Vietnam remains a compelling destination for strategic investors looking to tap into Southeast Asia’s dynamic growth. However, beneath the surface of opportunity lies a complex regulatory environment, distinct accounting practices, and evolving corporate governance standards. These factors can obscure critical risks—ranging from hidden liabilities and tax exposures to operational inefficiencies—that may significantly impact deal value.

A robust due diligence process is essential not only to validate financial performance but also to uncover structural weaknesses that could affect post-acquisition outcomes. This article highlights key financial, tax, and internal control risks commonly encountered in SMEs in Vietnam and outlines practical approaches to identifying and mitigating them. Whether you are preparing for an acquisition or evaluating a potential investment, understanding these risks is the first step toward securing a successful transaction in Vietnam.

Financial Risks

1. Valuation Challenges: Determining a fair valuation for a target company in Vietnam can be complex due to different accounting standards (IFRS vs. VAS), limited financial disclosures, and market volatility. Investors should perform a comprehensive financial analysis, including historical performance trends, normalization of earnings, non-operating assets, cash flow projections, and benchmarking against industry peers to ensure valuation confidence.
2. Asset Quality and Ownership: It is critical to verify that all key assets are legally owned by the company and not held personally by shareholders or executives. Investors should also assess asset registration, depreciation policies, assets management process and the presence of non-operating or idle assets that may not contribute to core business value.
3. Debt and Liabilities: A thorough review of the company’s financial obligations is essential. This includes identifying all loans and borrowings, evaluating off-balance-sheet exposures, contingent liabilities, and analysing the terms and covenants of existing debt agreements. Failure to uncover hidden liabilities can result in significant post-acquisition financial strain.
4. Financial Health Indicators: Companies operating with minimal charter capital but high reliance on external financing may signal underlying financial instability. Investors should examine the structure and sustainability of borrowings, interest coverage ratios, and the use of collateralized assets to assess long-term solvency and risk exposure.
5. Related party transactions: Transactions involving shareholders, executives, or affiliated entities can distort the company’s financial position and performance. Investors should scrutinise the nature, frequency, and pricing of these transactions to ensure they are conducted at arm’s length and do not mask underlying financial or operational issues.
6. Inventory Valuation: Inventory should be assessed for accuracy and relevance, particularly in sectors involving perishable, obsolete, or slow-moving goods. Overstated inventory values can inflate earnings and lead to overvaluation. A detailed review of inventory turnover, valuation methodology, and physical verification is recommended.
7. Cash Flow Transparency: Investors should closely examine the transparency and integrity of cash flows, as non-standard or unofficial transactions can significantly distort the financial reality of the target company. Common red flags include profit extraction through vendor or customer arrangements, irrational lending or borrowing involving owners, key personnel, or related parties, and off-the-books transactions. These practices may indicate poor governance, misaligned incentives, or deliberate financial manipulation. A detailed cash flow analysis—tracing sources and uses of funds, validating transactions, and assessing consistency with operational performance—is essential to uncover hidden risks and ensure the financial sustainability of the business.
8. Integration Costs: Post-acquisition integration often entails substantial and frequently underestimated costs that can impact the financial viability of the transaction. These may include IT system upgrades, regulatory compliance, governance enhancements, recruitment, employee training, and organizational restructuring. Such costs are typically not reflected in the target’s financial statements but can significantly affect post-deal performance. Investors should identify and quantify these expenses during due diligence and incorporate them into the overall acquisition budget and financial forecasts to ensure a realistic assessment of total investment requirements.

Tax Risks

1. Historical Tax Exposure and Compliance: Tax risks extend beyond the pre-closing period, as historical non-compliance or aggressive tax positions may be challenged during post-acquisition audits. This can result in the rejection of carried-forward tax losses, reassessment of prior filings, or additional tax liabilities. Given the complexity and frequent changes in Vietnam’s tax regulations, a comprehensive tax due diligence conducted by an experienced local team is essential to identify potential exposures and inform the need for contractual protections such as representations, warranties, or indemnities to safeguard the investor’s post-deal position.

