Vietnam has been an attractive destination for many years for foreign individuals to establish a business. Taking advantage of the opportunities that Vietnam presents, we have seen the creation of a significant number of dynamic companies with impressive growth which have been founded by foreign individuals in Vietnam. In that context, this creates a vibrant market for fundraising and disposal of businesses. This article is desired to bring you (a potential seller) better understanding and walk you through key questions for your sale plan.
What You Need To Know When Selling Your Business In Vietnam (Part I).
1. What is the realistic market value of your business?
When deciding to sell all or part of an investment in Vietnam, the first and foremost objective is to obtain the maximum sale price. So, what is your company worth? The sale price is not only the value that the seller expects or desires, but should be based upon “fair market value”, which will also depend on how attractive the business is and how it meets investors’ expectations. There are many methods to determine “value”, with the most common and practical components including:
- Earnings multiples (commonly “EBITDA” – earnings before interest, tax, depreciation and amortisation) – which is a comparable number and often preferred as a basis to initially estimate a businesses value. By using earnings multiples, the company must have positive earnings (eg. $1 million EBITDA) to multiply by an appropriate industry multiple (eg. 7 times) then the company has an implied value of $7 million. The most current years earnings or the average earnings from recent financial years (i.e. last 3 years) are often used to value the business, however, if the historical trend of earnings have been unstable (i.e. low then high, loss then profit from year to year), this simple valuation method may be challenging. Moreover, multiples vary from industry to industry and even from company to company, thus negotiations on applicable multiples often arise in practice. One of common approach to support negotiations is using third-party multiples from comparable companies/comparable transactions that have occurred recently.
- Discounted Cash Flow (DCF) – This is often regarded as a reliable and straightforward method to value a business. By using this method, the future forecast earnings (cash generation) of a company are discounted to establish a net present value (NPV) of the business. The DCF method is more appropriate for companies with uneven historical earnings or where they are on a significant growth path; however, it gives rise to the difficulties of estimating future earnings and the appropriate “discount rate” to be used. One the key premise of a DCF value is that future growth forecasts are supported by historic performance, and where the future doesn’t align with the past or where historical data is not reliable, then discount rates increase. The assumptions for future growth are often reviewed and challenged through investors analysts and investors themselves, and may require future commitments from the seller over the forecast period. Discount rates may further be impacted by company size, level of risk, quality of assets, debts, liquidity etc.
- Debt and Asset components. The company’s debts, properties, land use rights and other non-operating assets may significantly impact on the indicative valuation and price negotiations. Companies with assets that are not core to their business needs may consider disposing of them separately before undertaking the corporate sale transaction to maximise returns, and likewise non-commercial debts should be settled prior to commencing the process to remove discounts or reductions to values.
2. Do you have an appropriate corporate structure that facilitates an easy path for an exit?
For foreign investors operating a business or having investments in Vietnam, the investment structure behind them should be predicated on the ability to repatriate profits, invested funds and capital gains when exiting. Restructuring is always a time consuming exercise and is costly, which may lengthen and even significantly burden the transaction process. An appropriate corporate structure is encouraged to be well-planned and built from the outset.
With foresight and experience, a well-structured future exit strategy can provide significant value creation for an investment in Vietnam. An appropriate corporate structure could include an offshore holding vehicle, an onshore SPV structure, or differing and creative combinations that are built to ensure regulatory, corporate and operational advantages for the business whilst still optimizing taxation and ease of sale. The ability to receive proceeds of sales at the international/offshore level is often preferred. A “clean” structure allows investments to have maximum flexibility for ongoing operations with lesser risks from authorities, pro-actively manage compliance matters and minimise trapped capital or restricted funds. Although Vietnam has strict currency and foreign exchange controls, from an investor perspective, these controls can present only limited obstacles in practice.
3. Are you aware of likely tax due on proceeds from selling your business in Vietnam, and how will you receive payments?
Whether the seller is a corporate or an individual, tax-resident or non-tax resident, transferring capital of an LLC or selling shares of a JSC, below is a quick guide to determine the tax liabilities for a disposal transaction in Vietnam:
|Type of Transaction||Tax Resident|
|Tax Resident||Non-Tax Resident|
|Sale of Shares (public)|
|20% of the net gain|
20% of the net gain
|0.1% of sales proceeds|
20% of the net gain
|0.1% of sales proceeds|
20% of the net gain
|0.1% of sales proceeds|
0.1% of sales proceeds
For example, we can look at a seller, being a Vietnam tax-resident foreign individual who owns an Limited Liability Company (“LLC”) in Vietnam with USD600,000 charter capital, and they sell 100% of the capital in this LLC for USD1 million. If deductible selling expenses are USD10,000. Thus, the estimated tax liability will be: 20% x (USD1,000,000 – USD600,000 – USD10,000) = USD78,000
The responsibility for declaring and withholding/remitting taxes on gains from that disposal of capital/shares rests with:
|Seller||Buyer||Obligation for Declaring & Submitting Tax|
|Offshore Entity||Vietnamese Entity||Buyer|
|Offshore Entity||Offshore Entity||Vietnamese Target Company|
|Non-Tax Resident Individual||Vietnamese Entity / Tax-Resident Individual||Buyer|
|Tax Resident Individual||Any||Seller|
Additionally, the current ownership structure and deal structure are important elements to address how and where the seller will receive payments and negotiate any instalment payment/earn out options (e.g. 2 instalments paid over 2 years ). For example, A and B are two foreign owners (owning 50%/50%) of a manufacturing LLC in Vietnam (VNCo):
- If this VNCo is directly owned by A and B, then they can transfer capital, receive payments and must remit tax in Vietnam.
