The rapidly growing economy in Vietnam and a robust M&A market presents opportunities for overseas investors to enter, grow, and/or exit their interests in the country. Although the development of a new business in Vietnam is one market entry alternative, the acquisition of a target company provides the investor with faster means of entry to the business. Also, a previously developed robust exit plan enables the investor to maximize the potential value and the business to fulfill its objectives in the long run.
The purchase consideration for company acquisition in Vietnam is only the starting point. A potential acquirer must understand the restrictions on ownership, the various acquisition forms, the due diligence process, and the potential exit strategies. This guide highlights the essential issues to be addressed in the selling, acquiring, and exiting processes to aid foreign investors in structuring their business investments in Vietnam.
Vietnam M&A Market
The mergers and acquisition (M&A) market in Vietnam has recorded a significant increase in foreign investor participation. While the new company formation in Vietnam is a common strategy for potential foreign investors, the acquisition of a local company provides a quick entry to a customer base, a supply chain, and local operating permits and business expertise.
Vietnam’s M&A market also facilitates the exit of company founders and shareholders, who can realize their investments by selling their interests, leaving the business to operate under new owners. As Vietnam’s private businesses mature, the increase in company acquisitions and mergers reflects the growing demands of the economy.
Key M&A Trends and Active Sectors
Even with the changes in the global economy, Vietnam’s improving economy, growing population, and expanding market continue to bring investors. According to KPMG Vietnam’s M&A in Vietnam report, mid-market deals are on the rise and foreign investors are targeting companies with established operations that have the potential for long-term growth.
Manufacturing and industrial production, as well as logistics, retail, healthcare, technology, financial services, and real estate are still some of the sectors where mergers and acquisitions are most prominent. There has also been an increase in demand for companies that are involved with digital transformation, renewable energy, and business services, as international investors diversify their investments in Southeast Asia.
The majority of the deals in Vietnam are cross-border transactions. Japanese, South Korean, Singaporean, and Thai investors as well as stakeholders from Europe and North America are active investors in the sectors where Vietnam offers regional services as a manufacturing or consumer market.
While the largest deals capture the most attention, the market is shifting to deals of a smaller size where company founders now want a strategic partner to invest in the company’s growth or buy the company during the succession. For small to mid-size companies, selling part of the company or inviting a partner has become a substitute for the other financing options.
Foreign Ownership Limits
The rules on foreign ownership differ by target company and their operations and foreign investors should consider this while deciding on an acquisition.
100% foreign ownership is permitted in most sectors, including manufacturing and services, as long as the investors comply with the investment regulations of Vietnam.
Some sectors impose foreign ownership restrictions and conditional investment requirements. Advertising, logistics, education, telecommunications, aviation, financial services, and some distribution services may need specific licenses, joint ventures, or compliance with specific ownership limits.
Foreign ownership limits for listed companies are prescribed in Vietnam’s securities regulations, and vary by sector and according to available foreign ownership in the company.
Whether the business lines of the target company are open to foreign investment is typically the first issue to investigate in an acquisition. The legal feasibility of an investment or acquisition, in practice, depends on more than just the activities of the target company. It also depends on how the company has registered its business activities in the Enterprise Registration Certificate (ERC) and the Investment Registration Certificate (IRC), if applicable.
From an investor’s perspective, especially if ownership regulations are made clear early in the acquisition process, it becomes easier to assess acquisition targets and avoid delays due to the need for restructuring.
Business Acquisition Structures in Vietnam
After an investor has identified a target for acquisition, the focus now shifts to how the deal is to be conducted. There is no standardized approach to structuring a deal in Vietnam, and what is appropriate for the deal is determined by the legal status of the target company, the zone of business, regulations, tax, and the long-term goals of the buyer.
Most deals are made through a share transfer, an asset purchase, or an investment in a private company or joint venture. Each of these structures has particular advantages and disadvantages that should be assessed prior to the commencement of negotiations.
Share Transfer and Asset Purchase
Share transfers account for the majority of M&A deals in Vietnam. In a share transfer, buyers purchase shares or capital contributions from existing owners. The business continues to operate under the same legal entity, meaning existing contracts, licenses, employees, and customers remain with the business, subject to applicable regulations.
For investors looking to purchase an operating business, a share transfer is the most effective structure as it results in minimal disruption to the business and a more seamless post-closing process.
