Financial Due Diligence in M&A: A Step-by-Step Checklist for Malaysian Businesses
A merger and acquisition deal in Malaysia can transform a business — or expose a buyer to risks they never anticipated.
Financial due diligence (FDD) is the structured process that separates a well-informed acquisition from an expensive mistake.
Yet many Malaysian SME buyers enter M&A without a clear FDD framework, treating it as an extension of the annual audit.
It is not. The two serve fundamentally different purposes — and confusing them is one of the most common missteps in local M&A.
This guide sets out an eight-step checklist tailored to Malaysian buyers, grounded in the Companies Act 2016, LHDN requirements, and best practices for private merger and acquisition transactions in Malaysia.
Financial due diligence (FDD) is the structured process that separates a well-informed acquisition from an expensive mistake.
Yet many Malaysian SME buyers enter M&A without a clear FDD framework, treating it as an extension of the annual audit.
It is not. The two serve fundamentally different purposes — and confusing them is one of the most common missteps in local M&A.
This guide sets out an eight-step checklist tailored to Malaysian buyers, grounded in the Companies Act 2016, LHDN requirements, and best practices for private merger and acquisition transactions in Malaysia.
Financial Due Diligence vs Audit: What Is the Difference?
An audit is backward-looking. It verifies that historical financial statements are accurate and comply with accounting standards.
Financial due diligence is buyer-driven and forward-looking. It asks: is this business worth acquiring, and at what price?
According to KTP & Company, FDD focuses on the quality and sustainability of the target’s earnings, normalised EBITDA after stripping out one-off items, cash generation trends, and undisclosed contingent liabilities.
An audit gives you assurance. FDD gives you the commercial intelligence that underpins your deal price and negotiating position.
For acquirers seeking dedicated M&A support, the financial and transaction advisory team at ShineWing TY TEOH can guide the full FDD process.
Financial due diligence is buyer-driven and forward-looking. It asks: is this business worth acquiring, and at what price?
According to KTP & Company, FDD focuses on the quality and sustainability of the target’s earnings, normalised EBITDA after stripping out one-off items, cash generation trends, and undisclosed contingent liabilities.
An audit gives you assurance. FDD gives you the commercial intelligence that underpins your deal price and negotiating position.
For acquirers seeking dedicated M&A support, the financial and transaction advisory team at ShineWing TY TEOH can guide the full FDD process.
The Malaysian Regulatory Framework for M&A Due Diligence
Financial due diligence in Malaysia does not take place in a legal vacuum. Several statutes govern the process.
The Companies Act 2016 is the primary legislation covering corporate disclosures, director duties, and statutory filings.
Buyers should verify the target’s SSM compliance and any change-of-control provisions in shareholder agreements.
The Personal Data Protection Act 2010 (PDPA) applies when buyer teams access employee, customer, or supplier data.
Appropriate data handling agreements must be in place before the virtual data room (VDR) is opened.
For transactions involving listed companies, the Securities Commission Malaysia’s Guidelines on Due Diligence Conduct apply, and a Due Diligence Working Group (DDWG) is typically convened. Insider trading rules also apply to all deal team members.
Tax due diligence should involve tax advisory specialists with LHDN audit and transfer pricing experience.
The Companies Act 2016 is the primary legislation covering corporate disclosures, director duties, and statutory filings.
Buyers should verify the target’s SSM compliance and any change-of-control provisions in shareholder agreements.
The Personal Data Protection Act 2010 (PDPA) applies when buyer teams access employee, customer, or supplier data.
Appropriate data handling agreements must be in place before the virtual data room (VDR) is opened.
For transactions involving listed companies, the Securities Commission Malaysia’s Guidelines on Due Diligence Conduct apply, and a Due Diligence Working Group (DDWG) is typically convened. Insider trading rules also apply to all deal team members.
Tax due diligence should involve tax advisory specialists with LHDN audit and transfer pricing experience.
An 8-Step Financial Due Diligence Checklist for Malaysian Buyers
Step 1: Preliminary Assessment
Before requesting documents, define the deal rationale and the scope of the FDD exercise.
Agree with your advisers on which financial periods, entities, and business units the review will cover.
This prevents scope creep and ensures the data room request is targeted and proportionate to the deal size.
Agree with your advisers on which financial periods, entities, and business units the review will cover.
This prevents scope creep and ensures the data room request is targeted and proportionate to the deal size.
Step 2: Detailed Financial Review
Request audited financial statements for the past three to five years, management accounts, and the latest trial balance.
Analyse revenue trends, gross margin movements, and operating cost structures year on year.
Benchmarking against sector averages is often supported by business valuation advisory expertise.
Analyse revenue trends, gross margin movements, and operating cost structures year on year.
Benchmarking against sector averages is often supported by business valuation advisory expertise.
Step 3: Tax Compliance Review (LHDN)
This is one of the most critical steps in any merger and acquisition in Malaysia.
Obtain confirmation that all income tax returns have been filed and assessed by Lembaga Hasil Dalam Negeri (LHDN).
Check for outstanding tax assessments, unresolved audits, and Real Property Gains Tax (RPGT) exposure.
Also examine any transfer pricing positions that may attract LHDN scrutiny after the acquisition closes.
Obtain confirmation that all income tax returns have been filed and assessed by Lembaga Hasil Dalam Negeri (LHDN).
Check for outstanding tax assessments, unresolved audits, and Real Property Gains Tax (RPGT) exposure.
