Legal due diligence when buying a business in South Africa

Due diligence is the buyer’s investigation of the business before committing to the deal. Its purpose is not just to find problems. It is to find them early enough to do something about them: adjust the price, require them to be fixed before completion, obtain specific protection in the contract, or walk away.

South African law gives a buyer limited protection without contractual protection. A buyer who fails to investigate and fails to negotiate proper warranties may find that a hidden problem is simply its own loss. A well-run due diligence and a well-drafted agreement work together.

Types of due diligence

A full acquisition review usually has several workstreams:

• Legal: corporate structure, contracts, employment, property, intellectual property, regulatory compliance, litigation and data protection.
• Financial: quality of earnings, working capital, debt and debt-like items.
• Tax: income tax, VAT, employees’ tax (PAYE), customs and historic SARS audits.
• Commercial and operational: market position, customer concentration, systems and key people.
• Specialist reviews where relevant, such as environmental, IT security, B-BBEE and property condition.

This article focuses on the legal review, but the workstreams overlap. A lawyer reviewing customer contracts will pick up pricing and termination risks that matter to the financial adviser, and vice versa.

How the process works

1. Confidentiality. The parties sign a non-disclosure agreement before any information is shared. Where the parties are competitors, competition law limits the sharing of competitively sensitive information. A “clean team” arrangement may be needed.
2. Request list. The buyer’s advisers send a list of documents and questions, tailored to the business and the deal size.
3. Data room. The seller uploads documents to a virtual data room. Questions and answers are tracked in a Q&A log.
4. Review and management sessions. The advisers review the documents, raise follow-up questions and meet management.
5. Report. The buyer receives a report, often a “red flag” report that focuses on material issues rather than summarising every document.

What a legal due diligence covers

Corporate and ownership

• The company’s registration details, memorandum of incorporation (MOI) and any shareholders’ agreement.
• The securities register (which every company must keep under section 50 of the Companies Act 71 of 2008) and the history of share issues and transfers. Missing board resolutions, unpaid shares or share issues made in breach of the MOI or the Act can cast doubt on who actually owns the shares being sold.
• Pre-emptive rights, options, convertible loans and employee share schemes that could dilute the buyer.
• Board and shareholder minutes, especially for major past transactions.
• Beneficial ownership filings with CIPC.

Material contracts

• Key customer and supplier agreements: duration, termination rights, exclusivity, pricing mechanisms and liability caps.
• Change-of-control and anti-assignment clauses, which could allow counterparties to terminate after a share sale or block the transfer of contracts in an asset sale.
• Restraints of trade or non-compete clauses that bind the target and could limit the buyer’s group after completion.
• Agency, distribution, franchise and licence agreements.
• Related-party agreements with the seller or its group, which may need to be terminated or replaced on arm’s length terms.

Finance and security

• Loan agreements, overdraft facilities and guarantees, including change-of-control events of default and prepayment costs.
• Security over the target’s assets, such as mortgage and notarial bonds, pledges and cessions.
• Suretyships and guarantees given by the target for other parties’ debts.
• Inter-company loans with the seller’s group, which must usually be settled or assigned at completion.

Employment

• Employment contracts for key staff, including restraints, notice periods and bonus or incentive entitlements.
• Collective agreements and union recognition.
• Pending CCMA, bargaining council or Labour Court matters.
• Compliance with UIF, COIDA, skills development levy and employment equity obligations.
• Retirement fund and medical aid arrangements.
• The use of independent contractors who may in fact be employees.

Property

• Title deeds, bonds, servitudes and zoning for owned property.
• Leases: term, renewal options, rental escalations, landlord consent requirements and reinstatement obligations.
• Occupation certificates and compliance with building regulations where relevant.

Intellectual property and technology

• Registered trade marks, patents and designs, and whether they are registered in the target’s name.
• Ownership of software, content and designs. Under the Copyright Act 98 of 1978, works made by employees in the course of employment generally belong to the employer, but works made by independent contractors usually belong to the contractor unless there is a written assignment. Many founder-led businesses have gaps here.
• Domain names, social media accounts and key software licences.
• Open-source software use in the target’s own products.

Regulatory and licences

• Licences and permits needed to operate, and whether they survive a change of control.
• Sector-specific regulation (for example, financial services, health, mining, telecommunications, liquor).
• B-BBEE certificates and ownership credentials, which may change after the sale.
• Environmental authorisations and compliance.

Data protection

• Compliance with the Protection of Personal Information Act 4 of 2013 (POPIA): an appointed information officer, privacy notices, operator agreements with service providers, security measures and any data breaches.
• Cross-border transfers of personal information.
• The data room itself: sharing employee and customer personal information with a prospective buyer must be justified under POPIA. It should be limited, anonymised where possible and covered by confidentiality obligations.

Disputes

• Current, pending and threatened litigation, arbitration and regulatory investigations.
• Recent letters of demand and complaints.
• Any judgments against the target.

Common red flags

In our experience, the issues that most often affect deals involving owner-managed businesses are:

• share registers that do not match the shareholding the parties believe exists;
• key intellectual property owned by a founder personally or by an outside developer;
• major customers that can terminate on short notice or on a change of control;
• personal or family expenses run through the company, which distort earnings;
• informal arrangements with related parties that are not documented;
• employees treated as contractors;
• tax non-compliance, especially PAYE and VAT; and
• unregistered or expired licences.

Using the findings

A due diligence report is only valuable if it changes the transaction documents. Findings are typically dealt with in one or more of these ways:

• Price. Reduce the price, or adjust it for debt and debt-like items identified.
• Conditions precedent. Require the issue to be fixed before completion, for example by obtaining counterparty consents, assigning IP to the company or rectifying the share register.
• Specific indemnities. Where a known risk cannot be fixed, the seller indemnifies the buyer rand-for-rand if it materialises. Known risks are usually excluded from general warranty claims by disclosure, so a specific indemnity is the right tool.
• Warranties. Tailor warranties to the risks identified.
• Retention or escrow. Hold back part of the price to secure potential claims.
• Walk away. Some findings, such as uncertain title to the shares or the core IP, may make the deal unworkable.

Seller due diligence

Sellers increasingly carry out their own review before going to market (sometimes called vendor due diligence). It allows them to fix problems before buyers find them, control how issues are presented, prepare a cleaner disclosure letter and shorten the transaction timetable. For founders planning an exit in the next few years, a “sale-readiness” review is often the best investment they can make.

How O’Reilly Law can help

We run legal due diligence for buyers and investors, prepare sellers for exit, and translate findings into the protections in the transaction documents. Speak to our business structuring team.

Related reading: Share sale or asset sale? · Warranties and indemnities in sale of shares agreements

Contact us to discuss your transaction in confidence.

This article is general information and not legal advice. The scope of a due diligence should be tailored to the business and the deal. Correct as at October 2026.