Buying an established business can be an exciting opportunity, but making the right decision requires more than reviewing its asking price or current revenue. Before committing to a purchase, buyers need to understand the business’s financial position, profitability, liabilities and future obligations.

If you are buying a business in New Zealand, carrying out thorough financial due diligence can help you identify potential risks, assess whether the asking price is reasonable and make a more informed investment decision.

A business may look profitable on paper, but outstanding tax obligations, unpaid debts, cash flow problems or overstated earnings can significantly affect its actual value. This guide outlines 10 important financial checks to complete before purchasing a business.

Reviewed by: DFK Orb360 O’Halloran Team

Why Is Financial Due Diligence Important When Buying a Business in New Zealand?

Financial due diligence is the process of examining a business’s financial records, tax position, assets, liabilities and financial performance before completing an acquisition.

It helps prospective buyers understand what they are actually purchasing, verify information supplied by the seller and identify financial issues that could affect the transaction.

For anyone buying a business in New Zealand, this process is particularly important because the purchase may involve GST considerations, tax obligations, employee entitlements, existing contracts and other financial commitments.

10 Financial Checks to Complete Before Buying a Business

1. Review Financial Statements

Start by requesting at least three years of financial statements, including profit and loss statements, balance sheets and cash flow statements.

These records help you understand the business’s financial performance over time. Look beyond the reported profit and identify whether revenue and margins have remained consistent.

Compare financial statements with supporting records to check that the figures are accurate and reliable.

2. Examine Revenue and Profitability

Revenue alone does not indicate whether a business is financially healthy. Review gross profit, operating expenses, net profit and profit margins.

Look for unusual increases or decreases in revenue, one-off income and expenses, and any significant changes in operating costs.

When buying a business in New Zealand, it is important to understand whether reported profits reflect sustainable business performance rather than temporary or exceptional circumstances.

3. Check Cash Flow and Working Capital

A profitable business can still experience cash flow difficulties. Review cash flow statements and understand how money moves into and out of the business.

Assess whether the business has sufficient working capital to cover everyday expenses, supplier payments, wages, rent and other operating commitments.

Also consider seasonal cash flow patterns and whether the business depends heavily on short-term financing.

4. Review Tax Obligations and IRD Records

Tax compliance is an essential part of financial due diligence. Review the business’s GST returns, income tax records, PAYE obligations and any correspondence with Inland Revenue (IRD).

Check whether tax returns have been filed accurately and whether there are outstanding payments, penalties, disputes or unresolved tax matters.

Before buying a business in New Zealand, make sure you understand the tax implications of the proposed transaction and whether any outstanding obligations could affect the purchase.

5. Identify Existing Debts and Liabilities

Request a complete list of the business’s existing financial obligations. These may include bank loans, overdrafts, equipment finance, unpaid supplier invoices, leases and other contractual commitments.

Review repayment terms, interest rates, security arrangements and any guarantees associated with these liabilities.

It is important to establish which obligations will remain with the business and which will be settled as part of the acquisition.

6. Verify Assets and Inventory

Check that the assets included in the sale actually exist, are owned by the business and are in reasonable working condition.

Depending on the business, this may include equipment, vehicles, machinery, furniture, stock, software and intellectual property.

For inventory-based businesses, review stock levels, valuation methods, obsolete products and damaged goods. Compare the inventory records with a physical stocktake where appropriate.

7. Assess Accounts Receivable and Payable

Review outstanding customer invoices and supplier payments to understand the business’s short-term financial position.

Examine aged receivables to identify overdue customer balances and assess whether some debts may be difficult to recover.

Similarly, review accounts payable to identify overdue supplier invoices, payment disputes and outstanding commitments.

8. Review Employee Costs and Entitlements

Employee-related costs can have a significant impact on the financial position of an acquired business.

Review payroll records, employment agreements, holiday pay, annual leave balances, KiwiSaver contributions and other employee-related obligations.

Understand how existing employment arrangements may be affected by the proposed acquisition and seek appropriate legal and employment advice where necessary.