- If this VNCo is 100% held by a Singapore parent company (SingCo) which equally owned by A and B, then they can sell either VNCo or SingCo, receive payments and remit tax in Vietnam or in Singapore, depending on the deal/agreement with the buyer, and the foreign residency.
(Note: Vietnamese tax may still be payable on offshore transactions where the underlying assets relate to Vietnam or Vietnamese entities, therefore careful planning and structures should be put in place prior to any transaction, if the sellers wish to take advantage of lower offshore taxation on capital gains).
Furthermore, under current Vietnamese regulations on currency controls, for foreign individuals to repatriate funds they earn in Vietnam they need to be able to prove the capital or loans have been structured appropriately (ie, through Capital Bank Accounts) and that all necessary taxes have been paid. It is therefore important to proactively manage and structure a business in Vietnam prior to commencing a transaction process.
4. What is an investment teaser (teaser) and an information memorandum (IM)? Do you need a teaser or an IM to sell your business in Vietnam?
One of the first steps in an M&A transaction process is to prepare and “pack” the deal. Two key documents for the “sale package” are an Investment Teaser (Teaser) and Information Memorandum (IM), which are used to present relevant information/unique selling points of the fundraising or disposal of the business to be distributed to the potential buyers.
A Teaser is normally a 2-5 page summary highlighting the (often ‘anonymous’) target company’s business operations, high-level financials, projected growth etc. and key acquisition considerations to draw the attention of potential buyers. If a prospective buyer is interested after reviewing the teaser, a Non-Disclosure Agreement (NDA) may be signed by both parties, from which the buyer can then be provided with the IM that will include the target’s details and comprehensive information about its operations and financials.
An IM is realistically a marketing document, although it contains significant technical information, usually in the order of 50-80 pages or more. It provides comprehensive, impressive, in-depth and accurate information about the business from the past to current and future forecast, covering all important aspects of a business that an investor would seek to understand, capture and assess. Those aspects often include: the management, vision, core values, company structure, business and marketing strategies, competition, human resources, operations, finance and external/macro factors. An IM could be text-heavy or full of charts, graphs and photos etc. depending on the key elements, features and metrics of the business and its industry as well as the type of buyer that the seller is aiming at. Preparation of an IM takes significant time to prepare (and ensure/verify accuracy of the contents), and it is therefore costly to prepare an IM; though it is an effective tool where the seller appoints an investment advisor to pitch at sophisticated and professional investors. Most importantly, an IM should be well prepared to create the framework for the company’s value to the buyer from which sets the stage for maximizing the transaction value during negotiations.
Depending on the seller’s approach of fundraising/disposal of business, deal value, investment stage and type of investor, a Teaser or an IM or both may be needed. In practice, we have seen many foreign owners in Vietnam complete the sale of their business without having an IM. This implies that a practical approach using only a teaser or transaction pack may be sufficient for the two parties to move to the next stages of due diligence and negotiations, depending on the business and investor.
5. Why do you need a well-prepared data room?
During the deal process, a well-prepared data room is the foundation of a successful transaction. In order to pro-actively manage the information requested by the buyer(s) and facilitate the deal process, a the data room should prepared prior to the buyers’ due diligence (review) exercises. Potential buyer/investor analysts or investors themselves will request significant amounts of information and data in order to conduct their Financial Due Diligence, Tax Due Diligence, Legal Due Diligence and Commercial Due Diligence to assess the potential value and move the transaction forward. The data room, therefore, should be organised, stored/sorted appropriately and efficiently, and accessible by only those that need access. This will help smooth the transaction process and ease the path to success. Moreover, a well prepared and maintained data room (ideally, by a professional independent party) may help the seller: preventing mistakenly providing irrelevant information that may disadvantage the deal; and reduce/mitigate conditions in the Sale and Purchase Agreement to resolve before final completion.
An illustrative example of how a data room may be structured can include:
- Corporate information and overview, Ownership and Corporate Structure
- Legal documents (establishment, registrations, certificates…)
- Organisational structure, processes and procedures
- Financial and accounting data (audited/unaudited reports, management reports, accounting books)
- Tax Reports and Information (VAT, PIT, CIT, FCWT etc.)
- Employment (payrolls, labour contracts, compulsory insurances etc.)
- Contracts (commercial contracts, lease contracts, loan agreements, insurance contracts etc.)
- Others (business plan, forecasts, IP, etc.)
6. What is vendor due diligence? How can a vendor due diligence help?
At an appropriate stage of the transaction process, potential buyers will undertake their own due diligence on the business (Buyer Due Diligence) to thoroughly review the target company to understand and identify the issues and risks within the business. Based upon their findings, negotiations will arise in respect to making investment decisions (should the investor decide to proceed after their due diligence). Thus, before facilitating the Buyer Due Diligence, it is commonly best practice for the seller to conduct their own Vendor Due Diligence to pro-actively identify and self-assess its business’ limitations and risks from an investors’ point of view. This will permit appropriate corrective action to be taken as soon as possible, before the investor identifies issues, and allows the seller to create a framework or undertake commercial actions to mitigate issues. Moreover, Vendor Due Diligence may be used as a tool to protect/assist the seller in dealing with and cope with the Buyer Due Diligence process and results. Particularly, this will avoid value erosion from easily correctible items, and for more difficult issues it will provide the buyer with a potential road map to a more long-term structural process for ensuring compliance. This is all about maximising the enterprise value, and assisting the seller to realise that value.
Below is a diagram identifying the key areas that a Due Diligence may approach when reviewing a target company, and the findings.