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Due diligence is often described as “doing your own research” before an acquisition, but the reality is far more complex. In this episode of Ghost Stories, The Finance Ghost is joined by Althea Soobyah, Bongiwe Mbunge and Johan Marais from Forvis Mazars to unpack what a modern due diligence process really looks like.
From financial and tax diligence through to ESG and HR considerations, the discussion explores how buyers identify hidden risks, validate value and avoid expensive mistakes. The conversation also dives into deal structuring, cross-border complexities, tax exposures, cultural risks and the growing importance of non-financial factors in corporate transactions.
Whether you’re a CFO, investor, business owner or dealmaker, this episode offers valuable insights into what happens after the letter of intent is signed and the real work begins.
After all, the due diligence can make or break a transaction!
In this episode:
- Financial DD fundamentals: How buyers assess earnings quality, working capital and the key value drivers of a business.
- Tax traps and opportunities: Why tax diligence goes beyond compliance and can materially impact deal structure and valuation.
- The rise of ESG due diligence: Understanding culture, governance, workforce risks and sustainability factors that influence long-term value.
- Cross-border transaction challenges: Navigating tax, regulatory and operational risks across multiple jurisdictions.
- One deal, many workstreams: How coordinating financial, tax and ESG due diligence can improve efficiency and support better decision-making.
Connect with the Forvis Mazars team:
This podcast is brought to you by Forvis Mazars in South Africa.
Transcript:
The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. We’ve got a particularly interesting episode here, where we have three guests on it, all from Forvis Mazars, and for very, very good reason. Because we are going to be learning about the different elements of a due diligence (DD) process.
And at Forvis Mazars they have these skills in-house. They can do almost all the bits of a DD (we’ll obviously dig into the stuff that they don’t do as well).
To help us understand how that all looks these days, we have Johan Marais, Althea Soobyah and Bongiwe Mbunge ready to share their insights into due diligence best practice. Something I’m certainly looking forward to.
Welcome to the show, all three of you.
Johan Marais: Thanks, Ghost. Thank you for having us.
Althea Soobyah: Thanks, Ghost. It’s good to be here.
Bongiwe Mbunge: Pleasure for me to be here, thanks, Ghost.
The Finance Ghost: So, I do have a fair bit of experience in the corporate finance industry, although it’s been more than a decade now since I looked at a due diligence report myself.
But Johan, I’m sure not much has changed in the past decade in terms of what a DD is. And I guess for an investment audience, they might be used to seeing comments like, “Do your own research” whenever someone is writing about stocks or the market.
And really, a DD is just “doing your own research” in terms of a corporate transaction, right? It’s making sure that the thing is what you believe it is.
Johan Marais: If I were to just take one step back as to when the due diligence is required, the actual timing. That generally happens after your non-binding offer or your letter of intent has been agreed.
The terms contained in your non-binding offer would be your price, how much percentage is being acquired and other key commercial terms.
When that document was agreed, only limited information was shared between the parties. And this is where a due diligence comes into effect, because much more detailed information will be shared.
At Forvis Mazars, we do financial, tax, ESG, HR and IT due diligences. That’s why we have Althea on the call, Bongiwe on the call. Althea takes care of the tax due diligence, Bongiwe of the ESG due diligence side of things.
The Finance Ghost: And so the sides that you don’t do would be commercial, legal – as part of a deal. Your clients would need to obviously then just manage that with experts in that space, right?
Johan Marais: Absolutely. We don’t do the legal due diligence, and we don’t do the commercial due diligence. For legal due diligence, we work with various attorney firms, so we’re well placed to recommend a good attorney, who can assist with the due diligence.
If I were to get into a little bit detail as to what does a financial due diligence entail: in essence, no purchaser wants to willingly overpay for an asset. So, part of the financial due diligence is, we look at the quality of the earnings, the operating profit, because that drives value.
There are a few other bits that’s important as well, one of them being the working capital; your inventory, debtors, creditors; and how quickly that converts into cash flow. To sum it all up, a financial due diligence really wants to identify the key value drivers of the business as well as the risks.
The Finance Ghost: Yeah, so from a dealmaking perspective, essentially what happens in practice is: a company comes in, or an investor, they like the look of a thing, they’ve been given a pitch deck which says, “Hey, this is what this business does. This is why it all makes sense”.
Obviously, they’ve formed a view on it, which is essentially the commercial due diligence piece. Although sometimes an investor will actually get a full-blown commercial due diligence done, just to make sure of the understanding of how this thing fits into a market, etc.
