With technologies and economies developing all the time, entrepreneurs are offered new business opportunities. All one needs to do in order to succeed is be the first to grasp those opportunities and “skim the cream off.” Having confirmed that a business model is successful in one country, businessmen are taking steps to scale up quickly and dominate large international markets before the competitors leverage their achievements.
Entering new markets always involves various legal issues, one of them being the traditional incorporation of a foreign company. Alas, not many countries let foreigners register their company quickly, and setting up a bank account might take months. Buying an operating foreign company is considered one of the ways to fast-track this stage. We at SBSB, as international legal advisors, often receive customer requests for the purchase of ready-made companies.
Business owners are willing to pay for the rapidity and the opportunity to avoid the banks’ lengthy KYC procedure, for the operating bank accounts and the company’s good standing. Buying an existing business, on the one hand, holds the promise of bypassing difficulties inevitably faced by those registering a company from scratch (theoretically this should help save time significantly) but on the other hand, this is a major risk associated with a number of pitfalls which we will cover in this article.
Buying an operating overseas company with an account already set up: future success of your business, or a utopia?
The services market is full of offers for the sale of ready-made (“shelf”) companies. There are even dedicated online services specializing in the sale of such companies. It is not surprising, as where there is demand, there is supply. Each specific entrepreneur decides on their own whether purchasing a foreign shelf company is feasible but everyone should be aware of the pitfalls this purchase may involve.
The main hidden hazard is time ― something one generally decides to buy an existing company for. At the first glance, a shelf company with an account seems a perfect option: it has already been registered, it has a bank account and a performance history which the future customers and partners are able to see. The devil is in the details! Firstly, it takes time to issue documents pertaining to the owner change, and this usually takes almost as long as the initial registration. Secondly, with new key persons at the company the bank accounts are blocked as a rule, and not transferred to new owners. To continue using the existing account one may spend the same amount of time and efforts that would be necessary to open a new account because to review the changes the bank will require the same documents and data as it does for a new account. And thirdly, one needs to take time to check the company chosen for the purchase in order to safeguard against inherent risks that will be further considered. The conclusion is quite obvious: buying an existing company does not necessarily save time ― an asset so valuable for businesses.
Another highly relevant underlying problem is outstanding debts incurred by most shelf companies. Outstanding obligations often come up after the company is transferred to the new owner. The most common examples are executory contracts made by the previous company owner and surety contracts concerning third party obligations (which are quite likely not to be performed in the future). As a result, you become responsible for all the debts incurred by this company.
One should also remember to consider the reputation of a ready-made company. Not only do unscrupulous owners often force their debts on new owners but also sell companies with a tarnished reputation. The previous owner might have done business unfairly and deceived their counteragents; in this case you could face multiple claims and even court actions against your new company.
Yet another disagreeable situation you may experience after re-registering the business in your name is bank account blockage or even closure. Suspicious banking transactions by the previous owner and a discrepancy between the company’s activities communicated to the bank earlier and its new activities are the most common cause of account closing. The new owner’s identity can be another reason for closing or blocking the account. Banks by no means always accept a new company profile with a new owner and account holder. And if the new company profile or owner is approved, the bank profile amendment procedure per se could take more time than the procedure of account opening for a new company, braking all business processes.
The major mistake made by most businessmen is buying companies from unverified agents. Many business owners presume that their experience will be sufficient to check the company they intend to purchase on their own. Unfortunately, with no experts involved and no thorough investigation performed, the chances of buying a “pig in a poke” and losing both time and money are extremely high. Holding an unscrupulous agent accountable is usually near impossible ― he or she will easily find another buyer and ten more afterwards because the demand for ready-made companies is stable and strong.
SBSB provides turnkey solutions for customer projects. We structure deals, plan taxes for our clients and support their businesses at every stage. Make sure you do business with reliable and reputable agents and consultants only.
Buying a shelf company with nominees: high risk area
The ready-made company market includes a specific segment where companies are sold along with the services of nominee founders and directors. Many businessmen are willing to pay more for a ready-made shelf company with the option of retaining the company’s nominee founder and director (especially if this allows concealing the actual beneficiary). If no changes are made in state registers or account signatories remain the same after the shelf company is purchased, it takes very little time to get the company operating ― advertisements promise that the operations could start even on the next day following the purchase. This seems a perfect picture for owners willing to maintain their confidentiality, launch the operations shortly and avoid risks in the event of any mishaps. But let us consider the flipside of buying a company with the nominee service.
Nominee directors are usually complete strangers or persons you do not know well. You can never be confident about their trustworthiness and honesty. Entrusting this person with your business you risk losing control over your assets. The nominee director, being the legal business owner, may visit the bank any time and withdraw funds from the account even without having your account passwords, the account de jure belonging to his/her company. The bank would never refuse a legal business owner (that being the nominee) in this kind of situation.
When buying a nominee service business, you expect confidentiality; but one should keep in mind that those using the nominee structure could easily face confidential information leaks and even deliberate transfer of such information to third parties. Not infrequently, the information regarding actual company owners (beneficiaries) is revealed at the time of making the deal for company purchase, and should any force majeure circumstances arise, the nominee will be able to provide government authorities with the data about you or your business, thus protecting themselves and relieving themselves of the liabilities.
Nominee director always means significant risks. He/she can interfere with the actual company operations and also damage your business’s and your brand’s reputation. Nominee owners often belong to disadvantaged and socially deprived groups, with the risk of debt collection always at hand. Moreover, nominees rarely work for just one company. They are not concerned about your business and cannot guarantee its safety.
How does one protect one's business when buying a ready-made foreign company?
Buying a shelf company can still be an efficient solution helping your business thrive in the future. However, there are multiple underlying risks as well.
Having decided to buy an operating successful business, stay reasonable. Conducting the due diligence of such companies is a must for this type of risky deals. It is best to let experts do the in-depth legal review and to refrain from the do-it-yourself approach. One should take extra care not only to check the company but the selling agent as well. Any businessman not experienced in international due diligence procedures will find it hard to verify the legal compliance and background of the company purchased. The checks should cover not only the company but also the previous owners, registrars and secretaries. Engaging professionals is essential! SBSB has the necessary resources to check business integrity and always warns its customers about any potential risks and issues.
There are legitimate legal instruments designed to minimize the risks inherent in buying shelf companies with the nominee service. One of those instruments is signing an adequate agreement for nominee services and having the nominee sign a trust declaration. Those instruments are not available in all countries but the actual owner can have appropriate protection with the necessary documents issued. The legal mechanisms of business protection against unlawful nominee actions may vary depending on the jurisdiction. Think twice about the consequences of your error before trying to safeguard yourself against nominee founders on your own. It is best to refer to professionals who will help you choose the right legal protection tools and prepare the documents you need.
Before taking the final decision regarding the purchase of a ready-made company you should think through the outcomes of lost control and other potential risks carefully, and consider all the pros and cons. You may find it more feasible to register a company from scratch. The registration process often takes the same time it takes to re-register a shelf company.
SBSB has immense experience in investigating international companies in various jurisdictions. Guided by your individual specifications and needs, we will pick the optimum solution for you and create an effective structure in as short a time as possible, helping your business avoid unnecessary risks.