Post image for Purchase of a Business Has Its Own Challenges

Purchase of a Business Has Its Own Challenges

by Garland M Baker on October 17, 2005

Most people believe selling a business in Costa Rica is like selling a piece of real estate. This is not true. There are other factors to consider and special rules that apply to the sale of a business.

Two different situations may arise: The business may or may not be part of a real estate transaction. However, the business sale part of the deal does not differ much between the two cases.

Normally, a business operates from a company structure like a sociedad anónima (S.A.), similar to what is called a corporation in the United States or as a sociedad de responsabilidad limitada (S.R.L.), comparable to a limited liability corporation.

When the business is in one of these company types, transferring the entity is as simple as transferring its stock shares to a purchasing party. The new owners change the board of directors in the case of a S.A. and the managers in the case of a S.R.L. Then they restructure any clauses of the original constitution to suit their special needs.

This custom of transferring shares to change ownership is very commonplace, but dangerous. It is great for the seller but not safe for the buyers. Credit instruments like prendas, referred to in English as chattel mortgages, letras, known as letters of exchanges, and pagarés or promissory notes live on for four years even after a closing. These documents are usually undeclared or forgotten skeletons for which the purchaser is responsible.

Other obligations like bills to creditors, payroll withholding responsibilities, employee social benefit liabilities, and taxes all live on past a transfer of a corporation to a new owner. Each of these items has a different statute of limitation.

It is much better to setup a new organizational structure, fresh and clean, to hold the business that will be purchased. A must is to have an agreement with the current owners to legally liquidate all employee liabilities and close the old company with the Dirección General de Tributación. Tributación is Costa Rica’s tax authority, similar to the Internal Revenue Service or Revenue Canada.

In addition, a buyer must remember that an operating business is composed of many different physical elements, such as furniture, telephones, merchandise, documents and computers, as well as non-physical things like patents, commercial licenses, brands, intellectual property, clients and goodwill. Hacienda in Spanish is the word used to describe the totality of physical and intangible components that make up a business, and the word aviamiento describes goodwill.

Sometimes it is just impractical to transfer all that makes up a running business to a new company structure, especially when the business is large. The new owners want to keep the good credit history, the operating bank accounts and the contracts with customers and suppliers. These assets many times outweigh the downsides or the skeletons potentially lingering in the closet.

The secret is to use Chapter III, Articles 478 to 489 of Costa Rica’s Code of Commerce. These articles cover the Compra-Venta de Establecimientos Mercantiles e Industriales or the purchase-sale of mercantile and industrial establishments and offers specific rules and regulations to manage the transactions.

The most important and interesting of Chapter III and its articles, is the surety bond or performance bond required by law to protect both parties. The bond, deposited with a notary for 15 business days after the publication of a business transfer to another party, guarantees the correct transfer of licenses and other assets involved in this kind of deal.

Buying and selling a business in Costa Rica holds its own set of challenges apart from the challenges of real estate transactions. The same rule applies. Tread cautiously. It is better to work with individuals who have a track record in overseeing the sale of businesses. These do not necessarily have to be lawyers. Most lawyers in Costa Rica do not know much about business transfers.

{ 1 comment… read it below or add one }

Garland Baker November 17, 2005 at 5:36 pm

Dear Craig Hansen,

I have replied to your message via email. Garland.

Reply

Leave a Comment

Previous post:

Next post: