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Due diligence is a critical component for any prospective purchaser looking to buy a New Zealand business. It is essential to take the time and care necessary for proper due diligence, no matter how good the business might seem or your personal relationship with the business owner. It is industry standard to do comprehensive due diligence in New Zealand. Rushing that process can raise some issues and painful mistakes down the line.

This article sets out three reasons not to rush due diligence. This is because:

  • a comprehensive due diligence investigation takes time; 
  • you do not want to miss any red flags; and 
  • buying a business is a significant use of capital.

Comprehensive Due Diligence Takes Time

The fundamental reason why you should not rush due diligence is that properly completing this process takes time and resources. Of course, the total time needed will depend on the complexity of the business. As such, the due diligence process can take anywhere from several weeks to a few months to totally fully. 

Remember that due diligence is a detailed investigative process. As a prospective purchaser of a business, you want the confidence that the business’s financial, commercial, and legal records are in an accurate and acceptable state. This will require experts to comb through key records and documentation of the business you are thinking about buying. 

It is standard for good due diligence to include two-way communication between your team and the business. It is crucial for your team to do follow-up queries with the business in question about any vague or missing details. Likewise, you should give the business time to respond to these queries and make the relevant assurances.

Given the scale of the purchase of a business, taking these extra weeks to allow these processes to play out will give you confidence that the business is a good investment.

You Do Not Want to Miss Red Flags

Red flags are also known as ‘deal-breakers’. They are issues with the purchase or issues with the underlying business, that can endanger the deal, if discovered. Red flags can come in all kinds of forms and are not generally apparent to the outside eye. Sometimes, businesses are not as forthcoming about possible deal-breakers as they ought to be. For these reasons, due diligence is a vital tool to ensure that the business you are seeking to buy is what you think it is. 

Your team of lawyers and accountants should be well-practised at spotting possible red flags in the documents and details of the business’ records. These might include:

  • non-complete or missing documents;
  • stressed liquidity situations or other financial risks;
  • unrealistic planning assumptions; or
  • overvaluation of assets.

Buying A Business Is A Significant Investment

While it might seem obvious, buying a business is a significant investment for anyone in New Zealand. You are taking on a considerable entity with its own obligations and liabilities. In addition, you will probably be parting with a lot of money in the process. If for no other reason, this should give you pause if you are tempted to rush the due diligence process. 

Given the scale of your investment, taking extra time to ensure that there are no issues with the deal or the business is a very reasonable process and one that the business should expect.

The prospective business may be putting pressure on you to skip or rush due diligence. In that case, use this as an extra warning sign to ensure that the business checks out.

Key Takeaways

There are plenty of reasons not to rush due diligence when buying a New Zealand business. Some of these include the basic fact that comprehensive due diligence takes time, usually several weeks and sometimes multiple months. Speeding through this process means your team will not get the chance they need to go back and forth with the business adequately, and to scan for red flags. Likewise, buying a business is a significant investment. As such, taking your time with the due diligence process is a reasonable and industry-standard practice.  

For more information about the due diligence process, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

How long does it take to do comprehensive due diligence?

It depends on the complexity of the business in question and the details of the purchase. It will usually take at least a few weeks and can take several months for large businesses.

What are red flags in due diligence?

Red flags are possible deal-breakers. They indicate that something about the business is sufficiently alarming or urgent. Likewise, your knowledge of it may mean you do not want to buy the business at all.

What are the risks when rushing due diligence?

The problems with rushing due diligence include not having enough time to ascertain the risks presented by a potential deal properly. You and your team might miss potential red flags if under time pressure to complete a deal. This can be a non-issue issue if the missed problems do not amount to anything serious. However, there might be a critical issue lurking in the deal’s details.

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