An asset purchase, on the other hand, involves the purchase of specific assets, as opposed to the legal entity. Depending on the structure of the deal, these assets may be equipment, IP, inventory, customer contracts, or particular divisions of the business. The buyer elects which assets to purchase and leaves behind the obligations or liabilities that are not part of the deal.
This structure is appealing if the target company has legal risks, unresolved liabilities, or acts in a manner that the buyer does not want to absorb. Nevertheless, asset purchases are more difficult to implement since each asset’s ownership must be transferred. Also, certain licenses, permits, contracts, or employees may not transfer to the buyer.
Rather than asking which option is “better,” each option in a transaction should be considered from the perspective of the commercial aims of the transaction in conjunction with any legal, tax, and operational concerns.
Mergers and Consolidations
The phrase “M&A” covers a broad spectrum of business acquisition activities, however, not all procedures meet the definition of a merger under Vietnamese legal standards.
According to Vietnamese law, a merger is the process through which one company incorporates another, with the latter company’s merged legal entity ceasing to exist and the incorporated company assuming the merged legal entity’s rights and obligations. Normally, this approach is utilized for corporate restructuring or the post-acquisition assimilation of a company as part of the corporate integration process.
Vietnam’s law on competition may also obligate the notification of the National Competition Commission (NCC) for certain economic concentrations that meet specific thresholds. These thresholds are gauged according to the aggregate value of assets, total revenues, the value of the transaction, or the relevant market’s share.
For foreign investors, merger control represents an important aspect of the structuring of the transaction, particularly for the acquisition of large companies or companies of a significant market share in a concentrated market.
Acquiring a Stake in a Vietnamese Private Company or Joint Venture
Acquiring a business does not always mean 100% business ownership. Frequently, the Vietnamese market is entered by foreign investors through the acquisition of a minority or a majority stake in an established Vietnamese company.
A minority stake can provide founders with early access to local knowledge and customer connections and allow them to bring on local management talent. Strategic investors and private equity companies use this model as it allows them to focus on long-term goals rather than gain full control of the operations from the start.
The Shareholders’ Agreement (SHA) applies to both the investors and the founders and is critical at any level of equity ownership. A well-structured SHA provides a framework for governance, reserved matters, voting rights, board composition, dividend policy, transfer restrictions, the right to maintain ownership stake, and exit rights.
Another common investment model is a joint venture. These partnerships are especially prevalent in industries where existing local relationships, licenses, or partnerships are required to successfully operate a business. Successful joint ventures, in addition to specifying ownership interests, focus on agreements for management, capital contributions, profits, the authority to make decisions, and how disputes will be resolved.
The structure of transaction documents usually influences the long-term success of a business more than the purchase price. Investors who articulate their expectations regarding governance and decision-making, and who are aligned with the proposed exit at the time of the investment, create the conditions for sustainable growth.
Due Diligence in Vietnam
The purchase price is only one of many critical components of a successful acquisition. Buyers should conduct a thorough review of the business to gain an understanding of the company’s legal standing, its financial position, and the potential operational and market risks before completing any transaction.
In Vietnam, due diligence is vital as some historical compliance issues, undisclosed liabilities, licensing gaps, etc. may become apparent after negotiations have started. Due diligence is an important tool that helps investors identify issues at an early stage, negotiate better, and avoid surprises that may cost millions after the deal has been closed.
Legal Due diligence
Legal due diligence ascertains that the target company operates in accordance with Vietnamese law and that the target company’s records are in order.
Legal due diligence starts with Vietnamese company’s ERC and IRC, if applicable. Investors must also check the records of registered shareholders, charter capital, and legal representatives. The records must also be aligned with the operations of the company.
Licensing is another important area. Companies in the education, healthcare, food, logistics, finance, and manufacturing sectors are required to have special licenses to operate. It is the responsibility of the buyer to ensure that the licenses are obtained, and the business complies with the requirements of the licenses.
Due diligence on the compliance with employment law must also be undertaken. This encompasses employment contracts, internal labor regulations, contributions, and disputes, if any. While the employment issues may not be extremely relevant during negotiations, labor disputes and compliance gaps can be operational and financial burdens post-acquisition.
Finally, investors must check if the company is involved in lawsuits, arbitration, or regulatory investigations. Pending disputes with clients, vendors, employees, or government authorities will impact the valuation of the company and the risk profile of the buyer post-acquisition.
Financial Due Diligence
Financial statements rarely capture the complete picture of a business.
Financial due diligence aims to analyze the quality of earnings, whether cash flow is sustainable, the business’s financial obligations, tax exposure, and the overall financial situation of the business.
