Buying an existing retail business gets you trading from day one with established customers, which is genuinely valuable. It also means inheriting whatever the vendor is selling their way out of, and the due diligence should be built around finding out which.
Verify the takings independently
The single most important task. Do not rely on the vendor’s summary.
What to obtain and cross-check:
- Three years of financial statements and tax returns.
- GST returns, which are filed with Inland Revenue and are much harder to overstate than a spreadsheet.
- Bank statements showing actual banking against reported sales.
- Point of sale reports by day, month and category.
- Merchant terminal statements showing card volumes.
Where reported sales exceed what GST returns and banking support, ask why, and treat vague answers as the answer. Undeclared cash sales cannot be verified, cannot be relied on, and should not be paid for.
Normalise the earnings
Reported profit needs adjustment to reflect what a new owner would actually earn:
- An owner’s salary at market rate, where the vendor worked in the business without one.
- Removal of private expenses run through the business.
- Rent at market, where premises are owned by the vendor or a related party.
- One-off items excluded.
- Any costs the vendor deferred — maintenance, equipment replacement, stock refresh.
That last point matters. A business whose stock has not been refreshed and whose fitout is at end of life has costs arriving immediately after settlement.
The lease may be the whole transaction
For a retail business the lease is frequently more important than the goodwill.
- How long is left, and what renewal rights exist? A business with two years remaining and no renewal has a limited life at that location.
- Will the landlord consent to assignment? Consent is usually required, and a landlord who will not approve you ends the deal.
- What is the rent against market, and when is the next review? Buying into a below-market rent with a review due shortly is buying a cost increase.
- Outgoings — what is included, whether capital costs can be recovered, whether there is a cap. Ask for two years of actuals.
- Make good obligations at the end, which you will inherit.
- Trading hours requirements in centre leases.
- Seismic rating and who bears strengthening cost.
Have the lease reviewed by a lawyer before committing. Many retail purchases are decided by lease terms the buyer did not read.
Stock
Stock is usually valued separately at settlement, and it is where disputes concentrate.
Agree in advance: how stock is valued (cost, and which cost), how obsolete and damaged stock is treated, who counts it and when, and whether there is a cap on the amount you must purchase.
Walk the stockroom before agreeing anything. Aged, damaged and unsellable stock is common in a business being sold, and paying cost for it transfers the vendor’s problem to you at full price.
Asset sale or share sale
Most small retail purchases are asset sales — you buy specified assets and leave liabilities behind. That is generally what a buyer wants, because a share sale means inheriting the company’s entire history including unknown liabilities.
Purchase price allocation between asset classes affects both parties’ tax positions and must be agreed and applied consistently. Get tax advice on structure before agreeing terms, not after.
Employees
Establish who transfers, on what terms, and what accrued entitlements exist. Employment agreements, leave balances and any restructuring provisions all need review.
Note that employee protection provisions may apply for specified categories of vulnerable workers, giving rights to transfer on existing terms.
Talk to the staff after the deal is conditional and before settlement where the vendor permits. They know things about the business you will not find in the accounts.
Other checks
- Why is the vendor selling? Ask directly. Retirement and relocation are different from a competitor opening nearby or a lease ending.
- Licences and registrations — food premises, alcohol licence, and whether they transfer or must be re-applied for. An alcohol licence in particular is not automatic.
- Supplier arrangements, including whether favourable terms are personal to the vendor.
- Local competition and anything planned nearby — check the council for consents in the area.
- Equipment condition and what is owned versus leased.
- Restraint of trade from the vendor, which you should require.
Working capital after settlement
Budget for it. The purchase price is not the total cost — you need stock, working capital, and a buffer while you learn the business and customers adjust to a new owner.
business.govt.nz publishes guidance on buying a business, and the Companies Office register is free to search.
General information only, not legal or financial advice.
