The due diligence phase is where business deals succeed – and where many quietly fall apart. With a clear checklist and a structured process, you can properly investigate a business before committing serious time and money.
For many buyers, this is also the most emotionally charged part of the journey. By the time you reach due diligence you may already be imagining life as the new owner – the independence of running your own company, the potential financial upside, or the satisfaction of building something of your own. But due diligence is where excitement meets reality.
Are the customers stable? Are there risks hidden in contracts, tax records or daily operations? If the answers hold up, you move forward with confidence. If they don’t, walking away may be the smartest decision you make.
In this guide we strip away the jargon and walk through a practical twelve-step due diligence checklist for entrepreneurs and investors considering a business acquisition in South Africa.
Let’s dive in.
Due Diligence Checklist for Buying a Business in South Africa
Before diving into each step, here is the condensed twelve-step checklist at a glance. Many buyers find it helpful to copy this into a working document and tick off each item as they progress through the investigation.
At first glance the list can look intimidating. That’s completely normal. Buying a business involves many moving parts, and due diligence is the stage where you examine them carefully.
The good news is that not every item will apply to every transaction. A small service firm will have different risks from a manufacturing company, and a single-location business will require less investigation than a large multi-site operation.
Think of this checklist as a framework. It simply helps ensure you don’t overlook the areas where buyers most often run into trouble.
- Set-Up: timeline, document request list, advisory team, confidentiality agreements
- Financial Due Diligence: financial statements, tax returns, revenue verification, AR/AP review, working capital
- Inventory: stock reports, saleable inventory, independent counts
- Assets & Equipment: asset register, ownership vs leases, maintenance history
- Sales: revenue sources, pricing structure, customer concentration, CRM systems
- Marketing: marketing strategy, channels, brand positioning, digital presence
- People / HR: employee roles, compensation, payroll compliance, benefits
- Systems & Operations: accounting software, processes, IT access, internal controls
- Customers, Suppliers & Competition: market analysis, supplier dependence, customer relationships
- Contracts & Legal: leases, contracts, licences, regulatory compliance
- Pro Forma: acquisition financial model and break-even forecast
- Decision & Renegotiation: price adjustments, risk mitigation, closing strategy
Once you begin working through these steps one by one, the process becomes far less overwhelming. Each item simply represents another piece of the puzzle.
Step One: Set-Up
Before reviewing documents in detail, establish a clear structure for the due diligence process.
Agree on a realistic timeline with the seller. For many smaller acquisitions around 20 business days is typical, although more complex deals may take longer.
Create a document request list outlining the information you will need. This typically includes financial statements, tax filings, contracts, payroll records and customer reports.
Most buyers assemble a small advisory team at this stage. An accountant can review the financial records while a lawyer experienced in business acquisitions can examine contracts and legal risks. Some buyers also involve a trusted colleague or partner to help with operational tasks such as inventory counts.
Confidentiality is another important consideration. Sellers may want to limit who knows the business is for sale – particularly employees or customers. Make sure you understand what access you will have and who you are allowed to speak with during the process. If the seller restricts access too heavily, it may be worth asking why.
Tip: Our article Do You Need an Accountant or Lawyer When Buying a Business? offers practical guidance on choosing the right advisors.
Step Two: Financial Due Diligence
Your goal here is simple: confirm that the financial performance used to value the business is accurate.
At minimum you should request three years of financial statements and business tax returns. In South Africa this typically means reviewing financial statements alongside tax filings submitted to the South African Revenue Service (SARS).
You should also review VAT submissions, PAYE payroll filings and other tax records where applicable.
A common technique during financial due diligence is sampling and tracing. Sampling means selecting invoices from different months and periods rather than reviewing every transaction. Tracing means following the path from invoice to payment to bank deposit to confirm the revenue genuinely occurred.
Above all you are looking for consistency. Sudden margin changes, unexplained expenses or unusual one-off transactions should always be investigated.
Your financial due diligence checklist should include:
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Owner add-backs – confirm that personal expenses added back to profit are legitimate.
• Accounts receivable (AR) – unpaid invoices and average collection times.
• Accounts payable (AP) – supplier balances and payment patterns.
• Debt and credit facilities – loan terms, interest rates and lender covenants.
Tip: Our article Financial Due Diligence: What Every Business Buyer Needs to Know explores this stage in greater depth.
Step Three: Inventory Due Diligence
If the business sells physical products, inventory will form a significant part of the valuation.
This is also one of the areas where buyers sometimes get unpleasant surprises. A balance sheet may show a large inventory figure, but once you inspect it closely you may discover that much of it has been sitting in storage for years.
Request a detailed inventory report and determine which items qualify as good and saleable stock. Obsolete, damaged or slow-moving items may have very little real value.
