Business Due Diligence Checklist NZ: The Questions That Expose Bad Deals

Author: Fair Value Team
Published: December 22, 2024
Reading Time: 14 minutes

Here is a fact that will save you $100,000: the seller is lying to you.

Not necessarily about everything. Maybe not even intentionally. But they are presenting their business in the best possible light, omitting inconvenient truths, and hoping you do not ask the questions that expose the real problems.

Due diligence is not about being paranoid. It is about being realistic. It is the process of verifying every claim the seller makes and uncovering the issues they conveniently forgot to mention. It is the difference between buying a profitable business and buying someone else's nightmare.

This is your complete due diligence checklist for buying a business in New Zealand. These are the questions that separate good deals from disasters. If the seller refuses to answer any of these questions, or becomes defensive when you ask, you have your answer. Walk away.

Financial Due Diligence: Follow the Money

Financial statements can be manipulated, exaggerated, or outright fabricated. Your job is to verify every number and understand what the financials actually mean.

Request These Documents (No Exceptions)

Three Years of Tax Returns

Tax returns are filed with the IRD and carry legal consequences for fraud. They are more reliable than financial statements prepared by the seller's accountant. Compare the revenue and profit reported on tax returns to the financial statements the seller provided. If there are significant discrepancies, demand an explanation.

Question to ask: "Why does your tax return show $300,000 in revenue but your financial statement shows $350,000? Which number is accurate?"

Three Years of Bank Statements

Bank statements show actual cash flowing in and out of the business. Compare deposits to reported revenue. If the seller claims $400,000 in annual revenue but bank deposits total $320,000, where is the missing $80,000? Cash sales that are not deposited? Revenue that was never collected? Either way, it is a red flag.

Question to ask: "Can you explain why bank deposits do not match reported revenue? How much of your revenue is cash, and how do you track it?"

Profit and Loss Statements (Monthly, Not Just Annual)

Annual P&L statements hide seasonal fluctuations and declining trends. Monthly statements reveal the truth. Is revenue declining month-over-month? Are expenses increasing? Is the business profitable every month or only during peak season?

Question to ask: "Can I see monthly P&L statements for the past three years? I want to understand seasonality and trends."

Balance Sheet with Asset and Liability Details

The balance sheet shows what the business owns (assets) and owes (liabilities). Pay close attention to:

• Accounts Receivable: Are customers actually paying their invoices, or is there $50,000 in receivables that will never be collected?
• Inventory: Is the inventory current and saleable, or is it obsolete stock the seller is trying to offload?
• Liabilities: Are there hidden debts, unpaid taxes, or lease obligations that will become your problem?

Question to ask: "What percentage of accounts receivable is more than 90 days overdue? Can I see an aging report?"

GST Returns for Three Years

GST returns filed with the IRD provide another verification point for revenue. If the seller is underreporting revenue to avoid GST, they are committing fraud—and you are about to buy a business with legal problems.

Question to ask: "Can I see your GST returns for the past three years to verify revenue consistency?"

The "Add-Backs" That Are Actually Lies

Sellers love to "normalize" earnings by adding back expenses they claim are discretionary or one-time. Some of these are legitimate. Many are not. Here is how to spot the lies:

Owner Salary Add-Backs

The seller claims they pay themselves $150,000 but a manager could run the business for $80,000, so you should add back $70,000 to profit. Sounds reasonable. But when you try to hire that manager, nobody competent will work for less than $110,000. The add-back was inflated.

Question to ask: "What is the market rate for a manager with the skills needed to run this business? Can you provide salary data from similar businesses?"

"One-Time" Expenses That Happen Every Year

The seller adds back $25,000 in "one-time" legal fees from two years ago. But when you review the financials, there are similar expenses every year. They are not one-time; they are recurring costs the seller is trying to hide.

Question to ask: "Can you show me five years of financials so I can verify these expenses are truly one-time and not recurring?"

Personal Expenses That Are Actually Business Expenses

The seller adds back $15,000 in vehicle expenses because they use the car for personal use. But the vehicle is also essential for deliveries, client meetings, and operations. If you remove it, you will need to replace it with another vehicle. The expense does not disappear; it just shifts.

Question to ask: "If I remove this expense, what will I need to spend to replace the function it serves?"

The Revenue Questions That Expose Risk

Revenue is not all created equal. $500,000 in revenue from 100 customers is far more valuable than $500,000 from three customers. Here are the questions that reveal revenue risk:

Customer Concentration

If one customer represents more than 20% of revenue, or the top three customers represent more than 50%, the business is dangerously dependent on a few relationships. If those customers leave when the owner sells, your revenue collapses.

Question to ask: "What percentage of revenue comes from your top customer? Top three customers? What is the risk they will leave when ownership changes?"

Contract vs. Recurring vs. One-Time Revenue

Revenue from multi-year contracts is more valuable than month-to-month arrangements. Recurring subscription revenue is more predictable than one-time project work. Understand the composition of revenue and the risk of churn.

Question to ask: "How much revenue is under contract for the next 12 months? How much is recurring vs. one-time? What is your customer retention rate?"

