Buying a Business in New Zealand: What to Check Before You Sign

Table of contents

1. 1. What to do before signing
   2. Decide exactly what you are buying
   3. Test the price against sustainable earnings
   4. Calculate the funding and cash flow required
   5. Verify the assets, stock and goodwill
   6. Assess customers, suppliers, contracts and the market
   7. Review the premises and lease
   8. Understand the employees and the seller’s role
   9. Settle the tax treatment and purchase price allocation
   10. Check legal, regulatory and operational risks
   11. What should the sale and purchase agreement cover?
   12. Red flags when buying a business
   13. Frequently asked questions
   14. How DNACA can help before you commit

Before signing: carry out an initial review and protect the detailed review

Start with an initial review of the financial information, asking price and main risks. This should tell you whether the business is worth investigating further and which conditions your offer may need.

More detailed due diligence can take place under a conditional agreement. Make sure the agreement gives you enough time and access to information. You may also need conditions for finance, the lease, key contracts, licences or franchise approval.

Your lawyer should review the conditions and deadlines. Your accountant should identify the financial and tax information needed for the review.

1. Decide exactly what you are buying

Make a clear list of everything included in the sale and anything that is excluded. Do not rely on a broad description such as ‘the business and its assets’.

You should also decide who or which entity will buy the business before the agreement is prepared. This can affect ownership, financing, tax and risk.

Before signing, confirm:

• the equipment, vehicles, stock and work in progress included
• which assets are leased, financed or used as security
• whether debtors, creditors, cash or debt are included
• whether the name, website, customer records and online accounts can be transferred
• which key contracts need to transfer
• the handover and training the seller will provide

2. Test the price against sustainable earnings

One profitable year does not prove that the business is worth its asking price. Check whether the profit is accurate, likely to continue and enough to pay you, repay borrowing and fund the business.

Useful records may include:

• financial statements and income tax returns for at least the past three years
• current profit and loss and balance sheet reports
• GST returns and relevant bank statements
• sales and gross margin reports
• aged receivables and aged payables
• payroll, stock and asset records
• budgets and forecasts

Your accountant can compare the records and adjust the reported profit to estimate what the business may earn under new ownership. This may include allowing for a realistic owner salary, removing genuine one-off items and checking every seller add-back.

Pay attention to recent changes. A jump in sales may come from one contract, while a higher profit may reflect delayed maintenance or temporary cost savings.

3. Calculate the full funding and cash flow requirement

The purchase price is only part of the money required. You also need enough cash to keep the business running after settlement.

Your funding plan should allow for:

• the deposit and settlement payment
• stock purchased at settlement if it is priced separately
• legal, accounting, valuation and lending costs
• working capital for wages, rent, suppliers, tax and other operating costs
• repairs, replacement equipment, software or compliance work
• loan repayments
• your personal drawings or salary
• a buffer for slower sales, late payments or unexpected costs

Prepare a 12-month cash flow forecast using expected sales and a slower-sales scenario. It should show whether the business can pay its bills, meet loan repayments and provide you with an income.

4. Verify the assets, stock and goodwill

Check that the seller owns the equipment and that it is in reasonable condition. Identify anything that is leased, financed, used as security or likely to need replacing soon.

Stock should be counted and valued at settlement. Exclude or reduce the value of obsolete, damaged, expired or slow-moving stock. Agree how work in progress will be measured and invoiced.

Goodwill may include the name, reputation, customer relationships and systems. Ask whether that value will remain when the seller leaves. If customers mainly deal with the owner personally, some goodwill may not transfer to you.

5. Assess customers, suppliers, contracts and the market

Check how much revenue depends on one or two customers and whether those relationships are likely to continue. Do the same for key suppliers, particularly where prices, supply terms or product availability could change.

Read important contracts and check their end dates, renewal rights, cancellation terms and transfer requirements. Also consider demand, competition, regulation, technology, location, online reviews and the seller’s reason for leaving.

6. Review the premises and lease

For a location-dependent business, the lease can be critical. Check whether it has enough time left, what rent reviews are coming and whether the landlord will approve the transfer.

