M&A over a distressed company is not ordinary M&A at a cheaper price: it is a transaction where the buyer can very easily inherit tax debts, social insurance debts, encumbered assets and even a rehabilitation or bankruptcy procedure opening right after closing. This article shows how due diligence for distressed M&A differs in focus, tempo and transaction structuring from ordinary diligence.
Focus: from compliance to tracing debts and bankruptcy risk
Ordinary diligence revolves around licences, contracts and compliance; diligence on a distressed company revolves around what the company owes, to whom, and which debts will follow the buyer. The priority list includes: all credit balances with overdue status and security assets; tax debts and exposure to tax enforcement; social insurance and health insurance debts for employees; pending cases and existing enforcement decisions; and asset transfers and related-party payments in the period shortly before the transaction — the group of transactions at risk of being reviewed and declared void if a bankruptcy procedure opens under the Law on Rehabilitation and Bankruptcy 142/2025/QH15, the statute replacing the Bankruptcy Law 51/2014/QH13 from 1 March 2026. Another point ordinary diligence often misses is labour status: a distressed company commonly owes wages and allowances, and those claims rank high in the asset-distribution order.
Transaction structure: buying shares versus buying assets
For a healthy target, buying shares is the default route; for a distressed target, structure is a risk-management tool. A selective asset purchase lets the buyer take only the wanted assets and operations, leaving most liabilities in the old entity — but it must handle transfers of land, sector licences and contracts, and still faces the risk of being viewed as a liability-avoidance transaction if pricing is unfair. A share purchase keeps the entity and its licences intact but inherits all obligations, including undiscovered ones, so it needs strong protection mechanics: retention of price, specific indemnities for each identified risk, and conditions precedent on settling material debts before closing. A third structure often seen is buying through an asset auction or through the company’s own rehabilitation procedure, where diligence must track the process and approval authority within the Law on Rehabilitation and Bankruptcy 142/2025/QH15.
Tempo, cost and the post-signing phase
Distressed M&A moves fast because the target’s cash runs out by the week, but fast must not mean shallow: the effective model is two-tier diligence — a red-flag tier within one to two weeks for the in-principle decision and price framework, then a confirmatory tier digging only into the flagged workstreams instead of reviewing everything evenly. On cost, total advisory fees may be below a large ordinary deal but weekly intensity is higher, and the buyer must also price the post-signing phase: completion accounts, review of hard-to-collect receivables and handling inherited disputes. The costliest buyer mistake is economising on diligence only to discover after closing a tax debt, or that a core asset was already mortgaged for a loan the buyer has effectively just paid to own. In distressed M&A, diligence is not a formality — it is what decides the real value of the deal.
Frequently Asked Questions
Due diligence for a company in difficulty?
Due diligence on a distressed company must run as an investigation into money-losing risk rather than ordinary compliance checking: verify overdue and contingent debts, the encumbrance status of assets, pending disputes, the risk of a rehabilitation or bankruptcy petition being filed, and whether the company has entered into transactions liable to be declared void if bankruptcy opens. The current framework is the Law on Rehabilitation and Bankruptcy 142/2025/QH15, replacing the Bankruptcy Law 51/2014/QH13 from 1 March 2026.
Focus areas (debt, legal)?
Focus areas include: all loans, tax debts, social insurance debts and supplier debts with their overdue status; assets already mortgaged, pledged or in dispute; pending cases; major contracts with change-of-control termination clauses; and related-party transactions in the run-up period. The aim is to identify which obligations the buyer will inherit — something ordinary due diligence, centred on licences and compliance, often treats lightly.
Time?
Much shorter than ordinary M&A because sellers and creditors need quick decisions, but depth must not drop: common practice is staged diligence — a red-flag review in one to two weeks to decide whether to proceed, then confirmatory diligence focused on the flagged points. Time pressure makes document tiering and a fixed question list from day one decisive.
Cost?
Absolute cost is usually below full-scope diligence but cost per week of deployment is higher, because the team must work several workstreams in parallel and add valuation and tax specialists. The buyer should also budget for the post-signing phase: completion audit and review of suspicious transactions. The fair comparison is diligence cost against the loss one missed liability can cause — in a distressed deal, one missed tax debt can exceed the entire purchase price.
This article has been quality-reviewed by the FLAW AI Legal Council