…….Key areas of exposure may include:

• Value-Added Tax (VAT) Exposures: VAT risks in Vietnam can arise from incorrect classification of transactions, improper issuance or absence of VAT invoices, and failure to meet conditions for input VAT credit claims. Common exposures include unclaimed or disallowed input VAT due to insufficient documentation, late or inaccurate VAT filings, and misapplication of VAT rates. These issues can lead to denied credits, penalties, and interest charges.
• Corporate Income Tax (CIT) Deductions and Exposures: CIT risks in Vietnam can arise from a range of issues that affect the deductibility and accuracy of reported expenses. Invalid costs and intercompany charges—such as management fees, interest on intercompany loans, and other related-party transactions—may be disallowed if not properly substantiated with appropriate documentation, service agreements, licenses, and benchmarking studies. Additionally, improper revenue recognition, unrealistic expense allocations, and discrepancies between accounting records and tax filings can trigger reassessments and penalties. These exposures can materially increase the company’s CIT liability and should be carefully evaluated during due diligence to ensure compliance and mitigate post-acquisition tax risks.
• Personal Income Tax (PIT) Exposures: PIT risks may arise from improper classification and reporting of payments made to shareholders, executives, or key personnel. Common exposures include business travel, entertainment, allowances, and other fringe benefits that lack valid supporting documentation or are not treated in accordance with prevailing tax regulations. These payments may be reclassified as taxable income, triggering withholding obligations and potential penalties for the target company. A detailed review of compensation structures, benefit policies, and expense documentation is essential during due diligence to ensure compliance and mitigate PIT liabilities.

2. Transfer Pricing Compliance: Related-party transactions in Vietnam are subject to strict transfer pricing regulations, which are rigorously enforced by tax authorities. Non-compliance can result in significant tax adjustments, penalties, and reputational risks. Investors should conduct a thorough review of the target company’s transfer pricing policies, documentation, and intercompany agreements to ensure that pricing methodologies are consistent with the arm’s-length principle and supported by appropriate benchmarking. Special attention should be paid to the accuracy of disclosures in annual transfer pricing reports and the alignment between financial statements and related-party transaction records to mitigate audit risks and ensure regulatory compliance.

3. Profit Repatriation: Foreign investors in Vietnam must navigate a complex regulatory landscape when repatriating profits. Key risks include limitations on deductible expenses and the potential reclassification of income by tax authorities, which can increase corporate income tax (CIT) liabilities and reduce net distributable profits. Additionally, foreign exchange controls and anti-money laundering regulations may delay or restrict outbound fund transfers. These constraints can significantly impact cash flow planning and return on investment. As part of due diligence, investors should assess the target company’s historical profit distribution practices and develop a compliant, tax-efficient repatriation strategy that aligns with regulatory requirements and operational realities.

Internal Control Issues

1. Weak Internal Control Framework: A robust internal control framework is the backbone of operational integrity and financial reliability. When this framework is lacking, the business becomes susceptible to fraud, operational inefficiencies, and regulatory breaches. Investors should not overlook this during due diligence. The review should encompass key operational workflows and cross-functional processes, including accounting procedures, order-to-cash and procure-to-pay cycles, inventory accuracy and safeguarding measures, and the segregation of duties to prevent conflicts of interest. Furthermore, oversight mechanisms such as cross-checks, reviews, approvals, and reconciliation protocols should be examined. Pinpointing weaknesses in these domains helps investors gauge the reliability of financial disclosures and the overall health of operational processes.
2. Inventory Management Risks: Inventory is typically one of the largest assets on a company’s balance sheet, making its management a critical focus for investors. Ineffective inventory controls can result in stock discrepancies, inventory loss, and the failure to identify slow-moving or obsolete items—leading to potential financial misstatements. Investors should assess the inventory in/out process, including how goods are received, recorded, and dispatched, to ensure accurate tracking and control. The stock count process should also be reviewed, with attention to count frequency, variance reconciliation procedures, and the independence of personnel involved. Additionally, integration between inventory management systems and financial reporting platforms is essential to maintain consistency and data integrity. These evaluations help validate inventory valuation and cost of goods sold, offering a clearer view of the company’s operational effectiveness and financial reliability.
3. Cash Flow Management Deficiencies: Cash flow issues often signal deeper operational risks. Inadequate forecasting, delayed collections, and inefficient payment processes can strain liquidity and expose the business to financial instability. Investors should evaluate the company’s approach to cash planning, receivables and payables management, and the regularity of cash reporting and reconciliation. Treasury controls and disbursement oversight are also critical to prevent misuse and ensure funds are deployed effectively. Identifying weaknesses in these areas allows investors to understand the company’s capacity to maintain financial health and withstand external pressures.

