Navigating the Purchase: An Ecuadorian Lawyer's Due Diligence Checklist for Buying a Business in Cuenca

As an Ecuadorian Lawyer based in the heart of Cuenca, I have guided countless expatriates through the complexities of acquiring an existing business. The allure of this UNESCO World Heritage city is undeniable, but the path from entrepreneurial dream to legally sound ownership is paved with critical legal checkpoints. Buying a business is not just a financial transaction; it's an assumption of history, obligations, and potential liabilities. A superficial review is a direct path to costly future disputes.

This guide provides a comprehensive due diligence checklist, grounded in Ecuadorian law and my direct experience, to ensure your investment is secure, compliant, and poised for success.

Why Legal Due Diligence is Non-Negotiable

Legal due diligence is the systematic investigation of a target business to verify its legal and regulatory standing. In Ecuador, this process uncovers hidden risks tied to corporate records, tax compliance, labor obligations, and litigation. A failure here can expose you to everything from crippling fines from the SRI (Ecuador's tax authority) to inheriting years of unpaid social security contributions. Our objective is to arm you with the specific knowledge required to scrutinize every crucial document and legal status.

The Foundational Steps: Initial Document Scrutiny

Your investigation begins with a formal request for the business's core legal and financial identity documents.

Core Business Identity Request:
- Official Name and RUC: Demand the full legal name (Razón Social) and its Registro Único de Contribuyentes (RUC) number. The RUC is the unique identifier for all tax and legal purposes.
- Corporate Structure: Confirm the entity type. Is it a simplified corporation (Sociedad por Acciones Simplificada - S.A.S.), a limited liability company (Compañía de Responsabilidad Limitada - Cía. Ltda.), or a corporation (Compañía Anónima - C.A.)? Each has vastly different rules for ownership transfer. For instance, transferring participation in a Cía. Ltda. requires a public deed and unanimous consent from all partners, as stipulated in the Ley de Compañías, whereas transferring shares in an S.A.S. is a simpler private process.
- Registered Business Activities (Objeto Social): Obtain the company's bylaws (Estatutos) to verify its legally permitted activities. These must align with your operational plans.
Preliminary Financial Health Check:
- Request the last three years of financial statements and tax declarations filed with the Servicio de Rentas Internas (SRI). This provides a crucial financial context for the legal liabilities you are about to investigate.

The Core Legal Due Diligence Checklist

Here, we dissect the critical legal areas that demand your unwavering attention.

1. Corporate and Registration Compliance

This confirms the company's legal existence and authority to operate.

Company Bylaws (Estatutos): Review the complete, notarized, and registered bylaws. Verify the governance structure, management powers, and any clauses restricting the sale of shares or participations.
Certificado de Existencia Legal y Cumplimiento de Obligaciones (Legal Existence and Compliance Certificate): This is your most critical starting point. You must obtain two separate certificates from the Superintendencia de Compañías, Valores y Seguros ("Supercias"):
1. Certificado de Existencia Legal y Representación Legal: This official document, which currently costs approximately $6.38 to obtain online, confirms the company legally exists, lists its legal representatives (e.g., General Manager), and specifies their powers. This verifies you are negotiating with someone who has the legal authority to sell.
2. Certificado de Cumplimiento de Obligaciones: This confirms the company is up-to-date with all its required filings, reports, and payments to the Superintendency itself. A company can be legally existent but non-compliant, which is a major red flag.
Shareholder and Board Meeting Minutes (Libro de Actas): Review the minute books to identify major corporate decisions, previous share transfers, capital increases, or unresolved shareholder disputes that could impact your acquisition.

2. Tax Compliance with the SRI

Tax liabilities are inherited. This area must be pristine.

Certificado de Cumplimiento Tributario (Tax Compliance Certificate): This certificate from the SRI is mandatory. It serves as official proof that the company has no outstanding tax debts. Do not proceed without a current and valid certificate.
Tax Returns (3-5 Years): Scrutinize all Impuesto a la Renta (Income Tax) and Impuesto al Valor Agregado (VAT/IVA) returns. Cross-reference them with the financial statements. Discrepancies may indicate unreported income or other irregularities.
SRI Audits: Formally ask the seller to declare, in writing, if the business has undergone any tax audits (procesos de determinación tributaria) by the SRI. If so, you must review the final audit reports and confirm that any assessed fines or additional taxes have been fully paid.

3. Permits, Licenses, and Regulatory Compliance

A business without the correct permits is merely a collection of assets.

