Sellers Due Diligence: How and why you need to investigate your buyers

You’re in the process of selling your business, shares, and/or assets and a potential buyer has approached you – however you don’t know much about them. This can sometimes spell trouble for your sales transaction, because a problematic buyer could cost you time and money. Here’s where due diligence takes centre stage. By undertaking a sellers due diligence you can investigate potential buyers, allowing you to eliminate ‘bad buyers’ and making informed decisions to maximise your transaction value. This blog is all about the sellers due diligence process, with a look at what it is, what it involves, and why you need it.

What is due diligence?

Due diligence isn’t just a buzzword; it’s the compass guiding your decisions. Imagine you’re selling your beloved antique shop—the one with creaky wooden floors and stories woven into every teacup. Before handing over the keys, you want to know who’s stepping into your nostalgic world.

Due diligence is a comprehensive investigation to assess risks, uncover hidden issues, and make informed choices. The due diligence process is typically associated with buyers who engage in the process to verify the claims made by the seller regarding the assets to be sold.  This is particularly prevalent in transactions involving rent rolls, agency shares, and property/asset acquisitions.

Sellers due diligence: What is it and why do I need to do one on a buyer?

To make sure you're in the clear and not breaching the Right to Disconnect rule, there are several steps you can take as an employer:

• Establish Clear Policies: Clearly outline your expectations regarding after-hours communication in your company policies. Make it known that employees are not obligated to respond to work-related calls or emails during their personal time, unless exceptions apply (eg. emergencies, open houses, auctions).

• Define Exceptions: Clearly define what constitutes an emergency or exception, and establish specific protocols for urgent situations that may require after-hours attention.

• Encourage Open Communication: Foster a workplace culture where employees feel comfortable discussing their concerns or challenges related to after-hours work expectations. Establish effective channels for communication, and consider having a Human Resources department in place to handle internal matters before resorting to involvement with the Commission.

• Provide Training: Educate your team about the importance of work-life balance and the Right to Disconnect. Offer training sessions or materials that emphasise the company's commitment to respecting personal time and boundaries.

• Implement Technology Solutions: Consider implementing technology solutions that enable employees to set specific time frames for receiving work-related notifications. This can help in respecting their personal time and reducing the pressure to be constantly available. Additionally, for those after hour messages you've got lined up, try scheduling them to hit inboxes during work hours. That way, nobody feels the need to jump on them during personal time.

What are some key steps involved in a sellers due diligence?

1.  Financial Due Diligence

• Balance Sheets and Income Statements: This is important, especially if you are selling a large asset like a business or rent roll portfolio, because you need to know if the buyer has the financial ability to pay you and satisfy other conditions to the sale (ie. transfer of guarantees).

• Liquidity and Solvency: Check the buyers liquidity, to determine their ability to handle short-term risks, and their solvency to determine their overall financial health.  

• Red Flags: Watch out for debt overload, dwindling cash reserves, or creative (ie. incomplete, misleading) accounting.

• Expert: It’s pertinent to get this right – don’t get misled by wrong numbers or calculations. Here, we recommend bringing in your accountant or financial advisor to undertake the financial due diligence.

2. Legal Due Diligence

• Licenses and Permits: Are they licensed in the industry? Will they be able to continue business operations once takeover happens? Verify licences and regulatory compliance.

• Pending Legal Liabilities: Any lawsuits or large insurance claims coming their way? Uncover pending legal matters and other liabilities.

• Legal Advisors: Bring in the experts. Given the complexities involved, do it right by having it done by legal experts. For greater peace of mind have your legal due diligence done by legal advisors who have experience in your industry (PS. our team of real estate agency lawyers can help).

3. Operational Due Diligence

• Business Operations: Understanding how they move through business processes. What’s their customer relationship like?

• Landlord-to-PM Ratio: Evaluate their landlord-to-property manager ratio. Do they have enough support for the potential incoming acquisition? Any flight risks? What are their processes like? Will your staff (if taken across) fit in with the culture of the business?

