Insight
October 14, 2026
Buying a business can be exciting. The turnover looks promising, the customers are loyal and the price seems fair. Yet a profitable business may still carry legal problems that are expensive to fix. Due diligence - the process of checking a business before buying it - should therefore look beyond the financial statements. It should also establish whether the business complies with legislation and what problems could follow the sale.
The starting point is understanding what you are buying. If you buy shares in a company, the company remains the same legal entity, with its existing debts, contracts and compliance history. Changing its shareholders does not erase unpaid taxes or legal claims. Buying selected business assets is different, but it does not automatically remove every risk. The sale agreement and applicable legislation determine which obligations transfer.
Employees are one area where this distinction matters. Under section 197 of the Labour Relations Act, when a business transfers to another employer as a going concern, the new employer generally takes over the existing employment contracts automatically, subject to the Act’s provisions. A buyer cannot simply assume that everyone must reapply for their jobs. Outstanding leave, employment disputes and other employee obligations need careful investigation before the purchase price is agreed.
The same attention should be given to the information the business holds. Customer databases and employee records may be valuable, but they come with responsibilities under the Protection of Personal Information Act No. 4 of 2013, commonly known as POPIA. Buyers should check how information was collected, how it is protected and whether it may lawfully be shared during due diligence or transferred under the sale. A privacy policy alone does not show that the business’s everyday practices comply with the law.
Operational documents can reveal equally serious problems. A lease may require the landlord’s consent to a transfer or change in control. A key customer contract may allow cancellation when ownership changes. Depending on the industry and transaction, licences or permits may need to be renewed, amended or obtained afresh. These documents should be checked individually: buying a business does not necessarily give the buyer permission to continue every activity on the same terms.
The tax aspect of the transaction can also change the real cost of the deal. Calling a transaction the sale of a “going concern” does not automatically qualify it for VAT at the zero rate. The requirements of the Value-Added Tax Act No. 89 of 1991 must be met, including the relevant written agreements between the parties. An incorrect assumption about VAT can leave the parties facing an unexpected bill.
The sale agreement should turn the findings into practical protection. Required consents and compliance corrections can be made conditions that must be met before completion. The seller can give written assurances about disclosed information and agree to compensate the buyer for specified losses. These protections should identify the actual risks uncovered in the file, with clear deadlines and responsibility for resolving them.
A business’s value lies not only in its profits, but also in how well it meets its legal obligations. Careful due diligence helps buyers uncover hidden risks, understand the true cost of the purchase and address problems before signing. Taking the time to ask the right questions can prevent an exciting opportunity from becoming an expensive mistake.