But the financial due diligence is really where you just check that what you’ve actually been told is true, right? And obviously audited financials, etc. help, but when you’re in a smaller business space and the mid-market, I guess even then, you really want someone to just go and check all the detail on behalf of the buyer, and not just rely on the balance sheet that was signed last year.
Johan Marais: So, spot on, Ghost. It’s not just relying on the balance sheet last year, but it’s also understanding what drives the business. Where is the key risk, how much concentration risk do you have in customers? Are there exports?
And then very importantly as well, there’s this one-line item in the financial statement that talks about tax. So, what does it entail? Where are the risks? Is the company compliant? And that’s where we have the expertise of Althea, who can dig into quite a bit of detail from a tax due diligence perspective.
The Finance Ghost: Yeah, absolutely. So, Althea, let’s maybe bring you in here then. And tax is very much your area of specialty in a due diligence, and your expertise.
And there’s a bunch of practical considerations here, right? So again, people who might not be close to the detail of corporate transactions might not realise that sometimes they are structured as the acquisition of a business (which means the assets, some of the liabilities, come along for the ride).
And sometimes it’s the acquisition of shares, which means you get all the skeletons in the closet as well, if there are any. They come along because you’re buying the entity you’re buying. The entire history might just come with baggage. It’s a bit like a relationship.
So, from a tax perspective, how do you help people understand that baggage? And how does it inform your approach whether they are doing acquisition of a business or an acquisition of shares?
Althea Soobyah: It’s like you said, it’s all about protecting value in a transaction. Ultimately, at the end of the day, when you’re looking at tax exposure, it could impact the value of your assets that you’re going to acquire.
And it does impact the decisions you make on whether or not you’re going to acquire at the shareholder level, or you’re going to acquire assets.
What we do see from a lot of the transactions is ultimately about protecting value in the transaction. A lot of the time what we notice is that tax has always been a grudge purchase, from a compliance perspective, for any taxpayer. What we really do in a tax due diligence is to give comfort that to the extent that there is tax exposure, how does it impact the value or the acquisition, be it at share level or at an asset level.
And in practice, there could be unpaid taxes, VAT risk, payroll issues, transfer pricing exposures which would creep up along the line and sometimes, unbeknown to the potential buyer, if they’re not looking at it intricately and in detail, it might come up and “bite them” (laughs) after post-acquisition if they’re not careful.
The second part of it is also equally important is validating the tax assets. Looking at assessed losses. It’s not only mitigating risk; it’s about upside.
What is the upside in those assets? How do I take on those assets? If I’m going to acquire at the asset level, what is it that I’m acquiring it at?
What’s the upside for me? What are the incentives attached to those particular assets?
A lot of the time people see it as, like I said, a grudge purchase. But it could also be: what is the potential in those assets that I hold, that add value to my business? So that’s at asset level.
And then the same thing at the shareholder level: how does that impact my decision-making when I’m acquiring?
And similarly with a vendor due diligence: how does it impact my business if I want to sell?
How do I think about tax due diligence? How do I think about acquisition from an overall financial perspective? How does it all fit together when I’m actually in a position where I want investors to invest and to sell off my assets?
The Finance Ghost: I think another thing that a lot of people maybe don’t realise is the extent to which a DD can actually lead to a renegotiation of terms.
So, for example, if you’ve got an acquisition of shares, and then your tax due diligence picks up that there are actually huge potential risks here, of old issues and SARS assessments and everything else, that can trigger a restructuring of a transaction, right?
To say, actually, “No, thank you, we don’t want the shares, we’ll just buy the assets that we want”.
Althea Soobyah: Absolutely. Or, it will structure the entire legality around your sale and purchase agreements, where you’ve got an indemnity and a warranty, or even a lockbox – where you want to safeguard yourself against future tax exposure, where there’s uncertainty that crops up.
Now, we do different types of tax due diligence.
We can do it at a high level from a compliance perspective. Then you get a limited “red flag” where we just flag potential markers that might influence your price. And then the full scope, where we actually check the tax calculations.
So, it really depends on how prudent the vendor or the seller is and how clean he keeps his books. And it depends on how prudent the approach is that the buyer wants to take and how much risk they’re willing to take on.
The Finance Ghost: I used that analogy earlier of how it’s like figuring out the baggage that someone comes with, right? But that really is what a due diligence is. It’s like an accelerated dating process. You’ve agreed to get married and it’s like, “Well, we’ve only been on one date, we better go on another 50 and we better do it this week and figure out everything”.
Bongiwe, in your world, which is the HR, the ESG side of things, people sometimes forget this stuff. This feels a bit like meeting the parents. You know, that’s important too. You marry the family; you don’t just marry the person.
