Mergers and Acquisitions (M&A’s) are an increasingly popular route for foreign investors looking to begin operations in Vietnam – and due diligence is a key component of the M&A process.
While there are several aspects to consider in a due diligence – such as the company’s reputational profile, strategic position in the market, and assets – we focus on legal and financial due diligence because they represent the starting point for most investors.
Before commencing due diligence on a target company, the acquiring company typically signs an agreement such as a Memorandum of Understanding (MoU) with the target company. The acquiring company may also make a deposit to confirm that the deal is serious enough for the target company to spend time to prepare and release documents needed for the due diligence.
Legal and financial due diligence may take several months, depending on the size of the company being acquired, as well as the location where it is based. This work is typically conducted by a third-party professional services firm.
Foreign investors should seek to select a firm that has an office in-country with staff fluent in both Vietnamese and the language spoken at the investors’ headquarters. This profile will help ensure your service provider can work more efficiently during both on-site visits and communication with overseas managers.
Legal due diligence of a target company
During the legal due diligence process, service providers may ask to review the target company’s documents, certificates, qualifications, and licenses. These may include:
- Business licenses;
- Approval certificate;
- Company charter;
- Meeting minutes of Board of Management (BoM); and
- Shareholders and capital contribution of shareholders.
The percentage of foreign ownership to the target company based on applicable local laws, World Trade Organization (WTO) and other free trade agreements (FTAs) where Vietnam is a member will also need to be determined before the acquisition.
Commercial contracts, loan agreements, MoUs, and non-disclosure agreements signed by the owners of the target company.
Any ongoing litigation of the target company may affect its value. A thorough review of the litigation status is recommended.
Financial due diligence of a target company
Financial due diligence allows the investor to audit the target company and analyze the company’s earnings, its working capital needs, as well as sales and operating expenses.
Financial diligence can be broken down in two parts: assets and liabilities.
Internal financial statements
Review all of the target company’s documents related to revenue, expenditure and other accounts. This should be done to ensure the documents are factual and to identify any discrepancies.
Internal and tax reports
Analyze the target company’s internal and tax documents to see if there are any discrepancies between internal reports and tax reports. This review should evaluate relevant risks due to any discrepancies between the tax declaration and the actual status.
Other items that may need to be reviewed are capital contribution, cash on hand, cash flows and any other key financial indicators.
Timeframe and reporting
Once all the documents have been reviewed by the service provider, it submits a report, with details outlining to see if the target company is in compliance with all the rules and regulations in Vietnam.
At this stage, the third party can advise on any issues that need to be resolved between the acquiring and target company. Typically, the entire process of legal and financial due diligence in Vietnam can up to three months or more.
This article is produced by Vietnam Briefing, a premium source of information for investors looking to set up and conduct business in Vietnam. The site is a publishing arm of Dezan Shira & Associates, a leading foreign investment consultancy in Asiawith over 27 years of experience assisting businesses with market entry, site selection, legal, tax, accounting, HR and payroll services throughout the region.