Warning of common mistakes in financial due diligence during corporate mergers and how to avoid risks

Financial due diligence in corporate mergers is a crucial step that helps accurately assess a company’s financial capacity and minimize legal risks in M&A transactions. However, if the process is improperly conducted or based on incomplete information, enterprises may face inaccurate valuations, disputes, and substantial losses after the merger.

I. Common mistakes in financial due diligence during corporate mergers

During the corporate merger process, financial due diligence plays an important role in accurately evaluating the value and risks of the target enterprise. In practice, however, many enterprises still commit common mistakes such as collecting incomplete financial information, incorrectly assessing cash flow quality, or relying solely on financial statements while overlooking contingent liabilities and off-balance-sheet obligations. These shortcomings may result in inaccurate valuations and increase legal and financial risks following the merger.

II. Understanding financial due diligence during corporate mergers

1. What is financial due diligence during corporate mergers and how does it differ from annual financial statement audits?

Financial due diligence during corporate mergers is a process of comprehensively assessing the financial condition, enterprise value, and potential risks prior to conducting a merger transaction. Such an activity generally includes analyzing assets, liabilities, cash flows, business performance, and unrecorded financial obligations in order to determine the actual value of the target enterprise.

Unlike annual financial statement audits, which focus on verifying the truthfulness and fairness of financial statements for a particular accounting period in accordance with accounting standards, financial due diligence in mergers has a broader scope and is transaction-oriented, with a focus on forecasting future risks. While audits primarily serve compliance and historical verification purposes, financial due diligence supports investment decisions and merger strategies by focusing more heavily on enterprise value and post-transaction profitability.

2. Who should conduct financial due diligence during a corporate merger: the buyer, the seller, or an independent entity?

In corporate merger transactions, financial due diligence may be conducted by the buyer, the seller, or an independent entity; however, each party has different roles and levels of objectivity:

• First, the buyer is the most important party and is almost always required to conduct financial due diligence. The objective is to accurately assess the value of the target enterprise and identify hidden financial risks such as liabilities, cash flow issues, tax obligations, and post-merger profitability. It helps the buyer avoid inaccurate valuations or acquiring an enterprise with concealed risks.
• Second, the seller often proactively hires consultants to conduct internal due diligence before offering the enterprise for sale. The purpose is to standardize financial data, increase transparency, and enhance enterprise value during negotiations.
• Third, independent appraisal entities (audit firms or financial consulting companies) are considered the most objective and highly recommended option. They help ensure neutrality, reduce conflicts of interest among the parties, and improve the reliability of due diligence results in M&A transactions, particularly in large-scale deals or transactions involving foreign elements.

3. What methods and materials are commonly used in financial due diligence during corporate mergers?

Common valuation methods include:

• Asset-based method: Determining enterprise value based on total assets minus liabilities.
• Income approach (discounted cash flow method): Determining value based on the enterprise’s ability to generate future cash flows discounted to present value.
• Market comparison approach: Comparing the enterprise with similar companies that have been traded in the market.
• Capitalization of earnings method: Estimating enterprise value based on stable profit levels.

Supporting materials commonly used in financial due diligence include:

• Audited financial statements and internal management reports;
• Cash flow analysis models and enterprise valuation models;
• Financial ratio systems (liquidity, leverage, profitability);
• Market data and industry information for benchmarking and comparison purposes.

4. Which authorities are entitled to request financial due diligence reports during inspections or examinations of corporate mergers?

• Tax authorities: Pursuant to the Law on Tax Administration 2025 (Clause 3, Article 22), tax authorities are entitled to conduct tax inspections and examinations and request enterprises to provide accounting records, financial statements, and related documents in order to determine tax obligations in merger transactions.
• State inspection authorities: Pursuant to the Law on Inspection 2025 (Article 5), inspection authorities are entitled to request all financial records, including due diligence reports, in order to conduct inspections regarding compliance with laws governing corporate mergers.

III. Legal regulations relating to financial due diligence during corporate mergers

1. Which legal documents govern financial due diligence during corporate mergers in Vietnam?

First, the Law on Enterprise 2020 (as amended and supplemented in 2025) serves as the fundamental legal instrument governing mergers, consolidations, and principles relating to the succession of rights and obligations following mergers. In addition, the Law on Investment 2025 regulates mergers involving foreign investors or transactions requiring investment approval procedures.