Also examine any transfer pricing positions that may attract LHDN scrutiny after the acquisition closes.
Step 4: Earnings Quality and EBITDA Normalisation
Not all reported profits are recurring. FDD requires the buyer to normalise EBITDA by removing one-off items,
owner-manager remuneration adjustments, related-party transaction effects, and non-cash charges.
The resulting normalised EBITDA is the number that should anchor your valuation and inform the deal price.
The resulting normalised EBITDA is the number that should anchor your valuation and inform the deal price.
Step 5: Capital Structure and Debt Review
Map the target’s full debt profile: bank borrowings, intercompany loans, hire-purchase obligations, and off-balance-sheet commitments such as operating lease liabilities under MFRS 16.
Review change-of-control provisions in existing loan facilities — some trigger early repayment upon a share transfer.
Review change-of-control provisions in existing loan facilities — some trigger early repayment upon a share transfer.
Step 6: Review of Financial Policies and Controls
Assess the robustness of the target’s financial controls, approval authorities, and accounting policies.
Weak controls in inventory valuation, revenue recognition, or procurement approval increase the risk that reported figures diverge from economic reality.
The audit and assurance team can assist in evaluating the adequacy of the target’s financial controls.
Weak controls in inventory valuation, revenue recognition, or procurement approval increase the risk that reported figures diverge from economic reality.
The audit and assurance team can assist in evaluating the adequacy of the target’s financial controls.
Step 7: Red Flag Identification
A structured FDD should produce a red flag log — issues requiring further investigation or deal structuring adjustments.
Common red flags in Malaysian M&A targets are set out in the section below.
Common red flags in Malaysian M&A targets are set out in the section below.
Step 8: FDD Report and Findings
The FDD report consolidates findings into an executive summary, detailed financial analysis, and a risk register.
It informs the pricing negotiation, representations and warranties in the Sale and Purchase Agreement (SPA), and any price adjustment mechanisms such as earn-outs or locked-box pricing.
For foreign buyers entering Malaysia, market entry advisory support can complement FDD with regulatory structuring advice.
It informs the pricing negotiation, representations and warranties in the Sale and Purchase Agreement (SPA), and any price adjustment mechanisms such as earn-outs or locked-box pricing.
For foreign buyers entering Malaysia, market entry advisory support can complement FDD with regulatory structuring advice.
Red Flags Malaysian Buyers Should Not Ignore
Structured FDD regularly surfaces the following warning signs in Malaysian M&A targets:
- Aggressive revenue recognition — income booked before delivery or services are fully rendered
- Aging receivables — debtors outstanding beyond 120 days with no adequate provision in the accounts
- Customer concentration — more than 30% of revenue from a single customer creates significant deal risk
- Related-party transactions — sales or purchases with connected entities at non-arm’s-length pricing
- Undisclosed LHDN arrears or open tax assessments not disclosed in the data room
Any one of these flags warrants detailed follow-up before finalising deal terms or signing the SPA.
Frequently Asked Questions
1. What is financial due diligence in a merger and acquisition?
Financial due diligence is a structured review of a target company’s financial health conducted by the potential acquirer.
It examines earnings quality, tax compliance, capital structure, and financial controls to determine whether the acquisition is commercially sound and at what price the deal should be structured.
It examines earnings quality, tax compliance, capital structure, and financial controls to determine whether the acquisition is commercially sound and at what price the deal should be structured.
2. How long does financial due diligence take in Malaysia?
For a straightforward private company, FDD typically takes two to six weeks, depending on data room completeness.
For larger or more complex targets — with multiple subsidiaries or cross-border operations — the process may take two to three months.
For larger or more complex targets — with multiple subsidiaries or cross-border operations — the process may take two to three months.
3. What documents are needed for M&A due diligence in Malaysia?
Standard documents include audited financial statements (three to five years), management accounts,
LHDN assessment notices, loan agreements, key customer and supplier contracts, and SSM statutory filings.
4. Is legal due diligence required alongside financial due diligence?
Yes. Financial and legal due diligence are complementary and should run in parallel for any material transaction.
Legal DD covers corporate structure, contracts, intellectual property, litigation exposure, and regulatory licences under Malaysian law, including the Companies Act 2016.
Legal DD covers corporate structure, contracts, intellectual property, litigation exposure, and regulatory licences under Malaysian law, including the Companies Act 2016.
5. Who conducts financial due diligence for M&A in Malaysia?
FDD is typically conducted by a licensed accounting or advisory firm with M&A experience in Malaysia.
The team should include professionals familiar with LHDN tax requirements, MFRS accounting standards, and the corporate governance requirements of the Companies Act 2016.
The team should include professionals familiar with LHDN tax requirements, MFRS accounting standards, and the corporate governance requirements of the Companies Act 2016.
Conclusion
Financial due diligence is not a formality in Malaysian M&A — it is the foundation on which a sound acquisition is built.
A structured eight-step FDD process helps buyers verify the target’s financial health, identify risks before they become liabilities, and negotiate deal terms from an informed position.
Whether you are a first-time acquirer or an experienced dealmaker, engaging advisers with deep Malaysian market knowledge and LHDN compliance experience significantly reduces the risk of post-acquisition surprises.
A structured eight-step FDD process helps buyers verify the target’s financial health, identify risks before they become liabilities, and negotiate deal terms from an informed position.
Whether you are a first-time acquirer or an experienced dealmaker, engaging advisers with deep Malaysian market knowledge and LHDN compliance experience significantly reduces the risk of post-acquisition surprises.