Revenue Trends Over Three Years

Is revenue growing, flat, or declining? If it is declining, why? Industry-wide trends? Increased competition? Loss of a key customer? Operational issues? A declining business is worth far less than a growing one.

Question to ask: "Can you explain the revenue trend over the past three years? If it is declining, what is the cause and what have you done to address it?"

Operational Due Diligence: How the Business Actually Runs

Financial statements tell you what happened. Operational due diligence tells you how it happened and whether it can continue without the current owner.

Employee and Staffing Questions

Key Employee Risk

If one employee is responsible for 50% of revenue (e.g., a top salesperson, a key technician, a relationship manager), the business is at risk. If that employee leaves when ownership changes, revenue follows.

Question to ask: "Which employees are critical to operations? What is the risk they will leave when I take over? Do they have employment contracts or non-compete agreements?"

Owner Involvement

If the owner works 70 hours a week and claims the business "runs itself," they are lying. Understand exactly what the owner does and how many hours they actually work. If you will need to hire staff to replace the owner's labor, factor that cost into your valuation.

Question to ask: "How many hours per week do you work? What specific tasks do you perform? If I cannot work those hours, what will it cost to hire staff to replace your labor?"

Employee Turnover and Morale

High employee turnover signals operational problems, poor management, or low pay. Talk to employees (if possible) and ask about their experience, concerns, and whether they plan to stay after the sale.

Question to ask: "What is your employee turnover rate? Why do employees leave? What is the morale like, and do you expect employees to stay after the sale?"

Supplier and Vendor Relationships

Exclusive Supplier Agreements

If the business depends on one supplier for critical products or materials, and that supplier relationship is personal to the owner, you could lose access when ownership changes. Verify that supplier agreements are transferable.

Question to ask: "Do you have exclusive supplier agreements? Are they transferable? What is the risk of losing supplier access when I take over?"

Favorable Pricing or Terms

If the owner has negotiated below-market pricing due to long-term relationships or volume commitments, those terms may not transfer to you. Your costs could increase significantly.

Question to ask: "Are your supplier prices based on personal relationships or contractual agreements? Will I receive the same pricing and terms?"

Systems, Processes, and Technology

Documented Processes

If the business runs entirely on the owner's knowledge and there are no documented processes, you will spend months figuring out how things work. Well-run businesses have operations manuals, checklists, and systems.

Question to ask: "Do you have documented processes for key operations? Can I review your operations manual?"

Technology and Software

What systems does the business use for accounting, inventory, customer management, and operations? Are they modern and transferable, or are they outdated and tied to the owner's personal accounts?

Question to ask: "What software and systems do you use? Are licenses transferable? Will I need to invest in new technology?"

Legal and Regulatory Due Diligence: The Landmines That Destroy Businesses

Legal issues can wipe out your investment overnight. Do not skip this section.

Lease and Property Questions

Lease Terms and Renewal Options

If the business operates from leased premises and the lease expires in 18 months with no renewal option, the business may have no future. Verify lease terms, renewal options, and the landlord's willingness to transfer the lease.

Question to ask: "How long is left on the lease? What are the renewal terms? Have you confirmed the landlord will transfer the lease to me?"

Rent Increases

If the current rent is below market because the owner has been there for 15 years, expect the landlord to reset to market rate when you take over. This could increase your costs by 30-50%.

Question to ask: "Is the current rent at market rate? What will the rent be when the lease renews or transfers to me?"

Lease Obligations and Personal Guarantees

Some leases require personal guarantees from the business owner. If the lease transfers to you, you may be personally liable for rent even if the business fails. Understand the obligations before you sign.

Question to ask: "Does the lease require a personal guarantee? What are my obligations if the business cannot pay rent?"

Licenses, Permits, and Compliance

Transferable Licenses

Some business licenses are tied to the owner personally (e.g., liquor licenses, professional certifications, trade licenses). Verify that all necessary licenses are transferable or that you can obtain them.

Question to ask: "What licenses and permits does the business require? Are they transferable, or will I need to apply for new ones?"

Regulatory Compliance

Is the business compliant with all relevant regulations (health and safety, employment law, environmental regulations, industry-specific rules)? Non-compliance can result in fines, shutdowns, or lawsuits.

Question to ask: "Can you provide evidence of compliance with all relevant regulations? Have there been any violations or warnings in the past three years?"

Litigation and Legal Disputes

Past and Pending Lawsuits

Has the business been sued? Are there pending lawsuits? Even if the seller claims the lawsuits are frivolous, they represent risk and potential liability.

Question to ask: "Has the business been involved in any lawsuits in the past five years? Are there any pending legal disputes?"

Intellectual Property

Does the business own its trademarks, patents, domain names, and proprietary processes? Or does the owner personally own them and plan to keep them after the sale? Verify ownership and transferability.

Question to ask: "What intellectual property does the business own? Can you provide documentation proving ownership and transferability?"

Market and Competitive Due Diligence: Is This Business Going to Survive?

