How to check the company before buying?

Companies, much like real estate or vehicles, can be sold from one party to another. However, unlike real estate, discerning what exactly a company encompasses at a glance can be more complex. In these situations, enlisting a lawyer is crucial to avoid acquiring what may essentially be a 'cat in a sack.'

If you are confident about your decision and fully understand what you're buying, we're eager to assist in formalizing the deal and ensuring the proper state registration of changes. This article will elaborate on complex transactions and negotiations, particularly when clients are purchasing a company and need legal audit services.

Our firm provides such auditing and, importantly, takes charge of managing the company's re-registration process post-verification.

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What Are the Ways to Acquire a Company or an Established Business?

The most common methods of purchasing a company are:

1. Buying Corporate Rights. This is perhaps the most prevalent method for acquiring a company or a share in one. Here, a member sells their share to another individual, who then gains the corresponding rights of membership within the acquired share. It's crucial to remember that only an unencumbered share equivalent to the contributed charter capital can be sold, following the procedures and requirements set out in the Company's Charter. Thus, even for a partial purchase, it's advisable to conduct at least a minimal audit of the acquisition process to avoid future disputes. For instance, complications can arise if the seller is under execution proceedings, and their property is encumbered. In such scenarios, the sale of the share cannot be processed by the registrar.

2. Mergers and Acquisitions (M&A). The term “mergers and acquisitions,” or M&A, is quite popular in English. This process generally involves merging two companies under specific conditions. These procedures are complex, which is why such practices aren't as common in Ukraine.

3. Division/Separation of a Company Share and Its Sale. In cases where you negotiate the sale of a part of a company or a segment of its assets, a method used sometimes involves dividing the company into several distinct entities with different assets. For example, if you're looking to purchase a company with one factory while leaving another factory with the original company, the business can be split into two separate entities.

Scenarios where a comprehensive legal audit of a company is recommended:

• If the company is being bought for certain assets it owns that are of interest to the buyer.
• If an investor is considering investing in the company.
• If there are reasons to believe that there are internal issues within the company.
• In case of M&A, or company spin-offs.
• If sellers want to be assured of no legal complications in the deal.

Stages and Focus Areas for Legal Audits in Company Purchases

Legal audits primarily involve reviewing documentation and don't usually require physical site visits unless it's necessary to inspect specific assets like real estate owned by the seller.

The legal audit process typically includes the following stages:

1. Defining a clear set of questions and areas for review. The lawyer conducts the review based on the client's specified requirements.
2. Requesting documents from the Client.
3. Examining the documents and gathering information from public and other sources.
4. Conducting the audit, possibly involving additional experts.
5. Delivering the audit findings to the Client.

Areas typically examined by lawyers can be broadly categorized as follows:

1. Documents related to financial status, tax compliance, etc.
2. Corporate documents.
3. Documents pertaining to relationships with business partners.
4. Documents related to real estate, vehicles, and other assets owned by the seller.
5. Employee-related documents.
6. Information and documents regarding legal proceedings, enforcement actions, and other restrictions.
7. Other necessary documents and information as required.

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Engaging Additional Experts for Evaluating a Ready-Made Company

During an audit, it might become necessary to bring in additional experts to aid in the audit process. These experts are often accountants or certified auditors tasked with examining the company's financial statements and assessing its current financial health. However, depending on what's being audited, the need for other types of experts may arise.

In our experience, there was an instance where a client was interested in purchasing a company that owned a complete property complex. The client was particularly interested in this asset. However, during the documentation review and physical inspection of the property, we had suspicions about the legality of the property's documentation. We engaged a technical expert to verify the property against construction and operation standards. The seller's refusal to allow our expert access and to provide additional documentation ultimately led to the cancellation of the deal. It was later confirmed that the property complex indeed had legal complications.

Another case involved an audit of the LLC documents, which revealed personnel record discrepancies. By involving a professional HR specialist, we discovered numerous "ghost employees" who were receiving salaries without working, and several individuals with social benefits who would be difficult to terminate. Consequently, we advised the client to address these employment issues before proceeding with the purchase.

How Does the Client Receive the Conclusions of the Company Audit?

The conclusions of a legal audit conducted by a lawyer are typically presented in written form. If you're planning to purchase a company and require a comprehensive legal review to assess its dependability and uncover potential risks, our experts are prepared to provide you with qualified assistance. During the audit, we will meticulously assess the legal aspects of the company, answer your inquiries, and take into account the criteria you've specified.

In our report, you'll find not only responses to your questions but also an analysis of potential risks and recommendations for legally securing the transaction. Additionally, if requested, we can provide oral explanations and professional consultations.

With our services, you can rest assured that your audit will be conducted with a high standard of quality and attention to detail.

For information on the cost of a pre-sale company check, please consult with our specialists. The price will depend on the method of acquisition and other relevant factors.

You can also view the list of available ready-made companies, which don't require an audit.