Have your lawyer review the lease, including:

• the remaining term and rights of renewal
• rent, operating expenses and future rent reviews
• the permitted use of the premises
• repair and make-good obligations
• personal guarantees or security required from you
• assignment requirements and the landlord’s consent process
• access issues or restrictions that could affect trading

If the premises are essential, make landlord approval and a suitable lease a condition of the purchase.

7. Understand the employees and the seller’s role

Review employment agreements, pay rates, leave balances, disputes and reliance on key employees. Ask your lawyer how staff and employee entitlements should be dealt with in the agreement.

Find out what the seller does each day and which customers, skills or licences depend on them. If replacing the seller will require another employee, training or a longer handover, include that cost in your decision.

8. Settle the tax treatment and purchase price allocation

The purchase price is usually divided between stock, depreciable assets and goodwill. This allocation can affect deductions, depreciation and taxable income, so the buyer and seller need to use consistent values.

The agreement must also state whether the price includes GST and which GST treatment applies. A going concern may be zero-rated when the legal requirements are met, but this does not happen automatically. Ask your accountant to review the tax clauses and purchase price allocation before you sign.

9. Check legal, regulatory and operational risks

Financial due diligence is only part of the investigation. Work with your lawyer and other specialists to check the legal and operational position, including:

• security interests registered over assets
• disputes, claims or legal proceedings
• licences, permits and industry approvals
• franchise terms and any approval required from the franchisor
• privacy, health and safety and other compliance obligations
• insurance cover and claims history
• ownership and transfer of intellectual property and digital accounts
• cyber security, software licences and operating procedures

What should the sale and purchase agreement cover before you sign?

The agreement should clearly record the deal and the protections you need. Do not rely on verbal promises or assume an issue can be sorted out later.

Before signing, check that it covers:

• the correct vendor and purchaser
• a clear list of what is included and excluded
• the price, deposit, payment terms, stock adjustment and purchase price allocation
• the intended GST treatment
• a due diligence condition with enough time and access to information
• finance approval
• transfer or approval of the lease, franchise, licences and key contracts
• employee arrangements and responsibility for entitlements
• seller warranties, disclosures and any protections recommended by your lawyer
• the handover, training and transfer of records, passwords and digital assets
• deadlines for each condition and what happens if it is not met

Your lawyer should prepare or review the agreement. Your accountant should check that the financial, tax and cash flow terms match the numbers you have assessed.

Red flags when buying a business

Warning signs may justify more investigation, a lower price, extra protection or a decision not to proceed.

• pressure to sign before you have enough information or advice
• financial statements that do not match tax, GST, banking or sales records
• large or poorly supported add-backs
• a recent sales increase that depends on one customer or event
• heavy reliance on the seller, one employee, one customer or one supplier
• overdue tax, unpaid suppliers or old customer debts
• old stock, poorly maintained equipment or major costs due soon
• a lease, licence or key contract that may not transfer
• verbal assurances that are not included in the agreement

Frequently asked questions about buying a business

Should I do due diligence before or after signing a sale and purchase agreement?

Carry out an initial review before signing. Detailed due diligence can then take place under a conditional agreement that gives your advisers enough time and access to information.

What financial records should I ask for when buying a business?

Ask for at least three years of financial statements and tax returns, current accounts, GST returns, sales reports, aged receivables and payables, payroll records, stock reports and forecasts. Your accountant may request more information.

How long should due diligence take?

It depends on the size of the business, the quality of the records and how quickly information is supplied. Agree a realistic timeframe before signing so your advisers can carry out a proper review.

Who should review the sale and purchase agreement?

A commercial lawyer should review the legal wording, conditions and protections. Your accountant should review the price, financial information, tax treatment, funding and cash flow before you sign.

Do I have to pay GST when buying a business?

It depends on the transaction. A going concern may be zero-rated when the legal requirements are met. The agreement should state whether the price includes GST and record the intended treatment.

Can I renegotiate the price if due diligence finds a problem?

You may be able to seek a lower price, ask the seller to fix the issue or decide not to proceed. Your options depend on the agreement, so the due diligence condition needs to be drafted carefully.

What does an accountant check when I am buying a business?

An accountant can test the financial records, adjust the reported earnings, review cash flow and working capital, assess the asking price, identify tax issues and prepare funding forecasts.

This article provides general information only and is not legal, tax or financial advice for a particular transaction. Obtain advice that takes account of the business, agreement and your circumstances before making a commitment.