And I think that people have learned the hard way sometimes, in real life and otherwise, to actually go and check these things out properly and maybe take their time and understand them.
So just give us an idea from your perspective of, from an HR and an ESG side, what are some of the things that you end up picking up? That people, need to be aware of? Where they need to be afraid, they need to be careful, they need to actually get this work done.
Bongiwe Mbunge: Absolutely. And thank you for that, because I firmly believe (and I’ve seen it in practice) that sound leadership generally can navigate the known. It’s about the unknown that is unearthed in this process, that can later become a surprise element that really opens the transaction to risk.
What I really want to weave in as a theme is that it’s resilience planning. There’s a strategic part of it, and there’s a compliance part of it. And both of these are equally important to be known, pre the transaction.
So, categorically, we would conclude on things before the transaction (that are flagged) and after the transaction and give guidance as to what should take priority. And also have an overview of what kind of things will take how long to resolve.
This has an impact on money, to your previous point about renegotiating terms – 100%.
But what are some of the things that we really get to see, when we table reports that unearth the non-financial risk, both across both human resources and sustainability?
This is driven by the sector and the size of the target within the transaction. All things being equal, the most important thing is to understand the industry drivers. Because then you will understand what kind of sustainability risks exist for those industries, backed by lots of research, statistics and quantifiable aspects.
It marries growth and systems. Ambition to grow is very optimistic. But are systems developed?
HR will highlight issues of culture. Is there strong cultural alignment or misalignment? Those are deemed to be soft issues until you are in it, and it becomes everything (laughs).
Because I believe that it shapes the day and it sets the tone. It also draws some limitations in terms of what can and cannot happen in that environment and provide safety.
But more about the sector itself. When you have a target in manufacturing, you will focus on certain things. Occupational health and safety, manufacturing processes, the markets in which the targets operate. It’s often not significantly understood as to the impact that it can have.
Why is this important? Because, if you are going to have to adopt regulation of another market into your own, by virtue of transacting across the border, you need to know that. And some of those things can have implications on taxes (such as green border taxes) or reporting regulation as well.
One topical item that is really demanding the attention of executives, speaks to supply chains. Both from a modern slavery and human rights perspective within the supply chain, as well as the complexity that sits within the supply chain cross-border. These are nuances that, put down on paper, are well understood so that the right kind of picture can be set.
And coming back to my initial point, when leadership understands these issues at the right time, it changes and shapes the whole conversation.
Something that is deemed on the softer side, we call it a social licence to operate. The maturity level of this differs from region to region in terms of the consumers of those goods and services that we are talking about and their ability to push back.
So, when we are saying the resilience and strategic planning is the ability to anticipate that ahead of time, it’s to reposition the business, put the transaction where it needs to be, increase the value or plan for risk and compliance matters. And those are things that, across the human resources or sustainability broad streams, come into being.
You will appreciate that I haven’t mentioned governance, and it is the most critical thing. Because there’s a level of maturity when it comes to governance. There’s a level of code and understandability, and lesser, vague items when it comes to that.
But it is contextualised back also to the operation itself, and it is read within context alongside the other aspects of the S and the G.
The Finance Ghost: It’s such an interesting area and I think what makes it tricky for you, I would imagine, and I wanted to ask you about this, is just the scope of work. There’s so much to think about, right?
So, in Johan’s world, on the finance due diligence, he’s got these line items to work to, understands the common risks. Yes, there will always be some nuances specific to the company and specific to the sector.
Althea’s world, it’s going to depend on assets, is it shares, sector rules, all of that stuff. But it’s still at least a relatively understandable scope, particularly for a finance person like me. And many of the listeners to this will be financial-type people, CFOs and the like.
So, in your world, how do you design a due diligence to try and catch – it almost feels like a catch-all? This is where everything else goes.
Are your staff unionised? Are they unhappy? Is there a culture issue? A very topical and highly politicised issue now would be, are all your staff correctly permitted to be working in South Africa? Depending on what industry you’re in, then there’s all the ESG stuff.
So how do you figure out where to spend your time when you’ve got so much you need to try and catch?
Bongiwe Mbunge: I love that question, Ghost, because this leans to your experience on the ground to be able to bring to life the sector supplement of what you need to look at and decide because you need to make a decision: what is most critical here?
Can something slip? Yes. But can something significant slip? No.
That really is up to the experience that you are going to throw behind the execution of the due diligence. We must also highlight that an ESG due diligence can be R100,000, or R1 million. And you have got to understand critically the stakeholders that are going to be making a decision around what you are going to present to them and give guidance.
