Due Diligence Checklist: Buy a Business with Confidence

Published Monday 22 December 2025

Table of contents

• What is due diligence when buying a business?
• Why is due diligence important?
• Essential due diligence checklists before buying a business
• Common due diligence red flags and warning signs
• Key documents to review during due diligence
• Do your due diligence right
• Grow your new business with Xero
• FAQs on buying a business

Key takeaways

• Conduct comprehensive due diligence across five critical areas (financial, legal, operational, market position, and regulatory compliance) to systematically evaluate every aspect of a business before purchase and avoid costly surprises.
• Allocate sufficient time for thorough investigation, allowing 4-8 weeks minimum for small businesses and 2-6 months for complex acquisitions, as rushing this process is the most common and expensive mistake buyers make.
• Engage professional advisors including lawyers, accountants, and financial experts throughout the due diligence process, as the cost of expert guidance is minimal compared to the potential losses from missing critical issues.
• Recognize key warning signs such as inconsistent financial records, unresolved legal disputes, high staff turnover, and heavy reliance on the current owner, which signal the need for deeper investigation before proceeding with the purchase.

What is due diligence when buying a business?

Due diligence is your comprehensive investigation of a business before you buy it. It’s the research and analysis that verifies the business is what it claims to be and worth your investment.

Whether you’re buying an online business, small business, or larger company, due diligence protects you from costly mistakes. This process gives you confidence to proceed with the purchase, renegotiate terms, or walk away entirely.

Your due diligence checklist should confirm the business has measurable commercial potential and aligns with your goals.

Why is due diligence important?

Due diligence protects you from costly acquisition mistakes by uncovering risks before you buy. While sellers must represent their business accurately, it’s your responsibility to verify everything.

Proper due diligence ensures you’re making a sound decision, paying a fair price, and meeting regulatory requirements. Thorough due diligence helps you avoid discovering serious problems after the deal closes, such as:

• Hidden liabilities or overstated earnings
• Unreported debts, tax implications, or unreliable revenue sources
• Legal issues or regulatory non-compliance, which might result in fines or even business closure
• Operational inefficiencies, outdated systems, or fragile supplier or customer relationships
• Hidden reputational issues or market weaknesses

It’s worth seeking expert advice with your due diligence checklist, especially for legal and financial matters.

Essential due diligence checklists before buying a business

These due diligence checklists help you systematically evaluate every critical aspect of a business purchase. Each checklist focuses on a specific risk area to ensure you don’t miss important details.

Professional guidance is essential. Work with a lawyer for legal matters and a financial advisor for complex financial analysis.

Financial due diligence

Financial due diligence verifies the business’s true financial health and profitability, a process guided by official standards like NZ IFRS 3: Business Combinations, which helps define what constitutes a ‘business’ for reporting purposes.

Key financial areas to investigate:

• Historical performance: Review 3–5 years of tax returns, financial statements, cash flow records, and profit and loss statements
• Tax compliance: Confirm current tax status and identify any outstanding liabilities
• Debt analysis: Check for outstanding debts, loans, and other financial obligations
• Cash flow assessment: Analyse current cash flow patterns and growth potential
• Industry benchmarks: Compare revenue trends against industry projections and standards

Legal due diligence

Legal due diligence uncovers legal risks and confirms the business operates within regulatory boundaries. This includes reviewing mandatory disclosures, as regulations require a Key Information Summary (KIS) to include a summary of the ‘most significant’ risks.

Essential legal investigations:

• Contract review: Examine all supplier, customer, employee, and operational agreements plus leases
• Intellectual property audit: Verify ownership and value of patents, trademarks, copyrights, and trade secrets
• Registration verification: Confirm business name, domain, and trademark registrations are valid and transferable
• Litigation assessment: Investigate any past, current, or pending lawsuits and legal disputes

Operational due diligence

Use this operational due diligence checklist to cover all aspects of business continuity:

• Review business plans and strategy documents
• Evaluate the business’s operations and processes, including management structures, staffing, and human resources
• Assess customer and supplier relationships and contracts
• Review business assets and equipment, considering their age, maintenance schedules, and anything needing repair
• Examine the business technology infrastructure, data security, and software systems to make sure they’re up to date, secure, and scalable

Market position and competitive analysis

This due diligence category helps you understand a business’s true value so you can agree to a fair price. It deals with how, to whom, and where the business sells its products or services, the business’s position compared with competitors, and its opportunities for growth.

• Review market strategy plans and performance reports.
• Check out the business’s online presence, including search rankings, its existing ad buys, and other marketing campaigns.
• Perform a competitor analysis to understand the business’s challenges and opportunities, and the strength of the business in its market.
• Evaluate how the business reaches its customer base, and customer loyalty.
• Review customer records, feedback, and reviews.

Regulatory and compliance

Laws and regulations vary by industry, country, and region. Regulatory and compliance due diligence examines the regulatory challenges the business faces and checks that it meets its obligations and statutory requirements.

