow statements if available
Multiple years of data help you spot trends and anomalies. Is revenue consistently growing, plateaued, or declining?
Do profits follow the same pattern?
Are there unexplained spikes or drops that require explanation?
A brilliant little tip: Compare financial statements provided to you against tax returns filed with the ATO.
Discrepancies often reveal the most accurate picture of the business's true performance.
As one seasoned business broker in Brisbane liked to say, "People may lie to buyers, but they're usually more hesitant to lie to the tax office."
Remember, at this early stage, you're not doing a deep financial analysis—you're simply verifying that the business's performance roughly matches what the seller has claimed.
Question 2: "How is revenue broken down by product/service and customer?"
This question often reveals more about a business's health than any other. You're looking for two critical insights:
Product/Service Concentration: Does the business rely heavily on a single offering?
We once saw a marketing agency that claimed to be a "full-service firm" discover during due diligence that 87% of its revenue came from a single service that was rapidly becoming automated. Yikes!
Customer Concentration: This is the sleeping dragon of business risk. If a large percentage of revenue comes from a small number of customers, you're essentially buying dependency rather than stability.
What's "too concentrated"? While it varies by industry, we generally get nervous when:
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Any single customer represents more than 15-20% of revenue
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The top five customers account for more than 50% of revenue
A cautionary tale from Perth: A manufacturing business sold for a premium price based on strong financials and a "diverse customer base."
Three months after the sale, their largest client (representing 42% of revenue, which wasn't clearly disclosed) moved to a competitor.
The business never recovered, and the new owner ended up selling assets just to recoup part of their investment.
Question 3: "What key staff are essential to operations, and what are their intentions?"
Businesses aren't just assets and customers—they're people.
In many cases, the most valuable components of a business are the human ones, particularly in service businesses or those requiring specialized knowledge.
Key staff questions to explore:
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Which employees hold critical knowledge or customer relationships?
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Are there written agreements or contracts with these employees?
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Are they aware the business is for sale?
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Will they stay after the transition?
We worked with a buyer who purchased a thriving trades business, only to discover that the two senior technicians (who held all the relationships with major clients) had already planned to leave and start their own competing business.
Within six months, the business had lost 60% of its revenue.
The tricky part? This information can be sensitive during early due diligence since most employees don't know the business is for sale.
You may need to rely on the seller's assessment initially, while planning for more direct conversations later in the process.
Question 4: "Can I see a list of assets and equipment with their condition and age?"
The physical assets of a business—from manufacturing equipment to company vehicles to office furniture—represent both value and potential future costs.
What looks impressive during a quick walk-through might be on its last legs operationally.
For each major piece of equipment or category of assets, you want to know:
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Age and condition
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Maintenance history
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Estimated remaining useful life
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Replacement cost
A Melbourne restaurant buyer shared this painful lesson: "The kitchen looked spotless during my visits, but I didn't ask about the refrigeration systems' age.
Three weeks after taking over, two walk-in coolers failed simultaneously—a $27,000 emergency expense I hadn't budgeted for."
Don't just accept the seller's assessment here.
For major equipment, consider bringing in a specialist for evaluation before finalizing any deal.
That $500 inspection could save you tens of thousands in unexpected repairs.
Question 5: "What does the competitive landscape look like, and what challenges do you anticipate in the next 1-3 years?"
This question serves two purposes: it provides valuable information about market conditions, and it tests the seller's honesty and self-awareness.
Listen carefully to how the seller describes competitors.
Dismissive responses like "they're not really competition" or "nobody does exactly what we do" often indicate either naivety or deception. Every business has competition, even if it's indirect.
Pay particular attention to how forthcoming the seller is about challenges.
A seller who can't identify any significant threats or weaknesses is either not being truthful or lacks business acumen—neither is a good sign.
Some specific areas to explore:
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Who are the main competitors locally and industry-wide?
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Have new competitors entered the market recently?
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Are there regulatory changes on the horizon?
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How is technology changing the industry?
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What keeps the seller up at night about the business?
One of our favourite moments in due diligence came when a seller of a specialized transport business candidly outlined three major threats to his business model and his strategies for addressing them.
That level of transparency actually increased the buyer's confidence in both the business and the information provided.
Balancing Thoroughness with Practicality
It's important to remember that at this early stage, you're conducting preliminary due diligence.
The seller is still running their business and likely fielding interest from multiple potential buyers.
They won't have time to produce reams of detailed documentation for everyone who expresses casual interest.
Keep your initial requests focused on these five essential questions and the basic documentation needed to answer them:
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Three to six years of financial statements
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Customer and revenue breakdowns
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Staff organization information
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Asset and equipment lists
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Competitive analysis or market overview
As one experienced business broker told us, "You're still just kicking the tires at this stage."
The goal is to gather enough information to decide whether this opportunity merits the significant time investment of comprehensive due diligence.
Red Flags That Should Make You Pause
While conducting this initial assessment, be alert for these warning signs that might indicate deeper problems:
Reluctance to provide basic financial information Sellers sometimes cite confidentiality concerns, but with appropriate NDAs in place, there's no legitimate reason to withhold basic financial statements.
Significant discrepancies between verbal claims and written documentation If the seller claims the business makes $500,000 in profit but the financials show $300,000, either there's a misunderstanding or someone isn't being straight with you.
"Owner adjustments" that dramatically transform the financial picture.
Some adjustments are legitimate (like the owner's above-market salary or personal expenses run through the business), but be wary when adjustments turn a struggling business into a gold mine on paper.
High customer or revenue concentration - As mentioned earlier, dependence on a small number of customers creates substantial risk.
Declining trends with optimistic explanations - If revenue has decreased for three consecutive years but the seller insists it's about to turn around, proceed with extreme caution.
A bit of wisdom from a veteran business appraiser in Sydney: "The stories sellers tell about their businesses are often aspirational rather than historical.
Your job is to separate what is from what might be."
Moving Forward: From Truth Telling to Deep Dive
If a business passes this initial "Truth Telling" phase, you're ready to move to comprehensive due diligence. This deeper investigation will involve:
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Detailed financial analysis
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Customer interviews
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Employee assessments
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Market and competitive research
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Operational evaluation
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Legal and regulatory review
This more intensive process typically occurs after you've submitted an offer with contingencies or signed a letter of intent.
The important thing is that you've established a foundation of basic facts upon which to build your deeper investigation.
A Final Thought: Trust but Verify
Due diligence isn't about assuming sellers are dishonest.
Most business owners have invested years of their lives building something they're proud of, and they genuinely want to see it succeed under new ownership.
However, even the most honest sellers view their businesses through a lens of emotional attachment and optimism.
Your job as a buyer is to balance respect for what they've built with clear-eyed assessment of what you'd actually be acquiring.
By starting with these five essential questions, you establish a foundation of verified information that protects both parties and sets the stage for a successful transition—
if the business proves to be the right fit.
Your Next Step
Ready to put these due diligence questions into practice?
Explore our current listings of Australian businesses for sale at BusinessForSale.com.au