Whenever possible perform an independent inventory count rather than relying entirely on the seller’s numbers. It may feel slightly awkward at first – especially if the owner offers to help – but it is important that you see the inventory yourself.
The counted inventory should broadly match what appears on the balance sheet. If significant discrepancies appear, the purchase price may need to be renegotiated.
Step Four: Assets & Equipment
Many businesses depend heavily on equipment, vehicles or machinery. Understanding the condition and ownership of these assets is essential.
Create an asset register listing the major items used in operations. Confirm whether each asset is owned outright or financed through a lease or equipment agreement.
Review maintenance records, warranties and the expected remaining lifespan of critical equipment. Estimating replacement costs is equally important, since unexpected equipment failures soon after acquisition can quickly drain working capital.
Step Five: Sales Due Diligence
Understanding how the business actually generates revenue is critical. Where do leads come from? Are customers primarily repeat buyers, referrals or one-time purchasers? How visible is the sales pipeline?
You should also examine pricing policies, discount practices and the systems used to track prospects and customers, such as CRM software.
Customer concentration deserves special attention. If a large portion of revenue depends on a handful of clients or key salespeople, the business may become vulnerable after ownership changes.
At the same time this stage often reveals opportunities for growth – new markets, improved pricing strategies or more efficient sales processes.
Step Six: Marketing Due Diligence
Marketing due diligence focuses on how the business attracts and retains customers. Evaluate the company’s marketing channels, brand positioning and digital presence. Many small businesses still rely on outdated websites or minimal online marketing.
A positive sign is a structured marketing plan with defined budgets and measurable outcomes.
Tip: For an example of how improving marketing can transform a business after acquisition, read These Families Changed Their Lives by Buying a Business – And You Can Too.
Step Seven: Staff and HR
Employees are often one of the most valuable – and sensitive – aspects of a business acquisition.
During due diligence you should review employee roles, compensation structures, employment agreements and payroll systems. In South Africa this also means ensuring the business complies with labour regulations such as the Basic Conditions of Employment Act and PAYE payroll obligations.
You should also identify key employees whose departure could significantly disrupt operations after the transition.
Step Eight: Systems and Operations
A well-run business should not rely entirely on the owner’s personal knowledge. Review the operational systems that keep the company functioning day to day. Businesses with documented procedures and clear reporting systems are far easier to transition to new ownership.
Look at the accounting software, operational workflows and internal reporting structure. You should also confirm who has access to critical systems such as banking platforms, websites and administrative accounts.
Tip: For a closer look at why owner-independent systems make businesses easier to sell, read The Key to Selling Your Business? Make Yourself Redundant.
Step Nine: Customers, Suppliers and Competition
External relationships can have just as much impact on your success as internal operations.
Research competitors operating within the same industry and geographic region. Compare pricing, positioning and customer feedback to understand where the business sits within the market.
Supplier relationships should also be examined carefully. Over-reliance on a single supplier can create operational risk if that relationship changes.
Finally analyse the customer base in detail. Understanding who buys from the business – and why – will help you assess both risk and long-term growth potential.
Step Ten: Contracts and Legal Due Diligence
Legal due diligence is one area where professional advice is particularly valuable. A lawyer experienced in business acquisitions can identify risks hidden in contracts that buyers often overlook.
Your legal due diligence checklist should include:
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Leases – assignment clauses, renewal options and occupancy costs.
• Insurance – required coverage and replacement costs.
• Contracts – supplier, customer and employee agreements.
• Licences and permits – regulatory approvals required for the industry.
• Corporate records – CIPC registrations and company records.
• Litigation and compliance – lawsuits, regulatory issues or environmental concerns.
You should also verify that the company’s records with the Companies and Intellectual Property Commission (CIPC) are current and accurate.
Step Eleven: Build a Conservative Pro Forma
A pro forma is a forward-looking financial projection showing how the business may perform after the acquisition.
Start with a conservative revenue estimate and subtract Cost of Goods Sold (COGS) to determine gross profit. From there subtract operating expenses, acquisition financing payments, professional fees, capital expenditure allowances and your own salary. The result is a projected net profit.
A realistic pro forma should also account for seasonality and help you determine the business’s break-even point. Most importantly it should stress-test downside scenarios rather than relying on optimistic projections.
Step Twelve: Decision & Renegotiation
Once due diligence is complete the negotiation phase begins. The information uncovered during your investigation becomes the basis for adjusting the purchase price or restructuring the deal. Buyers often use mechanisms such as escrow agreements, seller financing or earn-outs to manage risk.
Tip: For a deeper dive into negotiation strategy, read our article How to Negotiate When Buying a Business.
Even after investing time and effort into due diligence, the most important skill for any buyer is the ability to walk away.
Buying the wrong business can cost far more time and money than abandoning a deal after careful investigation – and if you do walk away, remember there will always be other opportunities waiting.