Regarding accounting regimes and financial recognition, due diligence activities are governed by the Law on Accounting 2015, the Law on Independent Audit 2011, and particularly Circular No. 99/2025/TT-BTC (Article 23), which provides principles for preparing and presenting financial statements in cases of division, separation, consolidation, and merger of enterprises, including methods for determining net asset value, transaction costs, and accounting recognition methods.

Moreover, the Law on Tax Administration 2025 and guiding documents such as Circular No. 86/2024/TT-BTC provide regulations concerning tax obligations, tax code termination, and handling of tax dossiers in merger cases, constituting important legal grounds during the financial due diligence process.

2. What is the procedure for conducting financial due diligence during a corporate merger?

Pursuant to Article 23 of Circular No. 99/2025/TT-BTC, financial due diligence during corporate mergers is implemented according to accounting principles and procedures for determining asset values and obligations as follows:

- Step 1: Determining the nature of the merger transaction

The enterprise evaluates whether the transaction constitutes a business operation under Vietnamese Accounting Standard No. 11 and determines whether the transaction falls within common control cases. It serves as the basis for selecting methods for recognizing assets and liabilities.

- Step 2: Determining net asset value and recognition methods

• If the merger occurs between parties under common control, assets and liabilities are recognized based on book value;
• If there is no common control, the acquisition method is applied;
• If the transaction is not considered a business operation, it is recognized as the purchase of a group of assets or net assets.

- Step 3: Determining transaction costs and consideration value

Merger costs are determined based on cash, assets, equity instruments, or investments used as consideration. Valuation may be based on fair value or book value, while differences are recorded as capital surplus or business results in accordance with regulations.

- Step 4: Recognition, elimination, and adjustment of accounting data. The enterprise updates accounting books after the merger as follows:

• Ceasing recognition of assets transferred to the receiving enterprise;
• Eliminating internal transactions among the parties (if any) to avoid duplicate recognition;
• Handling differences between merger costs and net asset values in accordance with accounting standards;
• Fully performing tax obligations arising from the merger transaction.

3. Common violations arising in financial due diligence during corporate mergers

First, enterprises may provide or use incomplete or inaccurate financial information, leading to incorrect assessments of asset values, liabilities, and operational performance. It distorts due diligence results and directly affects merger decisions.

Second, asset valuation may fail to comply with regulations, including deliberate inflation or undervaluation of assets, or failure to comply with valuation principles and methods prescribed under accounting standards and relevant legal regulations.

Third, enterprises may fail to comply with due diligence procedures or omit important verification steps, such as failing to reconcile financial statements, failing to assess legal and tax risks, or failing to conduct independent reviews where necessary.

In addition, certain cases involve undisclosed conflicts of interest on the part of appraisal entities, thereby affecting the objectivity and independence of due diligence results.

IV. Questions relating to financial due diligence in corporate mergers

1. How long must enterprises retain financial due diligence results in corporate mergers for inspection and supervision purposes? Why?

Pursuant to Clause 5, Article 41 of the Law on Accounting 2015, accounting documents directly used for bookkeeping and preparation of financial statements must be retained for a minimum period of 10 years, while certain special cases may require longer-term or permanent retention.

Financial due diligence results in corporate mergers serve as a direct basis for determining asset values, obligations, and successor liabilities after the merger; therefore, they are considered important accounting documents used for inspection, examination, and legal verification purposes.

2. What legal dossiers and documents must be prepared for conducting financial due diligence in corporate mergers?

To conduct financial due diligence in a corporate merger, enterprises are required to prepare a dossier in accordance with Article 62 of Decree No. 57/2026/ND-CP, including: a proposal for the merger, a merger plan, audited annual financial statements and the most recent quarterly financial statements, a draft charter of the post-merger enterprise, a draft merger agreement, and other relevant documents (if any). These documents constitute the foundational materials for determining the scale, structure, and legality of the transaction.

