Fund investors doing regular deals in South Africa and across the region spend significant time and capital on the transactions that define portfolio strategy – the acquisition, the follow-on, the exit. The legal work that gets the least structured attention is the work that happens between those moments: the everyday contract fabric of each portfolio company, which quietly determines how much value is actually available when the next significant event arrives.
The issue is not the headline contracts. Those get reviewed, negotiated, and managed. The issue is the operating layer beneath them – customer orders that were never properly executed, supplier terms that were accepted without review because the relationship felt stable, contractor agreements where IP ownership was never addressed, NDAs that expired and were never renewed, amendments that were agreed commercially but never documented in writing. Individually, none of these is fatal. Collectively, they create a portfolio where legal and financial risk is distributed across hundreds of undermanaged documents that nobody has a clear view of until a buyer’s diligence team starts asking questions.
What poor contract hygiene actually costs
The cost shows up in three places. During the holding period, it appears as disputes – revenue recovery that is complicated by unclear contract terms, supplier claims that would have been manageable under a well-drafted agreement, and employment situations where the absence of proper documentation creates contingent liability rather than a defensible position. It also appears as management distraction: the time that portfolio company leadership spends resolving contract ambiguity is time not spent on growth.
During exit, it appears as timeline extension and value reduction. A buyer’s diligence team that cannot locate signed versions of material customer contracts, that finds IP ownership gaps with contractors, or that identifies change-of-control provisions in key agreements that weren’t disclosed will slow the process, add conditions, and push for holdbacks and escrow arrangements sized to cover the uncertainty. The legal fees incurred cleaning up contract hygiene issues under diligence pressure are multiples of what the same work would have cost during the holding period.
The third cost is the least visible but arguably the most significant: the deals that don’t happen because a potential buyer’s preliminary review raises enough concerns to redirect their attention. In a market where quality mid-market assets are genuinely scarce, a disorganised contract position is a credible reason to look elsewhere.
A programme approach – not a clean-up
The distinction between treating contract hygiene as a programme and treating it as a periodic clean-up is material. A clean-up happens under pressure, usually triggered by an upcoming transaction or a specific dispute, and it is expensive, disruptive, and incomplete because the business is simultaneously trying to operate normally. A programme is a structured, repeatable process that distributes the work across the holding period and creates a baseline that improves with each iteration.
The programme has four components. The 30-day audit at entry – covering the top twenty customer contracts, top twenty supplier agreements, key contractor and people arrangements, and any existing disputes – produces a categorised view of what is signed and current, what needs updating, what is missing, and what is unclear. This is not a comprehensive legal review. It is a triage exercise that identifies where the exposure is concentrated and what needs immediate attention versus what can be managed over time.
The template reset gives portfolio companies a usable standard pack: customer terms, supplier terms, a contractor agreement with appropriate IP assignment provisions, an NDA, and a short data processing addendum. The emphasis is on usable rather than comprehensive – templates that commercial teams will actually start from rather than templates that sit in a shared drive and get ignored because they are too complex to adapt without legal involvement.
The deviation control framework is a single page that defines what a portfolio company can sign without escalation – and what must come to fund counsel or the board. Unlimited liability, exclusivity arrangements, long lock-in terms, sensitive data sharing, and commitments above a defined threshold all trigger escalation. Everything below that line moves within the business. This one document removes both the most common source of missed risk and the most common source of unnecessary legal spend across the portfolio.
The storage and execution rule is the simplest and most frequently ignored: signed versions of all material contracts live in one place, named consistently, and are accessible to the fund without requiring a reconstruction exercise. For diligence purposes, a contract that cannot be located in its executed form does not exist – regardless of whether both parties performed under it for years.
The exit dividend
Every element of contract hygiene that is maintained during the holding period directly improves exit outcomes. Buyer diligence teams move faster when the document position is clean and organised. Change-of-control provisions that are identified and managed during ownership rather than discovered in diligence don’t become negotiating leverage. IP ownership that is properly documented through assignment agreements doesn’t create a warranty exposure that requires an indemnity. Employment documentation that is complete and consistent doesn’t produce a contingent liability that affects the purchase price adjustment mechanism.
The funds that achieve the cleanest exits in the SA mid-market are not always the ones who paid the most attention to the acquisition legal work. They are often the ones who treated the holding period legal framework – including the unglamorous contract hygiene layer – as a managed programme rather than an afterthought. The IRR difference between a clean exit and one complicated by documentation gaps is not marginal.
Caveat Legal works with fund managers and investors across portfolio management, distressed interventions, and exit processes. If your portfolio legal framework has gaps that a buyer’s diligence team would find before you do, get in touch.
