10 Deal Breakers in Malaysian M&A (and How to Avoid Them)

In fifteen years of Malaysian M&A advisory, I have seen more deals fail in due diligence than at any other stage of the process. Not because the businesses were bad — many were genuinely good businesses. They failed because issues that were either known to the seller and not disclosed, or unknown to the seller because no one had looked, emerged in due diligence and were either price-changing or deal-ending.

Most of these issues are preventable. A seller who conducts a pre-sale vendor due diligence — reviewing their own business through a buyer's eyes — will find and address these issues before going to market. A buyer who knows what to look for will assess these risks appropriately and price or negotiate accordingly. Here are the ten issues that most commonly kill deals in Malaysia.

1. Tax Arrears or Disputes with LHDN

Outstanding assessments, disputed tax positions, or unfiled returns with LHDN (Inland Revenue Board) are among the most common financial deal breakers. The liability is often larger than the seller realises: LHDN charges both the principal tax and penalty interest, which accrues at 10% per annum on outstanding assessments.

In due diligence, buyers request LHDN clearance certificates or tax compliance certificates for the last three years of assessment. If these cannot be obtained cleanly, the liability must be quantified and either settled before completion or escrowed against a specific indemnity in the SPA.

What sellers should do: Obtain a current LHDN tax compliance status before going to market. Engage a tax advisor to review the last three years of corporate tax returns and identify any positions that could be challenged. If there are outstanding assessments, resolve them — the cost of resolution before a deal is almost always less than the discount a buyer will apply for the uncertainty.

2. Undisclosed Contingent Liabilities

Contingent liabilities — potential obligations that may or may not crystallise — are by definition uncertain, but they are not invisible. They include: pending litigation (employee claims, supplier disputes, customer claims); regulatory investigations; environmental remediation obligations; and bank guarantees or letters of credit that could be called.

The legal due diligence will require a legal opinion from the target company's solicitors confirming that there are no material pending or threatened claims other than those disclosed. If the seller's lawyers are not aware of a claim that subsequently emerges, it becomes a warranty breach.

3. Key Person Dependency

When the business is effectively one person — the founder and owner — its value is a function of that person's continued involvement. A buyer acquiring a business where all client relationships are held personally by the seller, where operational decisions cannot be made without the seller's sign-off, and where the seller has no intention of working for the buyer post-completion faces a severe transition risk.

In due diligence, buyers test this by speaking to the second tier of management without the owner present and by reviewing: who signs supplier contracts, who authorises payments, who manages the top ten customer relationships, and whether the business has ever operated for more than a week without the owner present.

The solution is not to pretend the dependency does not exist — buyers will find it. The solution is to reduce the dependency before going to market, and to structure the deal so the seller remains engaged during a transition period (typically 6–24 months).

4. Lease Expiry Within 12 Months

For retail, F&B, or any location-dependent business, a lease expiring within 12 months of the proposed completion date is a critical risk. The buyer acquires a business whose primary operating asset — the location — is at the landlord's discretion. The landlord, who now knows there has been a change of ownership, is in a strong negotiating position.

Sellers should negotiate lease renewals as early as possible in the exit preparation process. A minimum of five years remaining lease term (ideally with a five-year renewal option) eliminates this as a due diligence risk. If you cannot secure a renewal before the sale process, be transparent about the status and have a realistic plan to present to buyers.

5. Bumiputera Equity Requirement Not Maintained

In regulated sectors with equity conditions, the failure to maintain the required Bumiputera equity stake — either because shares were transferred without approval, or because the requirement was not actively monitored — creates a compliance breach that may affect the validity of operating licences.

This is particularly acute in sectors where the licence is central to the business (financial services, certain healthcare sub-sectors, telecommunications). A buyer acquiring a business that is operating in breach of its licence condition faces both regulatory exposure and the prospect of licence revocation.

Conduct a licence audit before going to market and ensure all equity conditions are currently met and documented.

6. Opaque Related-Party Transactions

Related-party transactions — purchases from or sales to entities connected to the seller — are not inherently problematic. Many family-owned businesses legitimately transact with related entities. The problem arises when the pricing is not at arm's length, the relationships are not documented, or the transactions are not disclosed.

Common patterns: buying raw materials from a supplier in which the owner has a 30% stake at above-market prices; paying rent to a property company wholly owned by the owner's spouse at above-market rates; paying management fees to a related holding company without a formal services agreement.

When these are discovered in due diligence, they raise three concerns: the EBITDA is overstated (because costs are inflated); the business's true profitability is obscured; and governance standards are inadequate. Buyers will price all three risks. Sellers should document all related-party transactions, confirm pricing is at arm's length, and be prepared to provide detailed explanations.

7. Unaudited or Qualified Audit Reports

Three years of audited accounts is the standard buyer requirement. If any year's accounts are unaudited, the buyer is relying entirely on management representations for that period. If the audit contains qualifications — the auditor has stated they are unable to confirm a material element of the accounts — the qualified item is a due diligence finding that must be resolved.

Common audit qualifications in Malaysian SMEs: going concern qualifications (where losses have eroded equity); inability to confirm stock counts (common in businesses without systematic inventory management); and related-party disclosure qualifications.

An unqualified, clean audit for three consecutive years is a significant signal of quality and reduces the due diligence risk premium that buyers apply to your multiple.

8. Environmental Liabilities

For manufacturing, agricultural, processing, or logistics businesses, environmental liabilities can be material and are often not visible in the financial statements. They include: contaminated land requiring remediation; historic waste disposal breaches; water pollution incidents; and failure to maintain required DOE (Department of Environment) approvals.

Environmental liabilities are potentially unlimited in scale — remediation costs can exceed business value in severe cases. Buyers in asset-heavy businesses should request a Phase 1 environmental assessment (site investigation) as part of due diligence. If the assessment recommends a Phase 2 (actual soil and groundwater sampling), commission it.

Sellers who are aware of environmental issues should obtain an engineering assessment of remediation costs and either address the issue pre-sale or price the liability into their expectations.

9. Unrealistic Seller Valuation Expectations

This is a deal breaker of a different kind — not a financial or legal issue, but a negotiating reality. When a seller's valuation expectation is so far above what the market will pay that there is no basis for a constructive negotiation, experienced advisors will tell you there is no transaction to be done.

In the Malaysian market, common causes of unrealistic expectations include: comparing to high-multiple international transactions that are not comparable (a listed US SaaS company at 20x ARR is not comparable to a Malaysian IT services firm); applying a premium for emotional attachment (the 30 years the founder has invested in the business); and using gross revenue rather than EBITDA as the base.

The remedy is a credible, market-based independent valuation before the process begins — not to tell the seller what they want to hear, but to set expectations against comparable transaction evidence.

10. Undisclosed Regulatory Non-Compliance

Operating without a required licence, with an expired permit, without the required SSM filings, or in contravention of employment law obligations creates regulatory liability that a buyer will either have to remediate post-completion or that constitutes a representation breach in the SPA.

A compliance audit — systematically reviewing all regulatory requirements applicable to the business and confirming current compliance — should be conducted as part of pre-sale preparation. Items to check: all operating licences current; SSM annual filings up to date; EPF and SOCSO contributions current; employment contracts and records in order; relevant industry-specific approvals (Halal, food premises, MOH approvals) current.