Basic due-diligence when buying Russian companies
(I) Authority of the person entering into the agreement
Ownership is verified using the incorporation documents and various extracts – from the Unified State Register of Legal Entities for legal entities (LLCs, JSCs, etc.). It is important that the owner is listed as a founder or participant (for LLCs) or as the owner of a certain number of shares (for JSCs).
If the business is being sold not by the owner under a power of attorney, for example by the director general, check that it is notarized and issued by the founder or sole shareholder of the company. The power of attorney must be carefully reviewed, especially the validity period and the scope of authority, and also check whether it has been revoked.
(II) Compliance with the articles of association when entering into the agreement
If you are acquiring an LLC or JSC, carefully study the memorandum of association and the charter. It is easiest when the founder or participant in the company owns 100% of the shares – they are the sole shareholder.
If there are multiple participants (co-owners) in a business, you will need to obtain consent for the sale from the other owners and follow the share purchase/sale procedure, unless all participants are selling their shares at once.
When the share is sold by one of the participants review the procedure for the relevant transaction in the company’s charter. Sometimes this is only possible after obtaining consent from the other participants, and sometimes the share cannot be sold to a third party; it can only be sold to the participants themselves or to the company.
To verify the size of the seller’s share in the company, look at the extract from the Unified State Register of Legal Entities.
(III) Property rights and potential problems and risks associated with them (encumbrances, seizures)
Check the documents for the property (premises, equipment, vehicles, goods, etc.) that the business owner may own, lease, or use.
Find out: the terms of the lease (sublease), rent or use agreements; the terms specified in all agreements; any encumbrances; special terms of all agreements; amounts of payment specified in all agreements, any outstanding debts, penalties, etc. at the time of sale.
Please note that if any property is registered not in the company’s name but in the owner’s name (for example, in the case of a sole proprietorship), the transfer of ownership, lease, rent or use will need to be formalized in separate transactions.
(IV) Financial position of the business, presence of debt
Start by reviewing the declarations and reports for previous periods (P&L, cash flow statement, balance sheets and annual balance sheets, reports to the Social Fund, etc.).
Pay attention to the following indicators: turnover for the quarter, half-year, and year; profit and loss; tangible and intangible assets, their amounts; presence of accounts payable and accounts receivable.
It is best to have such documents reviewed by a specialist (an accountant or economist).
Request a certificate of obligations fulfillment to pay taxes, fees, penalties, fines, and interest. This is issued to the company representative or entrepreneur (the seller of the business) by the tax authority and reflects the status of all settlements on mandatory taxes and payments at the time the certificate is generated.
You can check the status of bankruptcy and arbitration cases, assess capital and loan dependence, and analyze the company’s credit history using the SberRating service from SberBusiness.
(V) Litigation, enforcement proceedings with bailiffs
By the TIN, OGRN, or company name, and the entrepreneur’s full name, you can review case files in courts of general jurisdiction: for example, in the GAS RF “Justice” system and in arbitration courts. Check courts in all regions, not just the one where your business is located. You can also check the company or entrepreneur for outstanding debts using the bailiffs’ database.
Analyze the number of court cases over the past period (for example, a year or two). If there are many, it’s likely that some processes within the company are not functioning properly, meaning there may currently be outstanding debts and claims for which legal proceedings have not yet been initiated.
Understanding the existence of debts, their amounts, and the repayment process is important, as the company and entrepreneur are liable for all debts with their assets. If a property purchase or sale transaction is concluded during the debt collection period, the consequences can be unpleasant, including the transaction being declared invalid.
(VI) Personnel documents and bylaws (regulations and orders for the organization, which are required by law)
Personnel documents will explain the terms of employment of employees, as well as whether there are relationships with self-employed individuals, individual entrepreneurs, and contractors under service contracts (GPC).
Request and review key local regulations: remuneration regulations; internal work regulations; job descriptions; occupational health and safety and fire safety documents.
It is especially important to review these documents if the company is engaged in specialized or licensed activities, requires special working conditions, or requires the adoption of special, additional occupational health and safety measures. Examples being: work is carried out using chemicals, on dangerous machines or at heights (for companies providing industrial mountaineering services).
(VII) Licenses, Permits, Patents
If you’re planning to buy a business that requires a license or permit, check their availability and current status. You can do this on the website of the agency that issues such licenses or permits. For example, you can check whether a store has a license for the retail sale of alcoholic beverages on the Rosalkogoltobakkontrol website.
Ask the business owner for copies of their licenses and check their status (current, suspended, or revoked) and expiration date. Obtaining a new license can be time-consuming and cost you significant profits.
Pay attention to intellectual property rights and trademarks, especially if they are important to your specific business. For example, a company sells a unique product developed under a patent or under a registered trademark.
Inquire about: how are the rights to the product registered? are the trademarks or trade names registered? who owns them? what is the remaining registration and use period according to the documents? what are the terms of the transfer or sale?
(VIII) Contracts with suppliers, clients, and employees
These should be requested from the seller to assess the terms, duration, and transferability of these contracts. For employee contracts, it’s important to check how they are structured: according to the Labor Code of the Russian Federation or whether they operate as self-employed or individual entrepreneurs. It’s also a good idea to personally speak with employees, clients, and suppliers to learn more about the seller and their experience working with the company you plan to purchase.
In addition to the documents, conduct a technical inspection of the equipment to ensure everything is working properly.