Purchasing a Business: Due Diligence Considerations

Written by Jack Sullivan, Senior Solicitor at DTI Lawyers

New Zealand is a country that has embraced the entrepreneurial spirit, and this is evident in the numerous successful Kiwi businesses operating on the world stage. Embarking in business is exciting, but the process of getting there can be stressful and potentially risky if you are not well-informed and do not understand what is required.

There are many important matters to consider if you are thinking of purchasing a business.  Your lawyer should play a large part in the process, advising you throughout. Their knowledge and experience in this area is abundant, and they know how to foresee and deal with problems, assist with due diligence, and help coordinate any finance required. Regardless of the type of business you are looking to buy, your lawyer’s job is to protect you against risk, and to assist you in making informed decisions while minimising stress. Your lawyer needs to be one of the first professionals you contact to provide initial guidance on the process.

This article summarises some important considerations that may be relevant to the business you are looking at purchasing.  Please note that this article does not provide an exhaustive list of considerations, and it is also important to consult with a number of other professionals to provide guidance throughout the purchase process.

Some important due diligence considerations when purchasing a business include:

• Assessing business records, accounts receivable and payable etc., to determine what income the business has generated in the past.
• Determining the ownership structure of the business (for example, will you own the business as a limited liability company, trading trust, sole trader, partnership).
• Assessing the age, condition, and functionality of the plant, equipment, and stock included in the purchase.
• Assessing any commercial risks to the business, including competitors, suppliers and customer contracts and relationships, products, services, and markets.
• Determining whether any rezoning or redevelopment is planned in the area where the business is located.
• Assessing litigation and insurance risks, and any risks to the reputation and goodwill of the business.
• Assessing the legal framework of the business, including regulatory approvals and licences (for example, many businesses require certain licences or approvals and can only be operated by people with certain qualifications).
• Determining the ability of the vendor to comply with pre-settlement and post-settlement obligations.
• Assessing staff relationships, staff performance, compliance by staff and the vendor with respect to legal and contractual obligations.

It is very important to complete thorough due diligence and consult with your professional advisors prior to entering into an unconditional agreement to purchase a business.  DTI can provide advice on the proposed ownership structure for the business and recommend other professionals with appropriate expertise to provide you with advice on matters such as tax and finance (for example, accountants, finance brokers, insurance brokers, banks).

As lawyers, we can review or prepare the documentation required including the agreement for sale and purchase of business, lease documents, employment agreements, franchise agreements (if relevant), and terms of trade.

At DTI, we have a team of specialist lawyers commercial and employment lawyers available to assist you with your business purchase. Contact us at reception@dtilawyers.co.nz.