I’m going to repeat that: you need to give guidance. Because many of the buyers, eight out of 10 times, they don’t know what they need to be looking at because of the newness of the topic evolving into the office of the CEO and CFO.
So, this is where we really need to bed down and say, in this particular transaction, given the reach into the markets and the sector and the size, this is the guidance of the minimum that we need to look at. And then take it from there.
The Finance Ghost: Incredibly interesting. And all of you have brought up this concept of cross-border transactions. It’s come up across the board here.
And obviously, when you are doing stuff across the border, the level of risk changes once again. Because now you are dealing with another country’s laws just as a starting point – whether or not you’ve complied with not just what’s in that country but actually going across the border.
Althea, you referenced transfer pricing. That’s a big one that has caught up some very, very big names in the market.
But Johan, just confirming that I’m right, that in a cross-border world, the risk in a due diligence, the amount of thinking that needs to go into planning it and trying to optimise the cost to the client (which is the point Bongiwe has just correctly raised) versus the risk: the complexity just goes through the roof, right?
Johan Marais: It certainly does. Complexity, and if you’re not careful, the costs as well, for performing the transaction from an advisory perspective.
You have much more risk once you go cross-border. And to understand that risk, that’s very important. And it’s not foreign currency risk, but also the flow of funds in and out of a country, as well as a tax risk as well.
When we do a due diligence, often there’s a subsidiary / associate / another investment that is outside the borders of South Africa. Now, we are very fortunate at Forvis Mazars, that we have a presence in almost 30 countries, which is fantastic when we assist the client to actually perform a potential acquisition, specifically on the tax side of things.
Now tax is very specific. It needs to be done by the local team, and that’s where Althea and her teams really coordinate it from South Africa. They quarterback it here. So, I would almost ask Althea just to give a little bit of detail around just the benefit of actually using Forvis Mazars.
Because not only is it the South African team that’s well diversified (financial, tax, ESG and a couple other streams,) but the assistance we get from our other local offices is fantastic up in Africa as well.
Althea Soobyah: I’ll do it by demonstration and by way of example. I think it’s best to do that.
If we’ve got a tax/financial/ESG DD in South Africa, target being a South African company, but there’s layers underneath that – every country, be it in Africa or global, they have their own legislative frameworks. And more often than not, whilst it’s the South African shares being sold or the South African assets being stripped out, if there’s holding in South Africa that’s influencing its subsidiary level in an African country, that could very well trigger a tax consequence in the different region.
Perfect example of that is in Tanzania – a shareholding being sold by foreign shareholders and the entity subsidiary sitting in Tanzania, holding the assets, might be affected. You might be triggering capital gains tax. There’s not just a transfer pricing issue with funding and cross-border transactions, but you might be triggering a capital gains tax because of immovable property or assets being held locally. There’s a sale of shares, at a foreign shareholder level, to South Africa or even globally.
So those are things that we look at when we need to look at the full picture in terms of the target, who’s the target; what the local requirements are, what the legislative framework is like.
And it doesn’t only hold true for tax. It might be for ESG purposes, it might be from a labour perspective, from an economics and a social perspective.
We know there’s a tendency in some of the African regions, where government makes decisions on a whim that will affect holding of assets and workforce, etc.
Other things that are likely to have an impact is Place of Effective Management issues, bringing in foreign people that are coming into the country to establish that particular entity. There might be a setup of a new entity, depending on what the post-acquisition needs are.
That might impact and influence the due diligence from a tax perspective, from a financial perspective and from an ESG perspective. That’s what we’ve seen from a cross-border perspective.
When we look at a coordination service, what’s important is how quickly we can pull together the resources. And what is that impact – what do we need to actually look at to provide advice to our clients that is holistic for them to make informed decisions, and how it’s going to impact the transaction?
Will they set up an Special Purpose Vehicle (SPV), are they going to retain the entity as part of their group structure? What do they need to do post-acquisition, to actually make sure that they tie all the aspects together?
The Finance Ghost: Althea, you raised Place Of Effective Management there. The acronym is POEM. The outcome is anything but poetry.
Especially when there’s a Mauritian holding company, right? It’s super common.
You have a scenario where there are assets here, there are assets in Africa. You’ve got a Mauritian holding company, and you’ve got to make very sure that POEM is being done correctly.
Otherwise, you think you’re buying one thing, and you’re buying something quite different. And legal jurisdiction and domicile is different to where you are a tax resident.
