Due Diligence – Assessment
Due Diligence - Comprehensive Assessment
Due diligence is a crucial and indispensable step in any M&A transaction. It's the process of examining, evaluating, and verifying information about the target company to help investors make informed buying and selling decisions.
Legal review
Purpose of legal review:
- Verify the legal status and ownership of the target business.
- Identify potential legal risks that could affect the transaction.
- Assessing the legality of a company's business operations.
- Assessing the legality of a business
Legal review contents:
- Basic legal documents: Articles of Association, Business Registration, Articles of Association, Shareholder/Member Registration Number…
- Asset: Land ownership/use rights, property rights, intellectual property rights…
- Contract: Important contracts with customers, suppliers, partners, etc.
- Labor: Employment contracts, salary and benefits policies, disputes…
- Legal disputes: Ongoing or potential lawsuits, violations…
- Comply with the law: Licenses, regulations, environment…
- Transactions with related parties: Identify and evaluate insider transactions.
- Organizational structure and management: Decision-making authority, corporate governance
Financial appraisal
Comprehensive financial analysis
Purpose of financial assessment:
- Assess the current financial situation of the target company.
- Identify and evaluate revenue, expenses, profits, assets, liabilities, and equity.
- Identify and assess cash flow generation potential and capital requirements.
- Identify potential financial issues that could affect the transaction.
Financial assessment contents:
- Financial report: Analyze financial statements for the last 3-5 years and check for consistency.
- Profit quality: Analysis of revenue sources, profit margins, and sustainability.
- Assets and liabilities: Assess the asset and liability structure and solvency.
- Working capital: Analyze the working capital, inventory, and accounts receivable cycles.
- Cash flow: Assess cash flow potential and capital requirements.
- Ability to pay: Analysis of liquidity ratios and financial structure
- Accounting policy: Check for suitability and consistency in application.
Operational assessment
Purpose of operational assessment:
- Evaluating the performance of the target business.
- Identify opportunities for improvement and increased efficiency after M&A.
- Assessing the potential for integration and synergy after the transaction.
Activities assessed:
- Business model: Value chain assessment and revenue generation models
- Product/Service: Product portfolio evaluation, quality, and R&D.
- Production and operation: Production capacity, processes, technology
- Supply chain: Supplier management, logistics, inventory management
- Client: Analyze customer structure, dependencies, and satisfaction levels.
- Marketing and sales: Strategy, distribution channels, effectiveness
- Personnel: Assessing key management personnel, their capabilities, and company culture.
- IT systems: Assessing IT infrastructure, software, and information security.
- Deficit rate: Assess the weaknesses in operations.
Risk identification
The main factors affecting dissolution costs are:
Common types of risks in M&A:
- Legal risks: disputes, violations of regulations, property rights…
- Financial risks: Bad debts, off-balance sheet commitments, opaque accounting practices…
- Operational risks: Poor operational processes, dependence on a few customers/suppliers…
- Tax risks: Unfulfilled tax obligations, disputes with tax authorities…
- Market risk: Changing needs, increased competition, new regulations…
- Technological risksOutdated products, lack of investment, dependence on outdated technology…
- Environmental risks: Pollution, waste treatment, regulatory compliance…
- Personnel risks: Differences in culture, systems, work processes, etc.
- Liquidity risk: Cash flow generation capacity, working capital requirements…
Assessment report
Due Diligence report structure:
- Executive Summary: Overview of assessment results and key findings
- Scope of assessment: Description of scope of work and methodology
- Key findings: Key outcomes and potential risks
- Detailed analysis: In-depth analysis of legal, financial, and operational aspects.
- Points to note: Assess the key issues that need to be addressed.
- Recommendation: Proposing solutions, adjusting transactions, guarantee terms, etc.
- Appendix: List of reviewed documents, detailed analysis
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