How to conduct due diligence for a merger and acquisition of a business in vietnam
Post date: 08-11-2014
The market for purchasing and selling businesses in Vietnam is highly developed and challenge. Regardless of whether you are buying a business as a company stock purchase, a corporate merger or acquisition, it is necessary to conduct due diligence on the target company in Vietnam.
Due diligence for a merger and acquisition of a business in Vietnam
Due diligence is a process of investigation into the details of a potential investment, such as an examination of operations and management and the verification of material facts. Due diligence is vital defining the risks and benefits of entering into a particular transaction and cannot, under any circumstances, be neglected, avoided or ignored.
Due diligence involves an in-depth investigation of the business. It requires review of a lot of documents such as legal documents, the financial reports and tax returns etc to understand thoroughly the business and to be able better to ascertain a fair purchase price of the business, and identify any surprise business liabilities for which investor likely will be liable after you become the business owner.
In general, there are three main areas of due diligence: financial and intellectual property. All three areas are related to one another, but each has separate issues that are of particular importance.
1. Legal Due Diligence a merger and acquisition of a business in Vietnam
Legal due diligence is focused on regulatory issues, threatened or ongoing lawsuits and unusual or onerous contract provisions. Typical areas of interest are filings with local regulatory bodies; correspondence with attorneys; filings, briefs and transcripts related to lawsuits; minutes from BOD meetings; shareholder agreements, customer contracts and debt agreements.
Key considerations in legal due diligence include the establishment of clear title to assets, obtaining a clear view of potential employee-related matters (e.g. wage and hour law violations, discrimination claims, health and safety violations), and uncovering possible environmental liabilities.
a. Corporate Documents
It should review the certificate of incorporation, good standing certificate, by-laws, minutes of shareholder and director meetings, shareholder agreements, and any outstanding warrants and option agreements, the articles of organization, good standing certificate, operating agreement, minutes of membership meetings, manager agreement, and any outstanding purchase rights agreements and option agreements.
Major Contracts: It should review all major distributor, supplier and customer agreements, all confidentiality and non-compete agreements, all intellectual property agreements (licenses into and out of the company), and all equipment leases.
Real Estate: It need to review all real estate leases entered into by the target company (whether as a tenant or a landlord), purchase agreements, surveys (if a long term lease or fee owned), title insurance policies (if fee owned); you should ascertain whether any consents are needed for the contemplated business sale (or merger) transaction, how much the rent liabilities are, whether there are sufficient term(s) remaining on the lease(s), among other things.
Insurance Policies: It should review all insurance policies carried by the target business to determine if the present coverage is adequate for the business as it is conducted (or plans to be conducted).
c. Licenses and Permits.
Is the target business required to maintain licenses and permits with the local and state authorities? If so, it need to obtain all copies and determine which licenses may require the seller’s obtaining prior consent for the contemplated sale or merger of the business.
d. List of all (major) Assets and Liabilities:
Regardless of whether you are buying the business or a stock purchase, you want to be sure of what the target company owns and owes. The target company’s assets may include cash, securities, equipment, inventory, intellectual property (copyrights, trademarks, patents, domain names, and other proprietary rights), notes and accounts receivables, real property (leased and owned). Liabilities may include bank debt, employee benefits and bonuses earned and not yet paid, threatened, pending and current lawsuits, licensing violations, etc. You should be provided with a list of all employees and their current salaries. It should identify which employees are key to a successful transition and continued operation of the business.
e. Customer Problems.
It should search the internet to see if there is any negative publicity or customer complaints about the target business. The internet is a very powerful tool for viral marketing and unfortunately, for flaming a business. Investor don’t want to buy a business that is saddled with a lot of negative consumer awareness.
2. Financial Due Diligence a merger and acquisition of a business in Vietnam
Financial due diligence is largely concerned with establishing a clear picture of the ongoing business of the target. Typical areas of interest are financial records and projections of revenues, profits and cash flows; lists of assets and liabilities; analyses of customer lists; review of supplier agreements and purchasing practices; review of bank accounts and tax records.
Financial due diligence is not an audit. An audit is concerned with historical financial statements only and provides an opinion as to whether the financial statements represent a "true and fair" view of the company”s operations. A financial due diligence, on the other hand, would incorporate a greater scope.
A financial due diligence review would not only look at the historical financial performance of a business but also consider the forecast financial performance for the company under the current business plan and consider the reasonableness of such forecasts.
Another major difference between an audit and a financial due diligence review is that, where an audit reports only on the truth and fairness of the financial results, a financial due diligence review will investigate reasons for the trends observed in operation results of the company over a relevant time period and report on this in terms of relevancy for the proposed transaction.
In general a financial due diligence would typically involve a review of the following areas: historical financial results; current financial position; forecast financial results; working capital requirements; employee entitlements provisions; valuation implications; risks and opportunities; and taxation implications.
Key considerations in financial due diligence include determining the true financial position of the target business, especially in regard to inventory obsolescence, R&D expenditures, excessive fixed costs, off-balance sheet liabilities, uncollectable accounts receivable, and tax contingencies.
a. What information need for a financial due diligence ?
The information required to complete a financial due diligence review is dictated by the agreed-upon scope as well as the reporting capabilities of the target company. The main sources of information for a financial due diligence review include:
• Historical financial data including statutory accounts, detailed management accounts and reports and income tax returns. Where statutory accounts have been audited access to audit work papers may also aid the financial due diligence process. In Vietnam, the successor to a business may be liable for tax liabilities incurred in the years prior to its purchase of the business. In order to be certain that you have the same returns that were filed with the taxing authorities, you can have the seller provide the applicable written consent so you can request copies of the actual tax returns directly from the applicable taxing authority. It should review the any tax liens filed on any assets owned by the target business.
• Current financial data such as year-to-date management accounts. The seller of the business should provide detailed financial statements (including balance sheets and profit and loss statements) for the prior 3 to 5 years.
• Business plans and forecast financial information (including
budgets and cash flow forecasts).
• Minutes of Directors” Meetings and Management Meetings.
b. What will we get out of a financial due diligence review?
Depending upon the scope of the procedures conducted, a financial due
diligence review should provide answers to the following questions:
• Is the information provided by the target/vendor reliable?
• Are the historical earnings of the company sustainable?
• What are the potential future earnings of the company?
• What are the possible synergies associated with the proposed acquisition?
• What are the immediate and future tax consequences of the proposed acquisition?
• Is the purchase price fair given the results of the due diligence process? Based on the outcome of the due diligence are there any potential deal breakers, is the structure of the acquisition appropriate and should any issues such as guarantees be included in the purchase documentation?
3. Intellectual Property Due Diligence a merger and acquisition of a business in Vietnam
IP due diligence is focused on establishing what rights the company may have in various intellectual property and where it might rely on the intellectual property of another entity. Typical areas of interest are patent, copyright and trademark filings; descriptions of the company’s IP protection processes; licensing agreements.
The key consideration in IP due diligence is establishing the ownership rights that the target business holds in a given piece of IP. The discovery of a “cloud” in the ownership of an IP asset may significantly decrease the value of the target business.
Intellectual property consists of patents, copyrights, trade secrets, trademarks, service marks and trade names. Patents, copyrights and trade secrets tend to be the most important types of intellectual property.
- Procedures for capital contribution, share purchase in Vietnamese enterprises by foreign investors, Click here
- Legal service in Mergers and Acquisitions (M&A) in Vietnam, Click here