An introductory guide on how to assess a target company when considering the purchase of a business

What is Commercial Due Diligence?

When it comes to business, no two buyers or sellers are the same. So understanding the business of the target company, as well as the buyer’s plan for it, is key to a successful acquisition.

Commercial due diligence essentially involves a thorough vetting of potential targets. It will assess a target’s internal and external environment, typically including finance, operations, strategy, risk and culture, and it’s subsequent alignment strategically, financially and culturally with the buyer’s business objectives.

Buyers conduct due diligence to confirm the accuracy of the seller’s claims, mitigate risk and garner deep insight into their operations – prior to committing to the deal. Failure to perform adequate due diligence may result in an overvaluation, missed opportunities for synergies, and integration difficulties.

Due diligence starts when both parties have agreed, in principle, to a deal but have not yet signed a binding agreement.

This e-book is written for the purpose of assisting business clients to assess the merits of undertaking a commercial due diligence assessment when considering the purchase of a business.

This e-book is not intended or given as legal advice but is solely to provide general information that will hopefully enable you to make informed decisions before and during a potential acquisition.

From this e-book you should understand:

1. Key factors to consider before signing on the dotted line.

2. The commercial due diligence process

The steps a prospective buyer needs to take to fully understand the position of their target company, and the potential impact of acquiring it.

3.The benefits of conducting commercial due diligence

How the outcomes of due diligence can support your business growth strategy.

4. How Ezra Legal can help

We have a team of commercial lawyers who can work with you to help you strengthen and grow your business by making evidence-based decisions.


Chapter 1:
Key factors to consider before signing on the dotted line

Purchasing a business is an exciting opportunity that can lead to reward and satisfaction. However, there are a number of factors that buyers should consider to avoid potential pitfalls.

1. Know the structure of the transaction

When considering the purchase of a business, it is important to understand whether it is a purchase of the business, which will comprise a collection of specific assets and associated liabilities, or whether it is a purchase of the entity that owns the business (the company or trust). Relevant considerations include:

  • whether you are prepared to accept all the liabilities of the company if you are purchasing the shares in the company, or if you would prefer the certainty of assuming only specific liabilities in purchasing the business;
  • taxation consequences;
  • stamp duty consequences; and
  • employee entitlements that may be crystallised.

2. Conduct a due diligence process

See Chapter 2

3. Understand the purchase price and whether the business is being sold as a going concern

You should ensure that the method used in valuing the business is accurate. Be sure that a method that is relevant to the industry is being used. You should also consider whether you wish to purchase the business on a stock inclusive basis, whether you wish to adjust for stock levels on completion or whether you will pay for stock as an additional sum. Many contracts will also require adjustments to the purchase price, such as amounts for accrued employee entitlements and other variables, which cannot be finalised until completion.

You should also understand whether the business is being sold as a ‘going concern’ for GST purposes. The business is sold as a ‘going concern’ if the sale includes all of the assets and other elements required for the continued operation of the business and the business is carried on until it is sold. The supply of a business as a going concern may be GST-free if the following requirements are met:

  • the purchaser is registered for GST on or before the date of the supply;
  • the supply is for consideration;
  • the seller carries on the business until it is sold;
  • the seller supplies to the purchaser all of the assets and other elements required for the continued operation of the business; and
  • both parties agree in writing that the supply is of a going concern.

However, if the business is not sold as a ‘going concern’, GST may apply and a tax invoice should be issued on completion so that GST can be paid and input credits can be claimed.

4. Understand how you will take possession of the premises

If there are premises from which the business is conducted make enquiries as to whether the premises are leased or provided under licence. If there is a lease or a licence, consent from the landlord will generally be required for any sale. This takes time and will need to be factored into sale timeframes.

5. Review the material contracts

You should carefully review the material contracts with suppliers and customers and the lease (if applicable) and ensure that they are capable of being assigned if there will be a purchase of the business. If there are any change of control clauses in such contracts, the seller will likely need to be obtain consent before the sale to ensure that it is not in breach of these material contracts. Close attention should also be paid to terms of the existing contracts as the purchasing entity will be required to comply with the terms of each contract after completion.

6. Identify key personnel and whether such personnel are to be offered employment

If there are employees, the seller should provide you with a table of each employee’s name, position and accrued employee entitlements. The employee entitlements up to completion will be the seller’s responsibility. However, there may be an adjustment for any accrued entitlements as at completion of the sale in your favour. Note however that when you are buying the shares in a seller entity that owns the business, there will be no change in the employer entity of the employees.

You should ensure that any non-salary benefits given to employees are documented. The ‘key’ employees whose employment is important to the business should be identified and you may wish to negotiate a term that acceptance of employment with you by the key employees is a condition precedent to the transaction being completed.

7. Ensure there are adequate protections in the contract

The inclusion of certain terms in the relevant sale document will be crucial in protecting you from the risks that may arise during and after the purchase of the business.

Protections you can include in the contract include, but are not limited to:

  • comprehensive warranties and representations about the business;
  • restraints of trade for the seller and their key personnel, which are critical for a purchaser to prevent a key person from setting up a business in competition after the sale has completed;
  • provisions in relation to the intellectual property including warranties in relation to the seller’s right, title and interest to such intellectual property;
  • an indemnity from the seller and any covenantors as to the warranties and debts or liabilities of the business; and
  • provisions in relation to training from the seller prior to and / or after completion.

