Buying a business in Costa Rica
Is buying a business in Costa Rica a smart move? Or should you start one from scratch? If you plan to move to Costa Rica, you will need to create an income, right? But don’t worry, we will tell you exactly how to buy a business in this article.
I have started a number of businesses and I have run and taken over existing ones. Therefore, I can show a track record of 40 years of going on my face, as well as doing well. I have put 7 tips for starting a business in Costa Rica in a blog, maybe they can be of some help with your plans.
Buying a business in Costa Rica that is already a functioning enterprise might be a good option for you if you are planning for a new life in a different country. We always have some existing businesses in our inventory.
Of course, you can also learn from this blog about starting your own business without screwing up. What should you do? Let’s get right ahead with some tips that you might find useful when buying a business in Costa Rica.
If you want to start a new business, this checklist will give you a good idea of permits and licenses you may need in order to run a business. Save a lot of time and educate yourself. You can start by reading this article in full and also check the Doing Business website by the Worldbank.
We have some really interesting tips for you here. The best tip I can ever give anyone who wants to start a business in a new country is to learn Spanish, as much and as fast as you can. I hope you follow my recommendation. I can assure you that my life turned a lot easier when I learned Spanish after moving to Costa Rica almost 40 years ago. Here are 7 more tips for you:
1. Do your Homework first
There are many advantages to buying a business in Costa Rica over starting a new one. You only need to make sure you do your homework and then make an educated decision.
Do you have this great idea about bringing a new product or service that doesn’t exist here yet? Often a product or service that is common in other countries is not available here. You might be successful here with a product that has a proven market elsewhere. Or, you can go completely on your face with it.
This is where an experienced real estate agent comes in. You might be totally mistaken about the need for this kind of product. Costa Rica is a different country, with a different language and different people. You need to understand the market, which is where we come in. We’ve all been living here for a long time and understand the market. If you want to learn more about the differences between markets, a great read is “The Efficiency Trap” by my good friend Mark Denton.
If you think that you’re going to find bank financing for the business that you will start or purchase, you’re wrong. It won’t happen, read here why.
Until you are a legal resident and have built up some business credibility with a local bank, you won’t have access to financing. For that reason, buying a business in Costa Rica with some owner financing might be an option.
3. The right location
Make sure you’ll be buying a business in Costa Rica in the right location. it is important is that you connect with an experienced well connected real estate agent in that area. The red tape of starting up a new business from scratch might be worth saving the money, or maybe not. Read on if you want to know why.
Meanwhile, I invite you to check our inventory for a wide range of businesses for sale in Costa Rica. So you get an idea of what’s going on:
- Bed & Breakfast
- Cattle Farm
- Industrial business
- Restaurants and bars
- Retail stores
- Tourism business
- Commercial potential
4. Tips for buying an existing business in Costa Rica
Buying a business in Costa Rica that already exists, has many advantages. Particularly in terms of getting permits and licenses. Buying a business that already has all the permits and licenses, bypasses all the bureaucratic hassle. And Costa Rica has an amazing amount of it, especially when you don’t have an idea where to start.
Bypassing the permitting stage allows you to jump into your new lifestyle right away. Also, you know that the business is functioning at a certain level, with many policies and procedures are already in place.
Employees of an existing business already know what they need to do. While starting a new company with people will not be so easy, even if you speak Spanish. This allows you to concentrate on improving the business and avoid many common start-up problems.
If you are looking for a sound investment, Costa Rica has a lot to offer. But you need to do your due diligence and take precautions. There are quite some common pitfalls you can avoid. Buying a business in Costa Rica that is already functioning might be the solution for you.
5. New or Existing Corporation?
Any business should be managed formally through a legally registered corporation. Although, if the business is really small, you can do it as a PYME. Often, the first decision is whether to buy the corporation’s stock or to just purchase its assets and bring them into a new corporation. Buying the stock and take over the corporation and place of business might seem smart. By taking over a corporation you might also be buying some hidden liabilities not shown on the corporate books.
Although you would not be personally responsible, your investment could be at risk.
You may want to protect yourself by buying only the assets of the corporation and not the corporation. In Costa Rica’s commercial code there is a clearly specified procedure for purchasing all the essential assets of a business. Including trademarks and clients.
Unfortunately, starting a new corporation is a lengthy process. All permits must be reapplied for in the name of the new corporation with no guarantee of success. Therefore as a practical matter, most people tend to purchase the corporation’s stock.
Talk to your attorney about your options here and which way is the best way for your specific business. There are different options for corporations. Your decision should depend on if you’re on your own or if you’ll have partners in the new venture.
