Buying a business in New Zealand: the money side, step by step

Buying an established business can be a faster route to a good income than starting from scratch: there are customers, staff, systems and cash flow from day one. It can also be an expensive way to buy someone else’s problems. The difference is usually in the money work done before the agreement goes unconditional.

What are the main steps?

business.govt.nz sets out a sensible sequence, which in money terms looks like this:

1. Research the market and the industry: suppliers, competitors, trends.
2. Register your interest with the seller or their broker, and sign any confidentiality agreement.
3. Appoint advisers early. An accountant to test the numbers and a lawyer for the agreement. It strengthens your position and saves expensive mistakes.
4. Compare the seller’s claims with the documents. Revenue, margins, owner hours, staff, stock.
5. Negotiate a conditional sale and purchase agreement with time for due diligence and finance.
6. Complete due diligence, confirm funding, then go unconditional and settle.
7. Handle the post-settlement tasks: Companies Office changes if you’ve bought shares, GST and payroll registrations, bank accounts, supplier accounts.

What should due diligence check?

Area	What to look at	Why it matters
Revenue	Three years of financial statements, GST returns, bank statements	Confirms the sales are real and shows trends and seasonality
Margins	Gross margin by product or service; supplier pricing	Shows whether profit depends on prices or contracts that may change
Owner’s role	Hours the seller works and what they do	A business that needs the owner 70 hours a week is buying a job
Stock	Stocktake, ageing, obsolete items	Stock is often overvalued in the asking price
Debtors	Aged debtors list and collection history	Slow payers become your cash flow problem
Contracts	Customer, supplier and lease agreements	Check transferability, terms and expiry
Staff	Employment agreements, pay rates, leave balances	Leave liability may transfer with staff
Legal	Pending disputes, compliance, licences	Hidden liabilities can outweigh goodwill

business.govt.nz suggests asking your accountant to check the books for areas for improvement, trends and the effect of seasonal demand or law changes. It’s money well spent.

How does GST work on a business purchase?

When a business is sold as a going concern between GST-registered parties, the sale is usually zero-rated: neither side pays nor receives GST on it. That avoids the buyer having to find 15% on top of the price and wait to claim it back. The sale and purchase agreement should state clearly whether the price is GST-inclusive or exclusive and whether zero-rating applies. Your lawyer and accountant will check the conditions are met.

Why does price allocation matter?

Inland Revenue requires the buyer and seller to agree how the purchase price is allocated across asset classes (trading stock, depreciable assets, goodwill and so on) when two or more assets are sold together, based on market value. The allocation affects tax for both sides: the seller prefers more value in non-taxable assets such as goodwill; the buyer prefers more in stock and depreciable assets, which give deductions. Agree the allocation in the agreement, with your accountant’s input.

How much do you really need to buy a business?

The purchase price is only the first line.

Illustrative example. A couple buying a Nelson café for $320,000 (including $40,000 of stock and $90,000 of plant) budget:

Item	Amount
Purchase price	$320,000
Legal and accounting fees, due diligence	$15,000
Lease deposit or bond and transfer costs	$12,000
Working capital for the first 13 weeks	$45,000
Small refresh and equipment repairs	$18,000
Total needed	$410,000

The working capital line is the one buyers most often leave out. Wages and rent start from day one, the GST and payroll registrations are new, and receipts take time to reach the seller’s old level while customers get used to new owners. A 13-week forecast after settlement is the best way to size it.

How do you judge whether the asking price is sensible?

Small businesses are often priced as a multiple of their adjusted profit, sometimes called EBITDA or “owner’s earnings”. The key word is adjusted. Before applying any multiple, your accountant should add back one-off costs and the seller’s personal expenses run through the business, and deduct a market wage for the work the owner does. A café showing $150,000 of profit where the owner works 60 hours a week isn’t really making $150,000; it’s making $150,000 minus what you’d pay a manager to do those hours.

Then ask what the multiple implies. If you pay three times adjusted profit, the business has to keep earning at that level for three years just to return your money, before any return on your effort or risk. Compare that with the cost of funding the purchase and with what the same money could earn elsewhere. Brokers’ asking prices are a starting point, not a valuation.

How are business purchases funded?

Most purchases combine the buyer’s own money with some form of lending, and sometimes a vendor finance arrangement where the seller accepts part of the price over time. Buyers who own property often have the most options, because lending secured on residential or commercial property can fund both the purchase and the working capital. Our page on funding a growth plan explains how to match funding to the purpose, and you can see what you could qualify for early in the process, before you’re under time pressure.

After settlement: protect the cash

The first months are when buyers learn whether the business is what they thought. Track weekly sales against the seller’s figures, calculate your own break-even point, and keep GST and tax money separate from day one. Our feature on why growth eats cash is useful reading for the first year.

Talk to us before you go unconditional

Funding is usually a condition of a business purchase, and finance dates come round quickly. We look at loans secured on residential or commercial property, which suit many purchases, and unsecured options for trading businesses. Enquiring involves no credit check, your details aren’t sent out to other lenders, and a real person on our New Zealand team reads what you send. Accurate answers mean our first call can tell you what’s realistic for the deal. Start your enquiry.