Mitigating Key Risks to Protect Deal Value and Ensure Post-Acquisition Success

In any merger or acquisition, especially within emerging markets like Vietnam, financial, tax, and internal control risks can significantly impact deal value and post-acquisition performance. Proactive risk management is essential to safeguard investor interests and ensure a smooth transition. To address these risks effectively, investors should consider the following strategic actions:

• Risk Assessment & Mitigation Planning: Develop a structured risk assessment framework that identifies potential financial, tax, and internal control vulnerabilities both pre- and post-acquisition. This should include prioritization of risks, root cause analysis, and clearly defined mitigation actions with ownership and timelines.
• Engage Experienced Advisors: Assemble a multidisciplinary team with deep expertise in Vietnamese M&A, financial and tax due diligence, legal structuring, and post-deal integration. Local knowledge coupled with global perspective is critical to navigating regulatory complexities and avoiding costly oversights.
• Strengthen Internal Control Reviews: Undertake a thorough assessment of the target entity’s internal control environment, with a focus on high-risk and operationally critical areas such as financial reporting, procurement, inventory management, cash flow controls, and IT systems. Post-acquisition, implement harmonised control procedures that align with the acquirer’s governance standards and internal audit protocols to ensure consistency, transparency, and regulatory compliance.
• Enhance Transparency and Seller Collaboration: Maintain open and transparent communication with the seller regarding financial records, tax positions, and contingent liabilities. Early identification of potential issues allows for more informed negotiations and smoother integration.
• Negotiate Protective Contractual Clauses: Ensure the acquisition contract includes robust representations, warranties, and indemnification provisions to shield investors from undisclosed liabilities, tax exposures, internal control deficiencies or governance lapses identified after closing. Utilise escrow arrangements or deferred consideration structures to mitigate exposure and preserve deal value.
• Implement Tax-Efficient Structures: Work with tax advisors to design acquisition and operational structures that optimise tax efficiency while remaining compliant with Vietnamese tax laws. This includes reviewing transfer pricing arrangements, VAT, FCWT, PIT and CIT implications.
• Develop a Post-Acquisition Integration Plan: Leverage due diligence findings to build a comprehensive integration roadmap. This should address harmonization of financial reporting systems, alignment of internal control policies, onboarding of key personnel, and implementation of monitoring mechanisms to ensure compliance and performance tracking.

By acknowledging these financial, tax and internal control risks and taking proactive measures, investors can navigate the acquisition process with greater confidence and protect their investment in Vietnam’s dynamic market. A well-informed and cautious approach is key to maximizing the investment’s value.

Ready to navigate the complexities of M&A in Vietnam? Vieter Vietnam offers tailored transaction advisory services to guide you through every stage, ensuring compliance, optimizing deal structures, and safeguarding your investment.

Connect with our experts to discuss your specific needs and achieve a successful transaction in Vietnam.

Thi Le – Director, Advisory Services – thi.le@Vieter.com

Rizwan Khan – Managing Partner – r.khan@Vieter.com