It is also important that the contract contains clear terms and arrangements for the payment and delivery of possession, unencumbered title and security of tenure of what you buy.

8. Engage key advisers

Having key advisors in your corner is crucial. You should consult your lawyer and accountant to advise you on the transaction, including whether the purchase of the business is being sold as a ‘going concern’, the tax implications of the purchase and any duty that may be payable. Your lawyer and accountant can also assist you with the due diligence process. Consulting your lawyer will be crucial during the negotiation stage as they can review the relevant documents and negotiate terms of the contract. Your lawyer can also assist you with settlement of the purchase of the business.

Due Diligence

Chapter 2:
The Commercial Due Diligence

A comprehensive vetting process examining numerous aspects of the target company, with specific focus on the following areas:

The following checklist provides a comprehensive overview:

Organisation and ownership

Structure of the target company – Articles of incorporation, list of officers and directors, organisation chart


Administrative information – business facilities, occupancy rate, number of workstations etc.

Accounting /Financial

Financial performance – identify any unreported liabilities, understand the target’s current financial position and determine if current costs, earnings and profitability are sustainable. Ensure a realistic valuation of the target and justification of the purchase price.


Business plan and operating model — sales, marketing, technology, supply chain and production. Identify gaps and potential areas where investment or development are needed. Can the current state of operations support the business plan provided by the target company?


Tax profile – tax returns and the company’s tax structure


Legal matters – what is the proper legal identity of the seller? Are there any restrictive and/or breached contracts, non-compete clauses and past or pending litigation? Will any guarantors be required? Who will act as covenantors on things such as warranties?


IT assets – sustainability, value, costs, scalability and evolution capabilities, as well as how systems would integrate into the buyer’s company. Identify vulnerability inherent in the IT infrastructure.

Physical assets

Tangible assets – confirm the existence, value, age, quality and ownership of a company’s real estate, fixed assets and inventory. Determine whether the assets are encumbered and whether there are any security interests over the assets registered on the Personal Property Security Register that will need to be removed.

Intellectual property

IP portfolio – patents and patent applications, trademark registrations, trademark applications and trade names, registered and material unregistered copyrights

Human resources

Total number of employees, demographics, accrued employee entitlements, compensation, benefit plans, human resource policies, contracts and organizational structure. Identify key employees and an integration plan. You should ensure that any non-salary benefits given to employees are documented. The ‘key’ employees whose employment is important to the business should be identified and you may wish to negotiate a term that acceptance of employment with you by the key employees is a condition precedent to the transaction being completed.


How is the business is perceived within the marketplace? A review of historical and forecasted sales figures. Understanding of key contracts with suppliers and customers


Environmental, health and safety issues that could affect the value and reputation of the target business, and by association, the buyer’s existing organisation


Cultural dynamics – company values, perceptions, traditions and working styles.


Overview – will the acquisition be of benefit to the buyer? Will it fit within the buyer’s existing business and will it maintain its value post-integration?

Due Diligence Process

Chapter 3:
The Benefits of Due Diligence

  • It provides the prospective buyer with a thorough understanding of the risks, liabilities and business problems of the target before negotiations begin. This allows the buyer to make informed decisions before finalising the transaction.
  • It provides an assessment of the external market landscape and what effect this may have on the target’s ability to reach its forecast results.
  • It will analyse competitors’ performance and market share, assisting the potential buyer to assess the target’s potential and determine whether an acquisition of the target is likely to yield a profitable long-term investment.
  • A commercial due diligence report can be used by the buyer to provide comfort and reassurance to potential investors.
  • The process may provide a legitimate reason to negotiate a reduction of the purchase price
  • The process may identify any necessity for specific indemnities, representations or warranties
  • The outcomes will inform post-closing implementation, including opportunities for synergies and integration
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Chapter 4:

How can Ezra Legal help?

From legal and commercial due diligence to deal prospecting, Ezra Legal helps our clients to make evidence-based business decisions.

Ezra Legal combines company information with intuitive experience and expertise that allow business owners to uncover opportunities and understand risks.

We can work with you to support your acquisition and negotiation strategy.

Our services include:

  • Legal due diligence (identifying and handling actual and potential legal liabilities and obstacles in the target company or asset);
  • Warranties and indemnifications;
  • Commercial due diligence;
  • Assessment of target’s risk exposure.

We have outstanding experience in commercial acquisitions, acting for buyers and sellers.

Experience Since 2005 Ezra Legal has been providing advice on all areas of commercial law

Expertise We have over 50 years combined experience in the area of commercial acquisitions

Reliability We’ll help you weigh-up your options by giving you straight-up, no-nonsense advice

Trust We are honest and reliable, going the extra mile to ensure our clients are 100% satisfied

We help our clients to understand the opportunities and risks of their target company – and the potential impact of acquiring it

Michael Fabbro

Contact Michael Fabbro

Tel: (08) 8231 6100
Website: Ezra Legal – Services – Commercial Law 

When we sold our veterinary practice, the advice and support we received from Ezra Legal was invaluable

Categories: Commercial, Ebook

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