The offer is the easy part. Due diligence is where deals are made or unmade. Here is the practical checklist we hand to first-time buyers — and the red flags that should make you pause.
Before due diligence begins
Get three things in place first:
- A signed non-disclosure agreement — you cannot do real DD on a verbal handshake.
- A conditional offer with a clearly defined DD period (typically 15 to 30 working days) and conditions specific enough to rely on.
- An accountant and lawyer who have done business sales before. A generic family accountant will miss things that matter.
Financial due diligence
The non-negotiables:
- Three full years of financial statements, GST returns, IRD statements
- Year-to-date management accounts within 30 days of the report date
- Bank statements for the same period, reconciled against the accounts
- Debtors and creditors ageing
- Inventory list with cost and indicative resale value
- Add-back schedule with evidence for each item (you'd be surprised how often add-backs evaporate when asked for receipts)
- Tax position — confirm no outstanding IRD obligations, including PAYE, GST and provisional tax
Red flags: cash sales not reconciling to bank, "personal" expenses that look operational, declining gross margin that nobody can explain, inventory significantly out of date.
Legal due diligence
- Company structure and ownership — companies register search, confirmation of shareholders
- The lease — full deed, remaining term, options, rent reviews, change-of-control clauses, make-good provisions
- Customer contracts, especially the top 10–20 by revenue
- Supplier agreements, especially any with exclusivity or change-of-control
- Employment agreements for every team member, with current terms and restraints
- Intellectual property — registered trade marks, domains, software licences, custom code ownership
- Litigation — current, threatened, or settled in the last three years
- Health and safety records, incident register, current obligations
Red flags: top customers without signed contracts, key employees without current agreements, software being used outside the licensed scope, unresolved disputes.
Commercial due diligence
This is where you stop reading documents and start understanding the business.
- Customer concentration — what % of revenue comes from the top 5, top 10 customers?
- Customer retention — how long do they stay, what's the churn rate?
- Pipeline and forward orders — what's actually contracted for the next 6 months?
- Pricing power — when did the business last put prices up, and what happened?
- Competitive position — who else does what this business does, in this region?
- Marketing engine — where do new customers come from, and is that channel sustainable?
Red flags: one customer above 25% of revenue, declining repeat business, no documented pricing strategy, "we get all our work from referrals" without anything formal underneath.
Operational due diligence
- A walk-through of the business during a normal working day
- Time with the team without the owner present (with the owner's agreement)
- Review of the systems — POS, accounting, CRM, scheduling, inventory
- Plant, equipment and vehicle condition, with service records
- Premises condition, including any deferred maintenance or compliance work
Red flags: undocumented processes, single-person dependencies, equipment overdue for replacement, premises that won't pass a current health and safety inspection.
People and culture due diligence
Often skipped — and often the reason deals fail post-settlement.
- Who are the key people the business cannot afford to lose, and what is their commitment to staying?
- What is staff turnover in the last 18 months?
- Are there any personal arrangements with staff (extra leave, flexible hours, off-the-books bonuses) that the owner hasn't put in writing?
- What is the owner's role going to look like after settlement — handover period, transition, restraint of trade?
Red flags: a key technician who's been there 20 years and is "thinking about retiring," recent senior departures that nobody volunteers information about, an owner who can't articulate who would run the business if they left tomorrow.
How to use the DD period
Set up a shared folder with the seller or their broker. Acknowledge documents as you receive them. Keep a running list of outstanding questions and review weekly with your accountant and lawyer.
If the seller is slow, evasive, or selective about what they release, that itself is information. Genuine sellers want a clean deal as much as you do.
The walk-away test
At the end of DD, ask yourself one question: "Knowing what I know now, would I make this offer today?"
If the answer is yes at the same price, settle. If the answer is yes at a lower price, renegotiate. If the answer is no, walk away — and trust that the next deal is out there.