The increasingly deep economic integration process has created many opportunities to promote investment through the form of M&A. That creates great challenges in M&A activities in general and cross-border M&A activities in particular. On the other hand, M&A brings many benefits to businesses, along with the accompanying benefits, there are certain risks surrounding related transactions. In fact, before buying and selling, the buying party must consider and check many factors to ensure there is no risk or the risk is at the lowest possible level. The process of buying and selling and merging is becoming more and more common and is one of the main causes, directly causing the failure of deals or even having long-term consequences that make businesses face difficulties. So what are the common risks in buying and selling and merging businesses? The following article will help customers answer these questions.
M&A in the Vietnamese market has been quite active recently, however, investors still cannot avoid risks and assess the level of damage when risks occur during the business merger process.
1. Common risks in M&A transactions
First, legal risks
Legal risks may include: risks during operations (being suspended or forced into bankruptcy); risks to state management agencies; from legal actions of partners; risks from intentional, unintentional or careless acts of managers and employees of the enterprise; disputes,… leading to the enterprise being sued or entangled in other legal issues.
Therefore, it is really necessary to conduct a legal review before deciding to buy back. Depending on each actual transaction, the specific industry of the target enterprise in M&A activities or depending on the agreement between the buyer and the seller, the document requirements for legal appraisal issues can be drafted and adjusted differently, but in general, the following documents can be summarized:
1. Establishment and operation records (Business registration certificate, licenses, Enterprise charter and other necessary documents related to the establishment and operation process);
2. Business owner’s capital records;
3. Personnel and organizational structure records;
4. Labor records;
5. Contracts, transactions;
6. Records of the enterprise’s assets;
7. Tax, accounting and banking records;
8. Records of sanctions, disputes and litigation (List and documents related to disputes of the Enterprise/Founding Shareholders/Founding Members; Minutes of administrative sanctions/direct inspections and checks of the enterprise and other relevant documents (if any);
After being provided with these documents, the buyer can conduct the appraisal themselves or hire parties with legal expertise such as Lawyers and law practice organizations to conduct the appraisal to issue a Legal Appraisal Report.
Second, financial risks
This is a risk that the buyer is particularly concerned about, these financial risks may be related to capital contribution. The enterprise has not contributed enough capital, the source of business capital is not transparent, asset risks include the valuation of assets not in accordance with the actual value, risks in debts to state agencies and partners. Normally, to check and review the financial contents, the buyer will hire independent auditing units to review financial risks , for assets, hire a valuation party to re-evaluate the enterprise.
Third, market risk and other risks
Market competitive advantage is also one of the factors that buyers are particularly interested in. Making good use of these advantages will help buyers save a lot of time and market building work, and instead can start exploiting existing potentials, etc. However, buyers also need to consider these advantages with legal , financial and other risks before deciding to sign a business transfer contract.
Therefore, businesses need to identify and control risks and take advantage of other businesses’ advantages to promote their business model to new heights.
2. Measures to limit risks
Firstly , for disputes between the seller and the buyer, the parties should clearly stipulate the expectations and ways to resolve conflicts and disputes if they do not achieve their expectations in the contract for the sale of shares/capital contributions, shareholder agreements, membership agreements, etc. These contracts and agreements, if well-constructed, reasonable, and complete, will be very useful when disagreements arise or help the parties explain those issues.
Second , for labor disputes with employees or labor collectives, the buyer or the new management of the company should handle them in accordance with the law but consider the interests of employees who have been with the target company. The company should have a roadmap for retraining and job transfer before considering the option of cutting employees.
Third , for disputes with partners, the parties or target companies should review the contracts signed with partners, find out the legal risks that may arise. When completing the M&A, the company should send a notice to all partners to review the outstanding issues and come up with a solution.
The above content provides risk mitigation measures that businesses can rely on to make the most correct decisions.
3. Legal consulting services
Step 1: It is necessary to choose a suitable seller ( the acquired enterprise ) to conduct the M&A process. The suitability is not only in terms of scale and field of operation, but also includes similarities in corporate culture, management structure, personnel, etc. Only then can the buyers ( acquiring enterprises ) find a common voice when conducting the M&A process as well as bring success to both parties’ enterprises in the post-M&A period;
Step 2: must clearly define the purpose of M&A. There are many cases where parties participate in M&A with very specific goals such as expanding the market in a short time, acquiring competitors or investment projects… These are inaccurate and incomplete views of M&A. When a business wants to acquire another business, this is not aimed at a specific purpose, but it is a tool or a stepping stone to help businesses achieve their business development goals;
Step 3: It is necessary to correctly determine the value of the seller or the acquired enterprise. The value of the enterprise is not only reflected through the balance sheet, but also includes potential values such as human resources, or the legality of the brand… Correctly determining the potential value of the seller ( the acquired enterprise ) will show the value of the M&A deal, its feasibility and the possibility of financial success;
Step 4: Identify potential barriers and risks through a detailed due diligence process. Each M&A deal has potential risks in terms of finance, trade and legal status. Therefore, participating businesses need to identify and anticipate the risks that businesses may encounter during the negotiation, implementation and stages of M&A, thereby proposing remedial measures, prevention and timely handling plans.
In short, participating businesses need to plan a thorough strategy including specific steps for each M&A deal, in which the method, roadmap and assignment of personnel are clearly outlined. After approval, participating businesses must organize and implement it systematically and strictly comply with the planned strategy.
