International investors and entrepreneurs commonly undertake direct investments in existing companies in Vietnam, however, as with any investment, care needs to be taken. When assessing the value and risks of a potential acquisition target, there are processes and actions that should be considered and included as core elements of the assessment and transaction processes.
In this article, we look at key issues that arise in transactions in Vietnam, risks that should be considered and reviewed, and procedures for structuring and protection when undertaking transactions.
Issues to consider
When buying or investing in an existing business in Vietnam, investors should consider macro level corporate issues such as governance, strategies and organisational culture, as well as more specific elements such as operations, procedures and the underlying risks related to the business.
Some of the key areas to consider in the initial planning when assessing an investment, include:
- Tax: Investors should focus on assessing historical tax compliance, internal processes, commercial and corporate structures, and recent tax inspections. Strategies may need to be put in place to avoid any future unforeseen tax liabilities arising;
- Financial: Investors should pay attention to the financial statements of the target, looking at these from a local compliance perspective, the translation to international accounting standards and the normalisation of earnings. They should also be reviewed to understand reliability of growth forecasts, cash flow implications, returns on investment, and the exit potential for the company;
- Employment: Investors should be familiar with how employees are managed within the organisation and assess the impact/needs of labour within any the new business structure, as Vietnamese laws don’t always provide flexibility in labour management/dismissal for which the new owners may wish to pursue. Issues also arise when the employees of the target company refuse to accept the new management style or operational strategy undertaken by the acquirer;
- Legal: Investors need to have sufficient information and clarity about the legal documentation and compliance of the business, business lines and restrictions, ownership agreements, asset ownership, leases and commitments, property matters, outstanding legal claims and potential warranty issues;
- Compliance: The accounting, tax and statutory compliance obligations of a company in Vietnam are time consuming and complicated, especially in comparison to more developed countries. The requirements are ever changing, with a significant number of lodgements required on a monthly, quarterly, half-yearly and annual basis. Understanding and staying on top of the compliance obligations specific to the target company is a critical for the investor;
- Commercial: Investors should delineate wider commercial issues related to the company’s transactions, customers, suppliers, market positioning and competitive analysis;
- Licensed activities: Understanding the licensed activities of the business, and any impacts of these on a change in ownership (ie restrictions for foreign investors). Further, future plans should be considered so that appropriate licenses are obtained (including sub-licenses and conditions), and knowledge that future plans can be delivered within existing regulations and laws.
Mitigating risks with investments
Investors are advised to take care when undertaking transactions, by using appropriate tools and resources to mitigate risks associated with the acquisition process. Three cornerstone elements of transactions are highlighted below, and these should considered critical in the early stages of undertaking the acquisition of a target entity in Vietnam:
- Structures: Investors should review the current entity/investment structure and consider whether it is appropriate to restructure the business as part of the acquisition. This may include incorporating a new Vietnamese entity for the acquisition process to mitigate compliance risks with existing entities, or creating an appropriate offshore structure for future optional transaction, treasury or operational needs.
- Valuation: Rational and fact-based assessment of the target business is critical in determining the purchase price and ensuring the price is aligned with the level of integration or acquisition risk. This can be an external or internal process, however a formal process should to be undertaken, with generalized assumptions on value avoided.
- Due Diligence: One of the key tools to mitigate structural and commercial risks for an investor is the Due Diligence process. To understand a target adequately, an investor needs to have a general overview alongside a detailed analysis of the entity, allowing an understand existing and potential risks, and to ensure investors truly know what they are acquiring. By performing a combination of financial, legal and commercial due diligences, investors receive constructive input for the valuation of the target company as well as positioning the buyer in the best possible negotiating position, and facilitate a compliant and smooth business integration after acquisition, minimising the impact of identified risks any future potential risks.
The role of due diligence in Vietnamese transactions?
Due Diligence is the process of investigating all aspects of a target company – finance, production and technology, legal, technology, human resources and culture and compliance in order to assess whether the initial perception of the target company is accurate, identifying risks and dependencies in the business, and to held the investor “qualify” whether to proceed with an acquisition process and establish its underlying value.
As a key transaction function, the Due Diligence process enables the investor to estimate how the acquisition will affect the efficiency of the internal business processes and the development of new capabilities/capacity, which are generally critical elements for achieving strategic goals and ultimately increasing shareholder value.
From a risk perspective, undertaking Due Diligence represents the underpinning of the M&A process, as it provides an independent scan of underlying issues and existing risks and discrepancies in the company’s operations and structure, revealing the most significant aspects which need to be dealt with for a successful pricing, acquisition and integration process.
Buyer protections and negotiations
When structuring a transaction, buyer protections are important and a potentially difficult discussion with the existing owners. Where risks or compliance matters are identified, putting in place an appropriate ability to protect through price reductions or deferred payments can be difficult as vendors may not perceive the same level of risk or need.
Therefore, the negotiation process and understanding expectations of both sides is important throughout the process. Quite often it is difficult to put the same level of protections in place that may exist in other markets, but careful negotiations and creative structuring can usually provide a similar level of protection that is acceptable for all parties.