Business consulting in Vietnam.

In order to evaluate a transaction as well as a target company, Financial Due Diligence (FDD) is a critical tool to explore and analyse the financial position of that company, the value drivers and dependencies, the internal systems and processes, and the risks and limitations existing and arising.

Although the Tax Due Diligence (TDD) can be separated from FDD, tax risks can significantly impact the market value of the target company. Therefore, we usually combine the TDD in the FDD to analyse the compliance of the target company. Particularly, in Vietnam, analysts conduct an FDD exercise by obtaining and reviewing extensive information (documents and data) of the target’s key areas including operations background, finance, accounting, tax and employment etc. to identify key findings, issues and risks of such company or transaction that an investor/buyer is considering to invest. Below are some specific items that an FDD may include:

• Business background and operations (corporate and ownership structure, organisational structure, key operations, products/services, customers and suppliers etc.)
• Financial Analysis (detailed analysis and comments on trading results (revenue and expenses), assets and liabilities, owner’s equity, related party transactions, working capital, cash flow etc.)
• Accounting compliance (accounting team, system and key process, procedures and policies etc.)
• Tax compliance (VAT, CIT, Foreign Contractor Withholding Tax)
• Labour & Human resources compliance (focus on PIT and compulsory insurances)

Commissioning party: An audit is undertaken by the target company while the commissioning party of Financial Due Diligence (FDD) can be the buyer or the seller.

Objective and scope: The goal of an audit is to verify that the target company is following all of the compliance rules and presenting accurate financial records and other information. The goal of FDD is to provide potential investors a detailed view and commentary of a target company’s performance and observe all associated risks. A due diligence may expand to review and analyse business plan, future aspects, corporate and management structure and legal issues, whilst audit does not.

Assurance: While an audit is an assurance service, FDD is a service based on business transaction and is non-assurance because it is focusing on risks.

Data: FDD may use available audit reports’ data and outcomes to conduct a detailed review, analysis, assessment and comments. The audit does not use FDD.

Content: Audited records typically only show general queries a potential investor might have. They do not provide any insightful and objective aspects. Audit reports provide data about market trends over the years but do not show in detail the factors behind these trends. FDD reports try to give the most in-depth and structural analysis of all the factors that influence market trends. Through a FDD, a prospective investor can obtain insightful information about the business operation, commercial, finance, accounting, tax insights.

Repetitiveness: An audit is a recurring event while a FDD is an occasional event.

In Vietnam, it often takes from 6 to 8 weeks or longer to complete a due diligence exercise depending on the availability of information required for review. 6-8 week is the ideal time to complete a full review and assessment, however further discussions, clarifications and adjustments against the due diligence’s (draft) findings may lengthen the process.

Under the law of Vietnam, related-party transactions (RPTs) are transactions arising between parties having related-party relationships during their production and business process. Particularly, parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties can be enterprises or individuals, including close members of the family of any such individual.

RPTs of foreign invested companies, especially multinational companies, are common transactions which occur between companies which are part of the same group/parent company due to common or complementary activities to provide goods and services together. However, if the purpose of RPT is to decrease profits in order to avoid tax obligations, it may be considered as a transfer pricing activity which is strictly regulated by the Vietnamese tax authority. Consequently, in order to prevent transfer pricing, taxpayers in Vietnam are requested to comply with Transfer Pricing documentation, unless they fall into an exemption category.

A corporate valuation is a process that estimates the value of a corporate entity, and is generally conducted by a seller/seller’s consultant for its initial valuation or an investor/investor’s analyst. There are several methods to determine the value of a business, with the most common and practical components including: earnings multiples, discounted cash flow, debt and assets components etc. In practice, an initial corporate valuation report may take around 4 weeks on average once all required information is made available. Furthermore, the corporate valuation can be adjusted depending on the result of the Due Diligence performance and deal negotiation.