6. Checklist for evaluating an existing corporation
This is more practical but carries some risks. You purchase the company’s stock, so the business continues as usual. But you must evaluate many factors:
- How honest does the seller seem and how clear are the books?
- Are they realistic in terms of business in Costa Rica?
- How difficult will it be to tell clients and suppliers of the changes?
- Is the lease agreement in the name of the existing corporation?
- What about any vehicles that come with the business?
- Is all the equipment owned by the corporation?
You should carefully review the following records when buying a business in Costa Rica:
Public legal corporate records
Review the recorded articles of incorporation, bylaws, type and amount of capital stock, and powers of attorney. You should have a knowledgeable, local, attorney specializing in corporate law check these.
Private legal corporate records
Review current stock ownership, possible pledges, and stockholder and board resolutions not on public record. The same attorney can check these items.
Check the financials. These records should clearly show the true income and expense situation. They should show fixed and liquid assets, intangibles such as a business name, and short-and long-term liabilities. This accounting should also include the mandatory tax accounting books with updated information. A certified public accountant (CPA) licensed in Costa Rica should check these items for you.
Business Tax Situation
You don’t want to purchase a business that owes taxes, do you? This includes yearly income tax, corporate tax, property tax, monthly sales taxes, and hotel lodging tax (if applicable). All vehicles pay road tax and RITEVE.
Also, the municipal taxes and commercial license fees. Local municipal charges for services such as waste removal, street lighting, and street cleaning. A certified public accountant licensed in Costa Rica should check all these items.
Permits and Licenses
All businesses need a health department permit (Patente de Salud) and a municipal business license (Patente Municipal). These should be valid for the current business name and activity.
Also be aware of special licenses according to the kind of business, including but not limited to: the sale of liquors; permit for late hours functioning; registration with the Tourism Board for lodging tax; and recognition of a tourism quality restaurant (if applicable). An attorney should check these permits.
The business you are buying has employees? Are there any written contracts specifying employee particulars with responsibilities and salaries? You want to check on up-to-date social security, workers insurance by INS, and worker’s compensation insurance payments.
In Costa Rica, it is best to insist on payment of benefits (mandatory vacation, Christmas bonus, and severance pay) accrued by the employees to the date of closing. Then you can start with the same employees on a 3-month trial basis.
A certified public accountant licensed in Costa Rica should check these.
My recommendation: don’t get rid of any employees, it will hurt your business. Try them first, then start filtering out the good and the bad ones.
Property title and plot map studies
Ascertain that the property (if included in the sale) is recorded in the name of the corporation, as well as checking for the presence of liens, encumbrances, mortgages, and judicial claims. The recorded measurements on the property title should agree with the actual measurements on-site.
A real estate attorney in conjunction with a topographer/surveyor can verify these items.
In case the property is rented, check whether the lessor is the current owner of the business, the conditions for use of the property, and the rental payments and possible increases. If you want to change the agreement through a new corporation, be aware of changes in the zoning restrictions.
The buyer should take into account that tenancy law excludes the possibility of conveying the lease without the written consent of the owner. This probably implies renegotiation of the contract terms, check with your lawyer.
In the case of a business located within a state-owned shoreline area (zona maritima-terrestre), it is necessary to review the government lease contract and what constitutes compliance with its terms. A Costa Rica real estate attorney can verify these items. If you need to rent a commercial space for your business, we’d love to assist you.
It must be clear that all furniture, equipment, and so on belong to the business corporation, free of pledges and other encumbrances. Check the inventory that is on the books.
Utilities (Water, electricity, and telephone)
Check to ensure that billing of the utilities is up to date and is in the name of the corporation, or at least of the current property owner (in the case of a lease).
Special attention must be paid to the telephone line(s), which in Costa Rica constitute a separate right subject to formal conveyance recording at the state Telephone Company.
7. Protection when you purchase
Your Costa Rican attorney can attempt to provide some protection by including certain clauses in the purchase contract. The seller can guarantee the disclosure of all corporate liabilities. And the buyer, when paying in installments, has the right to withhold payments if undeclared liabilities are discovered. This is what we recommend for a safe and secure business deal, even in case of a cash purchase-sale agreement.
Some situations may call for a deposit of part of the purchase price with a trustee for a certain amount of time to guarantee the performance of any remaining obligation on the part of the seller. The seller should always promise in writing to refrain from starting, purchasing, managing, or in any way participating in a similar business in the same area.
Feel free to contact us if you are looking into buying a business in Costa Rica.
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