Acquiring Distressed Companies in Vietnam

Types of “distress” — and which are worth buying

Not all distressed companies are alike. Correct classification from the start determines the entire deal strategy:

Liquidity distress with good assets: companies with factories, brands, market share but short of working capital or burdened by short-term debt. These are the most attractive distressed M&A targets — the buyer injects capital, restructures debt, and reaps from the existing platform.

Business model distress: prolonged losses from outdated products or high costs. The deal is really about buying assets (land, machinery, licenses) rather than the business — value on a liquidation basis, not going-concern value.

Legal distress: shareholder disputes, land entangled in planning, licenses at risk of revocation. The riskiest type, because some problems money cannot fix — a revoked license makes even the cheapest purchase worthless.

First principle: never value a distressed company with a healthy company’s methods. And second: the diligence period for a distressed deal must be longer, not shorter, however much the seller pressures for a quick decision.

Specialized due diligence: finding what financial statements don’t say

Beyond ordinary legal due diligence, distressed M&A requires digging into six risk groups:

1. Debts and contingent liabilities. Reconcile bank balances against credit contracts and appendices; check corporate guarantees for third parties (contingent liabilities often sit off-balance-sheet); review overdue payables and accruing penalty interest. For FDI companies, also check whether foreign loans were registered with the State Bank.

2. Secured assets. Search secured transactions at the National Registration Center for Secured Transactions: which assets are mortgaged, to whom, and for what secured obligations. One factory may have been mortgaged to three different banks for obligations exceeding the asset’s value.

3. Pending disputes. Check Courts and Arbitration: which cases the company is plaintiff or defendant in, dispute values, and losing odds. Pay special attention to effective but unenforced judgments and decisions — near-certain payment obligations.

4. Labor. Distressed companies often owe wages and social insurance. Under regulations, mass post-M&A terminations may burden the buyer with severance and job-loss allowances — quantify before pricing.

5. Tax. Tax arrears, fines, and late-payment interest from prior inspections; tax incentives enjoyed at risk of clawback if conditions were unmet. See also tax advice for FDI companies.

6. Licenses and land. Whether the investment registration certificate (IRC) remains valid and the project faces revocation for delays; whether land use rights are seized, mortgaged, or disputed.

Diligence findings must be quantified in money — each discovered risk needs a maximum value estimate, for price adjustment or protection mechanisms.

Valuing distressed companies — how to discount for risk

Distressed deal valuation differs fundamentally: value lies not in future profits (uncertain), but in net assets after all obligations — plus a discount for what remains undiscovered.

Adjusted net asset method: determine each asset’s market value (not book value — fully depreciated machinery still operating has value, and vice versa), minus all quantified debts and contingent liabilities. This is the baseline method for most distressed deals.

Net working capital and net debt adjustments: the purchase price is often structured as enterprise value minus net debt at closing. This protects the buyer against the company being loaded with more debt between signing and closing.

Unknown-unknowns risk discount: the practice is to hold back part of the price (holdback) or place it in escrow for 12–24 months post-closing, to handle obligations surfacing after diligence missed them.

Scenario valuation: for companies with recovery potential, an earn-out mechanism can be combined — the seller receives the full price only if the company hits agreed targets under new ownership. This aligns both sides’ interests but demands airtight calculation formulas to avoid later disputes.

Buyer protection mechanisms in the contract

In distressed M&A, the sale and purchase agreement (SPA) must be more heavily “armed” than usual:

Representations & warranties: the seller represents the state of debts, disputes, assets, and legal compliance at signing and closing. For distressed companies, the rep list needs more detail — and equally important is the disclosure letter: what the seller disclosed cannot be claimed later, so the buyer must read the disclosure letter as carefully as the contract itself.

Conditions precedent: closing depends on resolving material discovered issues — e.g., settling bank debt X, withdrawing lawsuit Y, obtaining authority approval for the transfer. Unmet conditions let the buyer walk away without penalty.

Price holdback and escrow: part of the purchase price (typically 10–30% depending on risk) is held back or deposited with a third party for a period, to offset post-closing obligations.

Indemnity: the seller undertakes to indemnify losses arising from pre-identified issues (e.g., pre-closing tax arrears), with clear caps and claim periods.

M&A (W&I) insurance: in large deals, the buyer may insure against rep & warranty breach risk — especially useful when the seller is an individual or a soon-to-dissolve entity unable to indemnify.

The link to recovery and bankruptcy proceedings

When the company is already insolvent, the buyer must distinguish two entirely different paths:

Buying outside bankruptcy proceedings: ordinary share/capital contribution or asset purchase transactions, but the buyer must be especially alert to the risk of transactions being declared void if the company later enters bankruptcy — payments and asset transfers within a certain period before opening may be revisited.

Buying inside recovery/bankruptcy proceedings: the company’s assets are liquidated under statutory order under Court supervision. The advantage is a legally “clean” purchase — assets without old debts. The downside is lengthy proceedings dependent on the litigation timeline.

Legal update note: the Law on Recovery and Bankruptcy 2025 (No. 142/2025/QH15, passed by the National Assembly on 11/12/2025) takes effect from 01/3/2026, replacing the Bankruptcy Law 2014. The key new point is the law prioritizes corporate recovery proceedings before bankruptcy — opening opportunities for buyers to participate as recovery investors rather than just waiting to buy liquidated assets. See also corporate bankruptcy advice.

In all cases, when the target shows insolvency signs, the buyer should consult a lawyer on deal timing — signing too close to the bankruptcy opening may put the whole transaction in question.

How FLAT LAW FIRM can help

FLAT LAW FIRM supports buyers and sellers in distressed M&A transactions: in-depth legal due diligence across the six risk groups above; deal structuring (share purchase, asset purchase, or participation in recovery proceedings); valuation and price adjustment mechanisms; drafting SPAs with rep & warranty, escrow, and indemnity systems; advising on recovery and bankruptcy proceedings under Law 142/2025/QH15. We work in Vietnamese, Chinese, and English. To discuss a specific deal, contact FLAT LAW FIRM.

Frequently asked questions