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Africa Update

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Werkmans Attorneys
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Doing Business in Africa: Risk Mitigation Strategies, Due Diligence on Acquisition Targets and Local Partners

Africa is a continent bursting with business growth, development and investment opportunities. This emerging market brings with it increasing business interest across all sectors. With these opportunities come risks and challenges related to navigating the increasingly complex regulatory landscape and ensuring due diligence on all aspects related to business and investment opportunities, especially on acquisition targets and local partners. Legal advisory services like those provided by LEX Africa help investors to navigate these challenges effectively. In the blog below, we aim to highlight the potential of the African business landscape and examine the various roles that legal and regulatory services play within the context of doing business in Africa.

Understanding the African Business Landscape

“Africa” is not a country but consists of 54 independent countries, each with its own economic, political, cultural and regulatory environments. This affects the ease of setting up and conducting business, trade regulations and investment opportunities. Most African countries are considered emerging markets and offer significant growth opportunities, especially with the accelerated growth of the middle-class population and urbanisation.

According to the AfCFTA: A New Era for Global Business and Investment in Africa Report, four specific sectors have been identified with high potential for growth and investment. These include the following:

1.  Automotive industry –In 2021, the automotive industry in Africa was valued at $30.44 billion and is predicted to grow to $42.06 billion by 2027 – an almost 40% increase in value. Across the continent, there is an average annual demand for 2.4 million motor cars and 300,000 commercial vehicles. This domestic demand – rising due to the continentwide increase in disposable income, middle-class solid growth and rapid urbanisation – is met mainly by imports of used vehicles. However, domestic production has been growing in the past few years at an average of 7% per year. Domestic production across Algeria, Egypt, Morocco and South Africa exports about 56% of its production outside Africa. With growing domestic production, there is a strong opportunity to apply domestic production to local demand.

2.  Agriculture and agro-processing – Agro-processing has important implications for economic growth, food security, job creation and poverty reduction. While African countries have accelerated their focus on agro-processing due to food insecurity caused by trade disruptions from global shocks like the Ukraine war, it will also be necessary to transform economies from the current primary focus on the export of raw materials, which has much less benefit for a country’s economy. As much as 80% of food production on the continent is from smallholder farmers with historically low yields. Agriculture and agro-processing have a high potential for economic growth, employment and inclusivity and could spur an increase in intra-African trade. Currently, the continent imports about $50 billion of agricultural products per year.  However, by 2030, intra-African agricultural trade is projected to increase by 574% if import tariffs are eliminated in accordance with the AfCFTA.  

3.   Pharmaceuticals –pharmaceuticals are seen as having the highest potential for addressing barriers to trade and production in a short time frame and the strong potential for meeting local demand. Pharmaceuticals also have high product complexity, which can lead to more significant opportunities for higher local value-added production. The pharmaceutical industry is projected to grow at a 5.13% compound annual growth rate (CAGR) in Africa in 2022–2027. The United Nations Industrial Development Organization (UNIDO) has identified four important factors leading to high projected growth in Africa’s pharmaceutical market. These are increased expenditure, expanded provision, a maturing business environment, and increased use of generics.

4.    Transport and logistics – transport and logistics has high-potential due to its role as an essential enabler of the trade of goods and the fact that it is the largest contributor to imports (the value of imports of freight transportation to African countries – from within and outside the continent – is $36.8 billion annually). Transport and logistics include passenger and freight transportation, third-party logistics, freight forwarding, and courier express and parcel services. Most intra-African exports are transported over land (60% of automotive exports, 56% of pharmaceutical exports and 60% of agro-processing product exports). As for maritime trade, this is projected to increase from 58 million to 132 million tons by 2030 with the implementation of AfCFTA. Road and maritime freight transportation offer, at present, the biggest opportunity as the infrastructure for air and rail transportation is still undeveloped. The establishment of the AfCFTA is projected to increase intra-African freight demand by 28%, leading to demand for almost 2 million trucks, 100,000 rail wagons, 250 aircraft and more than 100 vessels by 2030. Establishing large logistics companies has historically been a challenge for African companies, but that is changing with the rise of new digital logistics companies. South African Imperial Logistics (acquired by Dubai’s DP World in 2022) operates in over 20 African countries.

From the above, it is clear that there is immense growth potential for business across industries, creating opportunities for Foreign Direct Investment (FDI). The benefit of this is that FDI is a driver of globalisation and development and assists in creating jobs, transferring technology, stimulating economic growth and increasing international trade. With all these benefits come several challenges related to investing in Africa, including the regulatory landscape.

The regulatory landscape in African countries can be complex and inconsistent. Businesses must navigate various regulations, taxes, and legal systems, which can vary greatly from one country to another. Having access to legal advisory services from lawyers who know the laws and regulations of different countries is vital.

LEX Africa is a legal Alliance of leading African law firms FORMED IN  1993 and managed by South African member Werksmans to advise local and international clients on their trade, business, investment and other activities in Africa. LEX Africa is proud to be the first and largest African legal Alliance with a Pan-African legal team of more than 700 lawyers in 30 African countries providing clients with cross-border and local African legal services. The Alliance and the strong relationship between its members allow its clients to confidently navigate the complex African regulatory landscape.

The Role of Legal Advisory Services

The legal environment in Africa is intricate and diverse, and legal advisory services are crucial to help local and foreign business navigate the complexities, manage risks, and ensure compliance while conducting business on the continent. This professional guidance is vital for a successful and sustainable business operation in Africa. LEX Africa is uniquely positioned to help clients wanting to start and develop businesses across Africa.  Key issues are summarised below.