9. Examine Customer and Supplier Dependencies

A business that relies heavily on one or two major customers or suppliers may face additional commercial risk.

Review customer concentration, recurring revenue, supplier agreements, contract terms and the stability of key business relationships.

Check whether important customer or supplier agreements can continue after the ownership change and whether consent is required.

10. Evaluate the Asking Price and Future Financial Performance

Finally, assess whether the asking price reflects the business’s actual financial performance and future earning potential.

Consider historical profits, maintainable earnings, assets, liabilities, industry conditions and expected operating costs.

Review the seller’s forecasts and assumptions carefully. Consider whether projected revenue and profitability are realistic and supported by available evidence.

A professional financial assessment can help you understand the proposed valuation and identify areas that may need further investigation or negotiation.

Documents to Request Before Purchasing a Business

When buying a business in New Zealand, request relevant supporting documents early in the due diligence process. These may include:

• Three years of financial statements.
• Recent management accounts and profit and loss reports.
• Business bank statements.
• GST, PAYE and income tax records.
• Accounts receivable and payable ageing reports.
• Loan agreements and finance arrangements.
• Asset registers and inventory records.
• Employee payroll records and employment agreements.
• Major customer and supplier contracts.
• Lease agreements and other ongoing commitments.

The exact documents required will depend on the nature, size and structure of the business being acquired.

Common Financial Red Flags to Watch For

During financial due diligence, pay particular attention to warning signs such as:

• Inconsistent financial statements or unexplained differences between reports.
• Declining revenue or shrinking profit margins.
• Unpaid taxes, supplier invoices or employee entitlements.
• High levels of overdue customer payments.
• Unusually high inventory valuations.
• Significant reliance on a small number of customers.
• Unexplained cash transactions or incomplete financial records.
• Financial projections that are not supported by historical performance.

These issues do not automatically mean you should walk away from a transaction. However, they should be investigated before proceeding.

How Can an Accountant Help With Business Acquisition Due Diligence?

An experienced accountant can help you assess the financial information provided by the seller and identify matters that may require further investigation.

Professional support may include reviewing financial statements, assessing profitability, examining tax obligations, analysing working capital, identifying financial risks and assisting with the evaluation of the purchase price.

If you are buying a business in New Zealand, working with an accountant during the due diligence process can help you approach the acquisition with a clearer understanding of its financial position.

Frequently Asked Questions

What is financial due diligence when buying a business?

Financial due diligence involves reviewing a business’s financial statements, tax records, cash flow, assets, liabilities and other financial information before completing an acquisition. It helps buyers assess the business’s financial health and identify potential risks.

How many years of financial records should I review?

Buyers commonly request at least three years of financial statements, along with recent management accounts and supporting records. The appropriate review period depends on the business and the complexity of the transaction.

Should I hire an accountant before buying a business in New Zealand?

Yes. An accountant can help review financial information, assess profitability, identify tax and cash flow risks, and evaluate whether the asking price is supported by the business’s financial performance.

What are the biggest financial risks when purchasing a business?

Common risks include undisclosed liabilities, outstanding tax obligations, inconsistent financial records, poor cash flow, overstated profits, unpaid employee entitlements and unrealistic financial forecasts.

Does financial due diligence replace legal due diligence?

No. Financial due diligence and legal due diligence serve different purposes. Buyers should obtain appropriate financial, legal and tax advice before completing a business acquisition.

Planning to Buy a Business? Speak With DFK Orb360 O’Halloran

Buying a business is a significant financial commitment. Before signing an agreement, make sure you understand the numbers, identify potential risks and know what you are taking on.

The DFK Orb360 O’Halloran team can help you approach your business acquisition with informed financial and business advice.

Complete the form below to receive your free Business Acquisition Financial Due Diligence Checklist by email.

Submit your details and our checklist will be sent to your inbox. If you are considering an acquisition and would like professional guidance, you can also get in touch with our team.

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Disclaimer: This article provides general information only and should not be treated as financial, tax or legal advice. Each business acquisition has its own circumstances. Seek professional advice before making a purchase decision.