Buying a business is one of the most significant financial decisions you can make. Whether you are acquiring a small retail operation, a franchise, or an established services company, the due diligence process is your opportunity to look under the bonnet and verify that what you are buying matches what has been represented to you.

What Is Due Diligence?

Due diligence is the process of investigating and verifying the key aspects of a business before completing a purchase. It typically takes place after you have signed a sale and purchase agreement that is conditional upon satisfactory due diligence. The scope and depth of the investigation will depend on the size and complexity of the business, but there are a number of areas that should always be covered.

Financial Due Diligence

This is usually the starting point. You should review:

  • Financial statements - At least the last three years of profit and loss statements, balance sheets, and cash flow statements. Look for trends, unusual one-off items, and any inconsistencies.
  • Tax returns and GST - Confirm that the business is up to date with its IRD obligations, including income tax, GST, PAYE, and any other taxes.
  • Debtor and creditor ledgers - Understand who owes the business money and who the business owes money to. Check the age of debts and any provision for bad debts.
  • Bank statements - Verify cash flow against what has been reported in the financial statements.
  • Stock and inventory - If the business carries stock, verify the valuation method and conduct a physical stock count.

Legal Due Diligence

Your lawyer should review:

  • The sale and purchase agreement - Ensure the terms adequately protect your interests, including warranties, indemnities, and restraint of trade provisions.
  • Commercial leases - If the business operates from leased premises, review the lease terms, including rent, renewal options, assignment provisions, and make-good obligations.
  • Material contracts - Identify any key contracts with suppliers, customers, or service providers. Check whether these can be assigned to a new owner and whether any have change-of-control provisions.
  • Intellectual property - Confirm ownership of trademarks, domain names, and any other IP used by the business.
  • Licences and consents - Ensure the business holds all required licences and regulatory approvals, and that these can be transferred to you.
  • Litigation and disputes - Inquire about any current, pending, or threatened legal proceedings or disputes.

Employment Due Diligence

When you buy a business as a going concern, employees may transfer to you under Part 6A of the Employment Relations Act 2000 (for certain specified categories) or by agreement. You should review:

  • Employment agreements for all staff
  • Holiday and leave entitlements - including any accrued but untaken leave
  • Any personal grievances, disciplinary processes, or disputes
  • KiwiSaver and any other employee benefit obligations

Operational Due Diligence

Beyond the financials and legal documents, consider the operational aspects of the business:

  • Customer concentration - Is the business overly reliant on a small number of customers?
  • Key person risk - Does the business depend heavily on the current owner or a particular employee?
  • Systems and processes - Are there documented systems, or does the business rely on informal knowledge?
  • Reputation and online presence - Check online reviews, social media, and any public complaints or regulatory actions.

Red Flags to Watch For

  • Reluctance by the seller to provide information or access
  • Declining revenue or margins without a clear explanation
  • Significant related-party transactions
  • Pending regulatory changes that could affect the business
  • Unresolved tax disputes or outstanding compliance issues

How Indus Legal Can Help

Our commercial team in Auckland advises buyers through every stage of the business acquisition process. We conduct thorough legal due diligence, negotiate sale and purchase agreements, and ensure your interests are protected from conditional agreement through to settlement. If you are considering buying a business, speak with us early so we can help you avoid costly surprises.

Call us on 09 869 4888 or email office@induslegal.co.nz.