Due Diligence Checklist for Buying a Business in NZ

# Due Diligence Checklist for Buying a Business in NZ

Due diligence is the most critical phase of buying a business. It's your opportunity to verify every claim the seller has made, uncover hidden risks, and confirm that the business is worth what you're paying.

In New Zealand, the buyer's due diligence period is typically 10-20 working days and is a standard condition of the Sale and Purchase Agreement. Skipping or rushing this step is the single biggest mistake business buyers make.

This article provides a comprehensive, step-by-step due diligence checklist for buying a business in NZ.

Phase 1: Financial Due Diligence

Financial due diligence is about verifying that the business makes the money the seller claims it does.

Documents to Request - [ ] Profit and Loss statements — minimum 3 years, ideally 5 - [ ] Balance sheets — matching the same period - [ ] GST returns — for at least 2 years (these are hard to fabricate) - [ ] Bank statements — 12 months minimum - [ ] Tax returns (IR4 for companies, IR3 for sole traders) - [ ] Aged debtors and creditors reports - [ ] Cash flow statements - [ ] Monthly management accounts (if available) - [ ] BAS (Bank Account Statements) for all business accounts

Key Financial Checks - **Cross-reference revenue** with GST returns and bank deposits. If reported revenue is $500,000 but GST returns show $400,000, there's a problem. - **Verify the SDE calculation** — are all add-backs legitimate? Is the owner's claimed salary realistic? - **Look for seasonality** — is the business heavily seasonal? If you're reviewing annual figures in summer, the winter months may tell a different story. - **Check for one-off items** — has the seller had any unusual income or expenses that inflate/deflate the normal picture? - **Review aged debtors** — are there significant outstanding debts that may never be collected? - **Analyse expense trends** — are costs increasing faster than revenue?

Red Flags - Seller can't produce GST returns or bank statements - Large cash sales with no paper trail - Significant discrepancies between tax returns and management accounts - Revenue decline of more than 10% in the most recent year - Unusual large transactions near the end of the financial year

Phase 2: Legal Due Diligence

Business Structure and Ownership - [ ] Company registration details (Companies Office search) - [ ] Shareholder register and company constitution - [ ] Director details and history - [ ] Any personal guarantees the company has given - [ ] Outstanding litigation or disputes

Contracts and Agreements - [ ] All supplier contracts — terms, pricing, exclusivity - [ ] Customer contracts — especially any with key accounts - [ ] Service agreements - [ ] Franchise agreement (if applicable) - [ ] Partnership or joint venture agreements - [ ] Non-compete or restraint of trade agreements currently in force

Compliance - [ ] Resource consent or building consent requirements - [ ] Health and safety records and compliance history - [ ] Any WorkSafe NZ notices or investigations - [ ] Privacy Act compliance (customer data handling) - [ ] Any pending regulatory changes affecting the industry

Phase 3: Lease Due Diligence

The lease is often the most valuable — and most risky — asset in a business purchase. Get your lawyer to review it thoroughly.

Lease Checklist - [ ] Full copy of the lease (including all variations and renewals) - [ ] Remaining term and renewal rights - [ ] Current rent and upcoming review dates - [ ] Review mechanism (fixed %, CPI, market) - [ ] Assignment clause — can the lease be transferred? - [ ] Landlord's consent requirements for sale - [ ] Permitted use clause — does it cover your intended use? - [ ] Make-good obligations at lease end - [ ] Demolition clause - [ ] Outgoings (rates, insurance, body corporate, maintenance) - [ ] Personal guarantee requirements - [ ] Any rent arrears or disputes

Key Lease Questions - Is the rent at, above, or below market rate? - What happens if the landlord refuses to assign the lease? - Are there any upcoming developments near the property that could affect the business? - What are the total occupancy costs (rent + outgoings + insurance)?

Phase 4: Staff and Employment

Staff Due Diligence Checklist - [ ] Full list of all employees (names, roles, hours, pay rates) - [ ] Employment agreements for all staff - [ ] Holiday pay balances and entitlements - [ ] Any pending personal grievances or disputes - [ ] Performance issues or disciplinary records - [ ] Training records and certifications - [ ] Key person risk — is any single employee critical to operations? - [ ] Contractor agreements (for any non-employees)

Employment Law Considerations Under NZ employment law, when a business is sold, employees may have protections under Part 6A of the Employment Relations Act 2000 (vulnerable workers provisions). This means some employees have the right to transfer to the new owner on the same terms and conditions.

Even outside these industries, most business sales involve employee transfers by agreement.

Phase 5: Suppliers and Customers

Supplier Checks - [ ] List of all key suppliers and terms - [ ] Are any supplier agreements personal to the current owner? - [ ] Are there exclusive supply agreements? - [ ] What are the payment terms and credit limits? - [ ] Are there any supply chain risks (single-source dependencies)?

Customer Analysis - [ ] Revenue concentration — does any single customer represent more than 20% of revenue? - [ ] Customer retention rates - [ ] Customer contracts — are they transferable? - [ ] Customer satisfaction (reviews, complaint history) - [ ] Loyalty program obligations

Phase 6: Intellectual Property and Assets

IP Checklist - [ ] Trademark registrations (search IPONZ) - [ ] Domain names — are they included in the sale? - [ ] Social media accounts — will they be transferred? - [ ] Proprietary software or systems - [ ] Trade secrets, recipes, or formulas - [ ] Website and content ownership

Physical Assets - [ ] Full asset register with values - [ ] Condition assessment of major equipment - [ ] Vehicle ownership and registrations - [ ] Any leased or hired equipment (not owned) - [ ] Security interests registered on the PPSR (Personal Property Securities Register)

**Critical:** Search the PPSR before settlement to ensure no security interests (liens, chattel mortgages) exist over the assets you're buying.

Phase 7: Licenses and Permits

Phase 8: Operational Verification

Site Visits - [ ] Visit the business unannounced at different times (morning, afternoon, weekend) - [ ] Observe customer flow and staff interactions - [ ] Check the condition of premises and equipment - [ ] Talk to neighbouring businesses (they'll share insights the seller won't) - [ ] Count customers or transactions to verify reported figures

Systems and Technology - [ ] POS system — review transaction data for the last 12 months - [ ] Accounting software — does it reconcile with reported financials? - [ ] Booking or CRM systems — how many active customers? - [ ] Website analytics — traffic, conversion rates, trends

When to Walk Away

Due diligence isn't just about confirming the deal — it's also about knowing when to say no. Walk away if:

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