Buying a business is one of the most significant financial decisions you'll ever make. Before you take that emotional leap into business ownership, it's crucial to thoroughly investigate every aspect of your potential acquisition. At RightWay, we guide New Zealand business buyers through this complex process, ensuring you're making an informed decision that sets you up for long-term success.
The three pillars of business due diligence
When evaluating a business purchase, your investigation should focus on three critical areas: financial verification, legal compliance, and operational assessment. Let's explore what each of these entails and why they matter.
The financial health of a business is its foundation, and you need absolute confidence that what you're being presented is accurate, achievable, and hasn't been embellished to make the sale more attractive.
Start by thoroughly verifying the financial statements. This means going beyond the surface-level profit and loss statements to examine bank records, tax returns, and cash flow patterns over multiple years. Look for consistency and question any anomalies. Are the revenue figures sustainable? Do the profit margins align with industry standards? Has the owner been drawing a reasonable salary, or will you need to factor in a proper wage for yourself?
At RightWay, we're happy to assist any prospective purchaser with this financial verification process. Our experience with Kiwi businesses means we know what red flags to look for and what questions to ask!
You’ll need a lawyer who has experience in business transactions. They’ll guide you through the legal steps, help you understand your obligations, and ensure the deal structure supports your goals.
The legal side of a business acquisition goes well beyond reviewing contracts. One of the most important considerations is ensuring you’re buying the business under the right legal structure and that the valuation methodology in the sale documents is clear and appropriate. Your sale and purchase agreement or term sheet should set out how the valuation has been calculated, the mechanism being used, and what type of entity you'll complete this transaction through. Getting these fundamentals right often has a bigger impact on protecting your investment than the individual contract clauses themselves.
From there, it’s crucial to understand the key contracts and commitments that underpin the business. Are there strong agreements with major clients? What terms apply to supplier relationships? If the business operates from leased premises, what does the lease allow, and can it be assigned to you as the new owner? These contractual relationships often hold significant value, so reviewing them carefully is essential.
Licences and permits also need close attention. Make sure the business holds all the approvals required to operate and confirm whether they can be transferred to you. Some licences come with specific conditions or qualifications, so it’s important to identify any additional steps you may need to take.
Finally, don’t overlook other critical documents such as employee agreements, franchise arrangements, or service contracts that may transfer with the business. Understanding the full legal picture will ensure you're stepping into the opportunity with clarity and confidence.
This is where theory meets practice. You need to understand what running this business will actually look like on a daily basis.
Start with the staff. Will you need to retain all existing employees? Are there redundancies you could make to improve efficiency, or are you legally and practically required to keep the team intact? Crucially, if there isn't currently a working owner in the business, how will you afford to pay yourself? Many business buyers overlook this critical question and find themselves trapped in a business that requires their full-time presence but doesn't generate enough profit to pay them properly.
Next, assess the physical assets. How old is the equipment? What's its condition? When will major items likely need replacing? This assessment allows you to develop a realistic capital expenditure (capex) plan, so you're not caught off-guard by a major equipment failure six months after purchase.
Looking to the future: Market position and viability
Beyond the immediate due diligence, you need to think strategically about the business's future. We're living in the age of artificial intelligence and rapid technological change. Will this business be disrupted or made obsolete by AI and automation in the coming years? Or does it have characteristics that make it resilient to these changes?
Look for expansion opportunities. Is there an under-utilised aspect of the business you could leverage? Are there adjacent markets or services the business could move into? A business that's simply maintaining the status quo may not be worth the investment if it lacks growth potential.
Consider the business's market position as well. Does it have a strong reputation? Is there a loyal customer base? What competitive advantages does it hold, and are these sustainable?
Getting expert help before you commit
One of the biggest mistakes prospective business buyers make is waiting until after they've signed a sale and purchase agreement to seek professional advice. By then, you've already committed, and your negotiating power has vanished.
At RightWay, we encourage you to come and talk with us before you put in that offer. We can provide pre-acquisition advice that helps you:
This preliminary advice can save you from making a costly mistake or give you the confidence to move forward with a sound investment.
Taking the next step
Buying a business doesn't have to be overwhelming. With proper due diligence and expert guidance, you can make an informed decision that sets you up for success. Whether you're looking at your first business purchase or adding to an existing portfolio, thorough investigation of the financial, legal, and operational aspects is essential.
Don't hesitate to reach out to the team at RightWay. We're here to help New Zealand business buyers navigate the complexities of acquisition and make decisions they can feel confident about for years to come.
Contact RightWay today for expert advice on your business acquisition journey.