Tax compliance is of particular importance. In a share sale, the business continues to hold tax liabilities post the sale and the tax obligations typically transfer with the business. Buyers should analyze the historic Corporate Income Tax (CIT) and Value Added Tax (VAT) as well as the transfer pricing documents and the tax audit report and history to assess the tax exposure.
Related party transactions should also be analyzed. These transactions may occur among shareholders or companies and may not be structured under normal business and market conditions. These transactions may impact the profitability, working capital of the business as well as the valuation of the business.
Investors should analyze the management audit and recommendations of the privately held business. Additional reviews or validations may be needed in the case of privately held businesses to assess the valuation of inventory, receivables, contingent liabilities, and the recognition of revenue.
Financial due diligence is also about assessing whether the business will sustain the future cash flows to support the purchase price of the business.
Commercial and Operational Due Diligence
Buyers need to understand how the business operates beyond the financial and legal aspects.
Commercial due diligence involves the analysis of the market, customer base, competitive advantages, and the potential for business growth. A business may be financially strong, but there may be significant business risks if the revenue is dependent on a small number of customers.
Operational due diligence looks at how well the business can operate after the acquisition. Investors ought to look at the manufacturing ability, supply chain, personnel, and management; as well as the processes, technologies, and controls.
Another consideration is the intellectual property. This is particularly true for technology, manufacturing and consumer products companies. Some of the considerations are whether the trademarks and patents have been properly secured, and whether the company owns the software and the domain name.
Environmental considerations are especially the case for manufacturing companies. Buyers should ascertain the company holds the necessary environmental permits and adheres to the governing law as there may be environmental violations which are the company’s responsibility to remediate and which may constrain the company’s operation after the acquisition is concluded.
Effective due diligence is about understanding the risks to enable the buyer to negotiate deal safeguards and prepare the post-acquisition integration plan. It is not about searching for reasons to terminate the deal.
Exit Strategies for Foreign Investors in Vietnam
An investment loses value if there is no good exit plan. Having a well-defined and written exit plan will allow Foreign Investors in Vietnam to minimize their legal and operational risks in the exiting process while allowing them to maximize value. The exit plan will vary based on the operational structure of the business, the sector in which the business operates, and the long term goal of the business.
Exit Routes: Trade Sale, IPO, Secondary Sale and Buyback
In a trade sale, a business is sold to a buyer to whom the business is strategically relevant, and such sales typically present the best option to a business owner. Greater synergies may be realized by strategic buyers who also value the business’ market reach and customer relations, thereby enabling a higher purchase price.
In a secondary sale, a financial investor or private equity firm buys the business from another financial investor or private equity firm. This is widely used in private equity where the business has reached a higher growth stage but continues to need capital for further growth prior to the final exit.
An Initial Public Offering (IPO) also presents an exit option for larger businesses on the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX), but it mandates compliance with respective exchanges’ rules and regulations.
Management buyouts (MBOs), as well as share buy backs, may also be applicable in conjunction with the business’ shareholder agreements and ownership configuration. Whatever an investor’s exit option, it is prudent to address exit requirements early as governance, financial reporting and well-structured shareholder agreements impact the final price for the business.
Dissolving or Liquidating a Company in Vietnam
Investors may prefer dissolution to the sale of the business. This involves the clearance of the business’ obligations to pay all debts and taxes, fulfill all employee and contractual obligations and settlement of all disputes of a legal nature prior to the dissolution.
The usual steps involve getting the shareholders’ agreement, finalizing the taxes, closing the tax registrations, and filing the dissolution forms with the Business Registration Office. Foreign investors can send back the rest of the capital and profits made in accordance with Vietnam’s foreign exchange regulations after the legal and financial steps have been completed.
Whether opting for a sale or a formal dissolution, planning ahead minimizes the time taken for the process, and maximizes the investment. It also creates an easier transition for employees, shareholders, and business partners.
Conclusion
The understanding of M & A in Vietnam will influence your ability to make balanced business decisions when thinking about the purchase of a business, planning an exit or assessing a business investment. With the right exit strategy and the appropriate structure for the transaction, and comprehensive due diligence, the risks inherent in investment can be drastically minimized and the value safeguarded.
An ability to identify quality business opportunities will be afforded to astute investors as Vietnam’s private sector further develops and attracts international investment. Adjustments to regulations pertaining to foreign investment will empower these investors to conduct successful business transactions of a nature that will sustain long term business growth.