Permiso de Funcionamiento (Annual Operating Permit): Every business in Cuenca needs this permit, issued by the Municipality. It’s often a two-part process involving inspections from the Fire Department (Cuerpo de Bomberos) and the municipal control directorate. Verify it is current for the present year.
LUAE (Licencia Única de Actividades Económicas): This is the integrated municipal license. Ensure it is valid and that the activities listed precisely match the business's operations.
Hyper-Specific Cuenca Detail: Historic Center Compliance. If the business is located in El Centro Histórico, it is subject to strict regulations from the Dirección de Áreas Históricas y Patrimoniales. A common and costly mistake is assuming a standard LUAE is sufficient. You must verify additional permits related to signage (rótulos), façade alterations, and even permitted operating hours. An unapproved sign or renovation can lead to municipal fines and orders to undo the work at your own expense.
Sector-Specific Licenses: Businesses in food service, health, or tourism require specific permits from national agencies like ARCSA (Agencia Nacional de Regulación, Control y Vigilancia Sanitaria) or the Ministry of Tourism. Confirm these are active and transferable.

4. Labor Law and Social Security (IESS) Compliance

Employee-related debt is one of the most common and dangerous hidden liabilities.

Employment Contracts (Contratos de Trabajo): Review all contracts and ensure they are registered on the Ministry of Labor's SAITE platform, as required by law.
Certificado de Cumplimiento de Obligaciones Patronales (Employer Obligations Compliance Certificate): This certificate from the Instituto Ecuatoriano de Seguridad Social (IESS) is non-negotiable. It confirms the business is current on its social security payments for all employees.
Expert-Level Check: A basic certificate isn't enough. An experienced lawyer will also check the IESS system for pending glosas (audits or fines) or unresolved issues with employee registration/termination notices (avisos de entrada y salida). A previous employee who was improperly terminated can resurface years later with a valid legal claim against the company—and therefore, against you, the new owner.
Severance Provisions (Liquidaciones and Actas de Finiquito): Verify that all former employees have been paid their full legal severance and that a notarized and Ministry-registered Acta de Finiquito exists for each. This document is the legal release from future claims.

5. Contracts, Debts, and Litigation

Key Contracts (Suppliers, Clients, Leases): Review all major contracts. Pay close attention to assignability clauses. Does the contract allow for it to be transferred to a new owner, or does it require the third party's consent? For a commercial lease, landlord approval is almost always required and should be secured in writing before closing.
Litigation Search: A thorough search must be conducted on the national judiciary's online system (e-SATJE) using the company's RUC and the legal representative's ID number to uncover any pending lawsuits. Relying solely on the seller's word is insufficient.

⚠️ Legal Alert: When to Stop and Re-evaluate

The due diligence process is designed to find problems. You must halt negotiations and consult your attorney if you discover:

The seller cannot produce a valid Certificado de Cumplimiento de Obligaciones from both the Supercias and the IESS.
There are significant discrepancies between financial statements and SRI tax filings.
The business is operating without a current LUAE or essential sector-specific permits.
There are pending lawsuits or unresolved labor claims (juicios laborales).
Key leases or client contracts are not assignable to a new owner.

At this point, these issues must be either resolved by the seller before closing, or the purchase price must be significantly renegotiated to account for the financial risk and cost of remediation you will inherit. In some cases, the wisest move is to walk away.

Structuring the Purchase Agreement

Your findings from due diligence directly inform the purchase agreement. The agreement must clearly distinguish between an asset purchase (compraventa de activos/establecimiento de comercio) and a share purchase (cesión de acciones/participaciones). A share purchase means you acquire the entire legal entity, including all its known and unknown liabilities. An asset purchase can be structured to leave certain liabilities behind with the seller.

The agreement, which must be drafted by an Ecuadorian lawyer, must include:

Representations and Warranties: Legally binding statements from the seller confirming the truthfulness of the information provided (e.g., "the company has no outstanding tax debts").
Indemnification Clause: A clause obligating the seller to compensate you for any losses arising from breaches of their warranties (e.g., if a pre-existing liability surfaces after the sale).
Conditions Precedent: A list of conditions that must be met before the closing is finalized, such as obtaining landlord consent for a lease transfer.

Conclusion

Acquiring a business in Cuenca is a deeply rewarding venture when built on a foundation of rigorous legal due diligence. This checklist is your roadmap to uncovering risks and ensuring compliance. By methodically verifying each point, you transform a potentially speculative purchase into a secure, legally sound investment, allowing you to focus on what comes next: growing your business in this magnificent city.