The stuff is very, very, very complicated. There are, I have no doubt, a lot of deals that get done out there where a proper DD wasn’t done and nothing ever comes of it because it’s never assessed. No one ever finds out.
Detection risk is part of it, but the reality is if you are doing a large transaction, you cannot ignore this stuff.
If you are unlucky enough to be assessed, or someone comes and has a look or, in your world Bongiwe, something goes wrong from an HR perspective or ESG perspective. Or Johan, it turns out that actually the accounts receivable balance is almost impossible to collect and this thing doesn’t make cash.
A lot of money changes hands, and you’ve got the ability as a buyer to actually do a DD. If you either don’t do it properly or you don’t get the right people, or you don’t take it into account and structure the legals correctly, then that’s on you. There’s no consumer protection act here coming to save you.
This is an assumption that you’ve got sophisticated people on both sides of the transaction, and if someone doesn’t pick this stuff up, then sorry for you. So that’s why this is so important.
Bongiwe, I’m going to end off with you then. Just because you also bring such a wide variety of DD topics to the conversation, I think.
So how do you make sure that all these elements are then reported back coherently, to give this overarching view on risk? I think particularly in your case, because I’m guessing when you’re presenting to CFOs and the like – Johan’s work, Althea’s work, that gets lots of attention, right? That’s their language.
For your stuff, you’ve got to maybe convince them a bit more of the importance, right?
Bongiwe Mbunge: Absolutely spot on. If I had a magic wand, I would fast-forward the interpretation of the outcomes of an ESG DD, to directly interpret and influence the Weighted Average Cost of Capital (WACC) in Johan’s calculation. So that you can be able to translate: what does this mean? Because I think that’s where the rubber meets the road.
Yes, I see it. There’s a probability element; there’s a likelihood element; or unlikely. And therefore, depending on how optimistic the stakeholders feel around the transaction, they might just say “Good to know, and then we’ll move right along, we’ll keep it in mind”, only to have to deal with it in the future.
From a pre-conclusion perspective, we have got to distil the outcomes in simple language and translate it into potential risk. And not everything needs to be – you don’t need to ring a bell on absolutely everything. You use your experience to say these matters: yes, they’re important, yes, they need to be attended to. But you can make it a post-transaction thing to deal with.
But the pre-transaction elements is where the energy needs to go in, to make sure that if you are looking at the numbers, if you’re looking at the variables and the ratios over a number of years, and you marry that with what you are seeing on the non-financial element, then there’s a different dynamic.
So, it’s the experience of the lead for the ESG DD to be able to harmonize that, to educate, and bring that on board without being an alarmist.
This is not about a “save the planet initiative” or “hugging the bear”. The commercial substance that can be influenced – these nuances needs to be understood for what they are.
And so, I think coherently weaving that together and making sure that you are unequivocal about the recommendations that you are making, is important.
But ultimately, the decision is not resting with us. Have we actually delivered on the promise of saying we’ve highlighted significant things both on the upside and on the potential risk to give some level of clarity around some of the aspects that could enhance or compromise the transaction.
The Finance Ghost: Johan, let’s maybe finish off with you then. Any closing comments from your side for clients to be taking into account when they’re thinking about a due diligence and perhaps just a comment or two on the benefit of working with the Forvis Mazars team specifically.
Johan Marais: If you don’t know what a financial due diligence or tax due diligence entails – phone us, make a coffee, we can explain a little bit about the risk, what the process entails.
We do cover many angles of due diligence and that helps, especially the fees which someone would have had to pay for due diligence. Because all of the information is saved in one space, it’s shared between the different streams. Whether that’s only a South African business, whether it’s a foreign subsidiary, we work with the team overseas as you’ve heard as well.
That saves not just in the time but also the frustration factor from the business that’s being sold. That person doesn’t want to deal with three or four different service providers. They deal with one service provider, that deals with many of the diligence aspects (yes, there might be a legal due diligence advisor as well).
And that ultimately helps with deal execution: a shorter deal execution time. And also, we have quite a bit of experience managing different streams as well.
Thank you, Ghost.
The Finance Ghost: Thank you so much to the team and I will include the links to each of your LinkedIns and where people can find you on the Forvis Mazars website in the show notes.
Johan, Althea, Bongiwe, thank you so much for your time. Good luck with whatever due diligences you’re currently working on. I’m sure they all bring unique challenges and something interesting.
I look forward to getting some more insights from the three of you in years to come.
Johan Marais: Great stuff. Thank you so much.
Bongiwe Mbunge: Thank you, Ghost.
Althea Soobyah: Thank you. Great to be here.