With respect to due diligence contents, the determination of net asset value and merger costs must comply with Vietnamese Accounting Standard No. 11. Depending on each specific case (common control, non-common control, or transactions not constituting business operations), enterprises shall apply recognition methods based on book value, acquisition methods, or recognition as the purchase of a group of assets. At the same time, enterprises must standardize the determination of asset values, equity instruments, and treatment of valuation differences in accordance with accounting standards and relevant legal regulations.

In addition, enterprises are required to prepare documents relating to internal transactions, tax obligations, and accounting recognition bases in accordance with Circular No. 133/2016/TT-BTC and Vietnamese Accounting Standard No. 17. These factors serve as important grounds for ensuring that due diligence figures accurately reflect the financial substance of the transaction and minimize post-merger discrepancy risks.

3. If a financial due diligence entity in a corporate merger has a conflict of interest but fails to disclose it, who takes responsibility? And how is the resolution process implemented?

The legal basis regarding conflicts of interest is stipulated in Clause 8, Article 3 of the Law on Anti-Corruption 2018. Accordingly, conflict of interest means a situation in which the interests of a person holding a position or authority, or their related persons, improperly affect or are likely to improperly affect the performance of assigned duties or official tasks.

Accordingly, failure to disclose or conceal conflicts of interest may result in liability under anti-corruption regulations and may also affect the legality and validity of due diligence results. The process for resolving conflicts of interest discovered during financial due diligence in corporate mergers generally includes the following steps:

- Receipt and verification of information: Competent authorities or organizations shall review or receive reports regarding signs of conflicts of interest and require the appraisal entity to provide dossiers and relevant explanations in order to verify the accuracy of the information.

- Assessment of the level of conflict of interest: Based on the dossiers and relevant interest relationships, the competent authority shall determine the extent to which the conflict of interest affects the objectivity of the due diligence process, with reference to Clause 8, Article 3 of the Law on Anti-Corruption 2018.

- Application of remedial measures: Depending on the nature of the case, the following measures may be applied:

• Removing or replacing the appraiser from the transaction dossier;
• Suspending the due diligence process or requiring re-appraisal;
• Requesting supplementation, disclosure, or correction of conflict-of-interest declarations.

- Imposition of liability: Where violations are identified, relevant individuals and organizations may be subject to disciplinary measures, administrative sanctions, or legal liability in accordance with anti-corruption laws and specialized legal regulations.

4. How may parties be sanctioned if they fail to conduct financial due diligence in a corporate merger but still complete the transaction?

Pursuant to Article 13 of the Law on Competition 2018, the law provides for the assessment of anti-competitive effects of economic concentration activities, including corporate mergers, in order to determine their impact on the market and competition control. 

Pursuant to Article 14 of Decree No. 75/2019/ND-CP, as amended and supplemented by Article 5 of Decree No. 102/2026/ND-CP, failure to notify economic concentration transactions may result in the following sanctions:

• A fine ranging from 500,000,000 VND to 1,000,000,000 VND for enterprises with a scale of less than 3,000 billion VND in the financial year immediately preceding the year of economic concentration;
• A fine ranging from 1,000,000,000 VND to 2,000,000,000 VND for enterprises with a scale of 3,000 billion VND or more;
• The fine must not exceed 5% of the total turnover generated in the relevant market by the violating enterprise.

5. If significant risks are discovered after signing due to negligence in financial due diligence during a corporate merger, how may the injured party seek remedies?

If significant risks are discovered after execution of the transaction due to errors in financial due diligence during a corporate merger, the injured party may seek remedies under the Civil Code 2015. Specifically, the injured party may request that the transaction be declared invalid due to mistake or fraud under Articles 126 and 127, or request termination of the agreement due to breaches of information disclosure obligations under Article 428. 

In addition, if actual damages arise, the injured party is entitled to claim compensation for damages under Articles 360 and 585 of the Civil Code 2015.

V. Are you looking for a reputable law firm to assist with financial due diligence issues in corporate mergers?

Are you seeking a reputable legal consulting firm to assist with financial due diligence in corporate mergers? NPLaw provides comprehensive M&A consulting services, including legal and financial due diligence, risk assessment, drafting and reviewing merger documents, thereby helping enterprises closely control transaction value and minimize legal risks throughout the implementation process.

The above information is provided for reference purposes only. Should clients require detailed advice regarding specific cases, please contact NPLaw Firm for immediate consultation.