Due Diligence on Acquisition Targets

Due diligence helps the acquiring company assess the risks associated with the target company. This includes identifying any potential legal, financial, tax, regulatory, operational, or reputational issues that could affect the success of the merger and acquisition (M&A) transaction. By uncovering these risks early in the process, the acquiring company can make informed decisions about whether to proceed with the deal and how to structure it. This process not only assists in assessing risks but determines the target company’s value, plans for integration and ensures compliance with legal and regulatory requirements, ultimately contributing to the deal’s success.

Local Relationships

Local relationships can bring significant value add for businesses operating on the continent. These relationships can provide various benefits and address multiple challenges, contributing to the success and sustainability of business ventures by offering insights, networks, and resources that are often critical for navigating the target country’s business, political and cultural environment. These relationships can foster long-term success and sustainability while promoting responsible business practices that benefit the investor, the target company and the local community.

With many countries passing or strengthening local content laws and policies, investors should anticipate working with local partners. Choosing the right partner is essential to ensure for example that they are not linked to politically exposed persons or corruption, as this would risk triggering liability under domestic and foreign anti-corruption laws. LEX Africa can assist its clients in providing information on a prospective local partner to check  if there are the “right fit “and to assess risks.

Indigenisation Laws and Compliance

Indigenisation laws and regulations are government policies and measures designed to promote the participation and ownership of indigenous or local people in various sectors of the economy, particularly in industries that have been historically dominated by foreigners or minority groups. Indigenisation laws are intended to empower local communities and indigenous populations by giving them a stake in the country’s economic activities. These laws may require that indigenous or local individuals or entities hold a certain percentage of a company’s shares or ownership. Some sectors or industries may exclude or restrict foreign ownership, while others may be reserved exclusively for local or indigenous ownership. Governments may introduce preferential treatment for local or indigenous entities when granting tenders for goods and services or licenses or permits for various economic activities. Businesses may be required to report on compliance with indigenisation regulations and demonstrate their adherence to these policies. Navigating these laws and ensuring compliance is vital to the business’ success.

Legal Requirements and Regulatory Compliance

African countries follow various legal systems and traditions (for example English, French, Portuguese and Arabic), including civil law, common law, customary law, and mixed systems. This influences the legal and regulatory frameworks in place. African countries also have different government structures, including democracies, monarchies, tribal authorities and authoritarian systems. The type of government in power can significantly affect regulatory and legal systems. Economic development levels vary across the continent, with more developed countries tending to have more comprehensive and sophisticated regulatory systems. Some African countries are part of regional economic communities and trade blocs like the East African Community (EAC), Economic Community of West African States (ECOWAS), Southern African Development Community (SADC), Common Market for Eastern and Southern Africa (COMESA) and others. These regional organisations influence trade and regulatory frameworks. Regulatory environments also vary depending on the industry or sector. To navigate the regulatory landscape in African countries effectively, conducting thorough research and seeking local legal counsel from regulatory experts familiar with the specific country’s regulations is essential. Staying informed about changes in regulations and political developments is crucial for businesses and investors in African markets. 

Governance and Rule of Law

The rule of law in Africa, like in any other region of the world, refers to the principle that all individuals, institutions, and entities, including the government, are accountable to and governed by the law. It implies that the legal system is just, transparent, and accessible to all citizens, providing a framework for the fair and equitable application of the law and an independent judiciary. The rule of law is fundamental for good governance, human rights, and democracy. Challenges to the rule of law in Africa can include corruption, weak legal institutions, political instability, and inadequate resources for the legal system. Some African countries have made significant progress in strengthening the rule of law, while others continue to face challenges. It’s important to note that Africa is a diverse continent with varying legal and political systems, so the state of the rule of law can differ significantly from one country to another.

From a business perspective, strong corporate governance is essential. This is not only a matter of compliance but also a strategic competitive advantage. It promotes trust, ethical behaviour, and long-term success, benefiting the company and its stakeholders. It’s a fundamental element of responsible and sustainable business practices.

Managing Dispute Resolution

Dispute resolution mechanisms for businesses in Africa can vary depending on the country, legal system, and the nature of the dispute. This can include any of the following, Litigation, Arbitration, Mediation and Conciliation, Alternative Dispute Resolution (ADR) Ombudsman and Regulatory Bodies, Commercial Courts and Specialised Tribunals, Trade Associations and Industry-Specific Bodies.  The African Continental Free Trade Area has issued a protocol on dispute resolution.  

Arbitration and mediation are some of the most widely used Alternative Dispute Resolution resolutions. These ADR methods are favoured for several reasons, including their effectiveness, flexibility, and the potential to avoid lengthy and costly litigation. African legal systems often suffer from overburdened court systems. Arbitration and mediation can help relieve this burden by providing an alternative and efficient means of dispute resolution. Parties can resolve their issues without relying on slow and congested court processes. Many African countries are signatories to international conventions on enforcing arbitral awards and foreign judgments. This means that arbitral awards and foreign judgments can often be enforced across borders, providing a reliable mechanism for enforcing awards and judgments in international disputes.

Businesses operating in Africa should carefully consider the most suitable approach for resolving their specific disputes, considering the nature of the dispute, the parties involved, and the legal framework of the jurisdiction in which they operate. It is essential to have access to lawyers with the experience, insight and expertise to help businesses resolve disputes effectively.

Conclusion

From the above, it is clear that the African continent has immense growth potential, especially where business investment is concerned. One of the most significant challenges related to investing on the continent is navigating the increasingly complex regulatory landscape of each country. This is why many businesses and investors turn to LEX Africa for legal advisory services. With over 700 lawyers across 30 African countries, LEX Africa is uniquely positioned and has the local experience, over 30 year track record and expertise required to assist businesses in navigating local laws and ensuring compliance across all business operations. For more insight into how LEX Africa accomplishes this, visit: https://lexafrica.com/ 

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