4. Risk Assessment

• Market Risks: Are they dancing on a tightrope in a volatile market?

• Industry-Specific Risks: Every industry has it’s own risks – so you need to be aware current situations that may cause this deal to fall over.

• Reputation Risks: Gossip travels fast and can have a significant impact on you, personally and professionally. Investigate your potential buyers reputation, understand what others in the industry are saying about them, and get NDA’s signed!

5. Background Checks & Interviews

• Individual Spotlight: Background checks on key individuals—directors, shareholders, and beneficial owners.

• Stakeholder Interviews: Chat with their management team. Is everyone on board?

Creating a Due Diligence Report

Putting your due diligence findings in a synthesised reports will provide you a comprehensive understanding of your potential buyer, allowing you to make an informed decision. It will also allow you to adequately address any red flags or risks you have identified, including conversations about key issues internally and with the buyer, speaking with your expert advisors (eg. lawyer or accountant) first, and leveraging your findings in negotiations to achieve more favourable terms.

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Key Takeaways

• As a seller, you can perform a due diligence on potential buyers to guide your sales decisions, and vet out the ‘bad’ or unqualified buyers, generally before you expend your time and resources on them.

• By performing a sellers due diligence You can identify and mitigate buyer associated risks, gain insight into the interests and intentions of a buyer, determine their financial capability, protect yourself and your reputation, have negotiation leverage, and transact with confidence knowing you’ve made an informed decision.

• Remember – sometimes the buyer offering the most money upfront, may not be the best for your bottom line in the end. This is most common with rent roll sales where buyers with misaligned objectives or interests can cost you with lost managements.

• A thorough sellers due diligence will involve a team of experts (ie. real estate, legal, financial) performing analysis over a range of areas including the buyers financial, legal, operational, and reputational situation.

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Your Next Steps

Thinking about selling your agency or rent roll, and have potential buyers in the running?

Protect yourself by doing your legal due diligence with the RE agency law experts – book your FREE 10 min chat to find out how we can help.

Frequently Asked Questions (FAQ)

• What is sellers due diligence and how is it different from regular due diligence?

  While due diligence is typically associated with buyers verifying a seller's claims, sellers due diligence flips the process, allowing sellers to investigate and vet potential buyers before committing to a sale, helping eliminate "bad buyers" and protect transaction value.

• What financial checks should I do on a potential buyer?

  You should review their balance sheets and income statements to confirm they can pay you and meet sale conditions, assess their liquidity and solvency, and watch for red flags like debt overload, dwindling cash reserves, or misleading accounting. It's recommended to involve an accountant or financial advisor for this step.

• What legal checks are involved in sellers due diligence?

  Legal due diligence involves verifying the buyer's licences and regulatory compliance, checking for pending lawsuits or insurance claims, and ideally engaging legal advisors experienced in your industry to handle this process properly.

• Why is operational and reputational due diligence on a buyer important?

  Operational due diligence helps you understand the buyer's business processes, customer relationships, and staffing ratios (like landlord-to-property manager ratio), while reputation checks reveal what others in the industry think of them, helping you avoid disputes or reputational fallout post-sale.

• What should I do with the findings after completing buyer due diligence?

  You should compile the findings into a due diligence report, address any red flags internally and with your expert advisors, and use the findings as leverage in negotiations to secure more favourable sale terms.

The REALGATE Legal Team

REALGATE Legal is a team of commercially minded lawyers who specialise in helping business owners, particularly in real estate and service-based industries, stay compliant, protect their assets, and grow with confidence. Led by Founder Kristen Porter, our team combines deep legal expertise with firsthand business experience. We don’t just interpret the law; we translate it into strategic advice you can actually use. From contracts and employment to privacy, compliance, and M&A, we’re here to simplify the complex and make the law work for you. At Realgate Legal, we’re changing the way business owners experience legal services.

Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.