Even if the financials look good today, the business could be obsolete in three years. Understand the market and competitive landscape.

Industry Trends

Is the industry growing, stable, or declining? If the industry is in structural decline (e.g., print media, video rental), no amount of hard work will save the business.

Question to ask: "What are the industry trends over the past five years? Is the sector growing or declining? What threats or opportunities do you see?"

Competitive Landscape

Who are the competitors? What advantages do they have? Why do customers choose this business over competitors? If the only answer is "personal relationships with the owner," the competitive advantage disappears when the owner leaves.

Question to ask: "Who are your main competitors? What is your competitive advantage? Why do customers choose you over competitors?"

Customer Reviews and Reputation

What do customers actually think of the business? Check Google reviews, Facebook reviews, and industry-specific review sites. If the business has a poor reputation, you will inherit that problem.

Question to ask: "Can I see your customer reviews and feedback? What are the common complaints, and how do you address them?"

The Red Flags That Mean "Walk Away"

Some issues are negotiable. Others are deal-breakers. Here are the red flags that should end your interest immediately:

The seller refuses to provide financial documentation. If they will not show you tax returns, bank statements, or financial records, they are hiding something. Walk away.

Revenue has declined 20%+ over the past two years with no clear explanation. Declining businesses are worth far less than stable or growing ones. If the seller cannot explain the decline, assume it will continue.

One customer represents more than 40% of revenue. This is catastrophic customer concentration. If that customer leaves, the business collapses.

The seller pressures you to close quickly or skip due diligence. Legitimate sellers understand due diligence is necessary. If they are rushing you, they are hiding something.

There are unresolved legal disputes, tax issues, or regulatory violations. These problems will become your problems. Do not assume you can fix them.

The business depends entirely on the owner's personal relationships or skills. If the revenue leaves when the owner leaves, you are not buying a business. You are buying a job with no income guarantee.

The Due Diligence Timeline: How Long Should This Take?

Due diligence is not something you complete in a weekend. Here is a realistic timeline:

Week 1-2: Initial Document Review

• Request and review financial statements, tax returns, and bank statements
• Identify major questions and red flags
• Decide whether to proceed or walk away

Week 3-4: Deep Financial Analysis

• Hire an accountant to verify financials and identify issues
• Analyze revenue trends, customer concentration, and profit margins
• Verify add-backs and normalized earnings

Week 5-6: Operational and Legal Review

• Hire a lawyer to review contracts, leases, and legal documents
• Meet with key employees, suppliers, and customers (if possible)
• Verify licenses, permits, and regulatory compliance

Week 7-8: Market and Competitive Analysis

• Research industry trends and competitive landscape
• Review customer feedback and reputation
• Assess long-term viability

Week 9-10: Final Negotiations and Contract

• Address issues discovered during due diligence
• Renegotiate price or terms if necessary
• Finalize purchase agreement

Total Timeline: 10-12 weeks minimum

If the seller pressures you to complete due diligence in two weeks, they are not serious about a fair transaction. Take the time you need.

What to Do When You Find Problems

You will find problems. Every business has them. The question is whether the problems are fixable, negotiable, or deal-breakers.

Fixable Problems (Negotiate a Lower Price)

• Outdated equipment that needs replacing
• Below-market marketing or technology investment
• Minor lease or contract issues

Negotiable Problems (Adjust Terms)

• Customer concentration (request seller financing contingent on customer retention)
• Employee retention risk (negotiate a longer transition period with the seller)
• Revenue decline (reduce purchase price to reflect lower earnings)

Deal-Breaker Problems (Walk Away)

• Fraud or financial misrepresentation
• Unresolved legal disputes or regulatory violations
• Structural industry decline with no path to recovery

Conclusion: Due Diligence Is Not Optional

Most buyers skip due diligence because it is expensive, time-consuming, and uncomfortable. They trust the seller, rely on the broker's assurances, and hope for the best. Then they lose $200,000.

Due diligence is not paranoia. It is common sense. It is the only way to verify that the business you are buying is the business the seller claims it is. It is the difference between a smart investment and a financial disaster.

Hire professionals. Ask hard questions. Take your time. And if the seller refuses to cooperate, walk away. The right deal will still be there in three months. The wrong deal will haunt you for years.

Start with a professional valuation to understand what the business is actually worth. Get a $149 NZD valuation now [blocked] and make informed decisions backed by data.

Frequently Asked Questions

How much does due diligence cost?

Expect to spend $5,000-$15,000 on professional due diligence (lawyer, accountant, valuation, inspections). This is not optional. It is the cheapest insurance you will ever buy.

Can I do due diligence myself?

You can complete some of the work yourself (reviewing financials, researching the industry), but you need professionals for legal review, financial verification, and valuation. Do not skip the experts.

What if the seller refuses to provide information?

Walk away. Legitimate sellers understand due diligence is necessary and will cooperate. If they refuse, they are hiding something.

How do I know if I have done enough due diligence?

You have done enough when you can answer every question in this checklist with confidence, and you have verified every major claim the seller has made. If you still have unanswered questions, keep digging.

About Fair Value

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