Founders often experience diligence as a series of document requests and questions that seem designed to find reasons not to invest. That framing is understandable but unhelpful. Diligence is an investor trying to verify that the story you told in the pitch reflects the reality of the business. The cleaner the match between what you said and what the numbers show, the faster and smoother the process.
Here is what South African investors, from private equity funds to development finance institutions to impact investors, consistently prioritise during due diligence.
The financial model
If there is one document that separates funded deals from unfunded ones, it is the financial model. Not the pitch deck. The model.
Investors are not just looking at whether the numbers are large enough. They are stress-testing the assumptions underneath them. Common lines of inquiry:
- Is the revenue build bottom-up or top-down? Top-down models (we will capture 2% of a R10 billion market) are nearly always rejected. Bottom-up models (we have 12 clients paying R80,000 per month; we are adding 2 per quarter based on current sales velocity) are credible.
- Are unit economics visible? Customer acquisition cost, lifetime value, contribution margin, and payback period should be derivable from the model, not buried or hidden.
- How does it behave under stress? Investors routinely shock key assumptions: what happens to the business if revenue is 30% below forecast for two quarters? If the model breaks under reasonable stress, the conversation stops.
- Does it reconcile to actuals? If your model shows a historical period, it should match your audited financials exactly. Discrepancies are red flags.
The data room
A well-organised data room is not just a courtesy; it signals operational maturity. Investors judge businesses by how prepared their documentation is, because it is a proxy for how the management team runs everything else.
What belongs in the data room:
- Three years of audited or reviewed financial statements
- Up-to-date management accounts (within the last 90 days)
- Cap table showing shareholding, options, and any convertible instruments
- CIPC company registration documents and share certificates
- Material contracts: major client agreements, supplier contracts, key leases
- Employment agreements for senior management
- B-BBEE certificate (or verification documentation)
- Tax clearance certificate
- Any existing shareholder agreements, loans, or side arrangements
Missing documents from this list are not just administrative inconveniences. They generate questions, create delays, and, for development finance institutions in particular, can stall committee approval until resolved.
Governance and legal
Investors, especially institutional ones, are underwriting not just the economics of the business but the legal and governance integrity of the entity they are investing in. Areas that consistently generate concern:
- Undocumented shareholder arrangements. Verbal agreements, informal dilution understandings, or undocumented loans from founders to the business create legal ambiguity that any competent investor will want resolved before they sign anything.
- Related-party transactions. Transactions between the business and founder-related entities need to be disclosed, documented, and ideally conducted at arm’s length. Unexplained related-party flows raise governance concerns.
- Tax compliance gaps. Outstanding tax obligations are a serious risk in any acquisition or investment. Investors check. SARS can be a creditor that ranks ahead of equity, which fundamentally affects the risk profile of the investment.
- Undisclosed litigation or disputes. Any material dispute, whether with a client, supplier, employee, or regulatory body, needs to be disclosed. Investors find out eventually. The later they find out, the worse it looks.
The founder and management team
In growth-stage businesses, investors are frequently making a bet on people as much as on the business model. What they are looking for in the management assessment:
- Depth of insight into the business. Can the founder talk through the financials without notes? Do they know their unit economics and key assumptions? Founders who are not across their own numbers raise questions about operational control.
- Honesty about weaknesses. Investors are experienced at identifying the vulnerabilities in a business. Founders who acknowledge them credibly, and explain how they are being managed, build more trust than founders who deflect.
- Key-person risk. For businesses where one or two individuals drive the majority of revenue or relationships, investors will probe what happens if those people leave. Having a plan, or actively building one, matters.
- References. For larger transactions, investors will ask for references. Know who yours are, and brief them.
Diligence does not kill deals. Surprises do. Everything an investor discovers during diligence that you did not tell them upfront becomes a trust problem, not just a documentation problem.
The best preparation for diligence is not assembling documents at the last minute. It is running your business in a way that means there is nothing to hide, and knowing your numbers well enough to answer questions with confidence.