• Review regulatory and compliance obligations specific to the industry.
• Check for issues related to licences, permits, premises, or government regulations.
• Review tax compliance status, including tax records, liabilities, and compliance with local and international tax laws, noting that professional standards evolve. For example, recent code revisions for accountants will strengthen ethical expectations for tax planning activities in New Zealand from July 2025.
• Review compliance with workplace conditions, agreements, and employee entitlements.
• Investigate whether the business follows environmental regulations, and check its potential liabilities in areas like waste management, pollution, and hazardous materials.

Common due diligence red flags and warning signs

A smooth due diligence process is a good sign, but it’s just as important to know what trouble looks like. Keep an eye out for these common red flags. They don’t always mean you should walk away, but they are signals to dig deeper and ask more questions.

• Inconsistent financial records: Be cautious if the financial statements don’t match the tax returns, or if the story you’re being told doesn’t line up with the numbers.
• Unresolved legal issues: Lingering lawsuits or compliance disputes can become your problem after the sale.
• High staff turnover: If employees are leaving in large numbers, it could point to a poor work culture or instability within the business.
• Heavy reliance on the owner: A business that relies heavily on its current owner can be a higher-risk purchase. Make sure its success isn’t tied to one person.
• Declining sales or customer base: Investigate why revenue is dropping or why customers are leaving. It could signal a problem with the product, service, or market position.

Key documents to review during due diligence

Reviewing documents forms the foundation of thorough due diligence. These records provide concrete evidence to verify claims made by the seller and reveal potential issues.

Your document checklist will include financial records, contracts, legal documentation, sales reports, and customer records. The specific documents you need vary by industry and location.

Get professional help: An accountant, lawyer, or business broker can ensure you haven’t missed critical documents for your specific situation.

Financial and tax

• Tax returns (3–5 years)
• Profit and loss statements (3–5 years)
• Balance sheets (3–5 years)
• Audit reports
• Business credit reports
• Bank loans or other finance
• Leases
• Sales records
• Business valuation(s)

Equipment, assets, and stock

• Plant, equipment, or vehicle leases
• Maintenance records
• Other assets owned or leased
• Outstanding debts to suppliers
• Stock
• Software licences

Legal

• Insurance contracts
• Regulations or compliance issues
• Legal proceedings
• Mandatory codes of practice
• Business standards and procedures
• Legal agreements for directors, partners, or shareholders
• Privacy requirements
• Data management processes

Operations

• Business plans and other strategy documents
• Staff contracts, awards, entitlements, and insurances
• Staff induction and training records
• Licences and permits required to run the business
• Policies and procedures
• Supplier contracts
• Voluntary codes of conduct
• Minutes of management meetings
• Marketing campaign strategy documents
• Branding strategy and guidelines

Intellectual property

• Trademarks
• Patents
• Copyright
• Branding
• Registered designs
• Business registration
• Domain registration

Do your due diligence right

Successful due diligence requires patience, thoroughness, and expert guidance. Rushing this process is the most common and costly mistake buyers make.

Timeline expectations:

• Small businesses: 4–8 weeks minimum
• Complex businesses: 2–6 months depending on size and industry

Never rush decisions due to seller pressure.

Most common mistake: Rushing the process or failing to understand key details before making final decisions.

• Get expert advice from your accountant, lawyer, and broker. It’s a false economy to save money or time by doing it alone. The costs of missing something important would easily outweigh the initial cost of accountants and lawyers who will catch what you might miss.
• You’ll also need financial experts to draft the purchase agreement and guide you through finance and legal technicalities. You can find financial advisors in our advisor directory.
• Make sure you think about the operational and cultural aspects when doing your due diligence. Ideally, the existing culture of the business aligns with your own values, goals, and management style.

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FAQs on buying a business

Here are answers to common questions about the due diligence process and buying a business.

How do I buy a business in New Zealand?

The New Zealand business acquisition process usually follows these steps:

1. Confidentiality agreement: Sign non-disclosure documents to access business information
2. Formal interest: Register your intent to proceed with evaluation
3. Due diligence: Complete comprehensive business investigation
4. Offer and negotiation: Submit formal purchase offer
5. Legal contract: Have your lawyer draft the purchase agreement
6. Goods and Services Tax (GST) considerations: confirm GST obligations with the seller

Essential: Get professional advice from your accountant, financial advisor, and lawyer throughout this process.

You can also check out guidance from the New Zealand Government on buying an existing business.

What are the advantages of buying a business?

By buying an existing business, you’re dodging much of the work to build a business from scratch.

• You inherit an established customer base and brand reputation, and existing revenue streams, supplier relationships, and operational systems.
• You won’t have to deal with high initial operating costs, setting up premises, hiring employees, or buying initial stock.
• You’ve also got a proven concept, possibly intellectual property of high value, and brand recognition to build on.
• You may have easier access to financing with an established business.

What are the 4 P’s of due diligence?

The 4 P’s of due diligence are People, Performance, Philosophy, and Process. This framework helps you investigate the team, the business’s track record, its core values, and how it operates day-to-day.

How long does due diligence typically take?

The timeline can vary from a few weeks to several months. It depends on the size and complexity of the business, how organised the seller’s records are, and how quickly you can get information from third parties.

What are the biggest red flags during due diligence?

Key warning signs include messy or inconsistent financial records, unresolved legal issues, and a heavy reliance on the current owner. A thorough check helps you spot these potential problems before you commit to the purchase.