Uncovering Hidden Liabilities: A Cuenca Expat's Guide to Purchasing an Existing Business

Purchasing an existing business in Ecuador, particularly here in the vibrant city of Cuenca, presents a compelling opportunity for entrepreneurs. The allure of an established client base, operational infrastructure, and a tangible revenue stream is undeniable. However, beneath this appealing surface lies a complex web of hidden liabilities that, if left undiscovered, can transform a promising venture into a costly legal and financial quagmire. As an Ecuadorian lawyer with extensive experience guiding foreign investors in Azuay province, I’ve witnessed firsthand the pitfalls that await the unprepared. This guide moves beyond generic advice to provide a meticulous, expert-driven roadmap for conducting thorough due diligence and securing your investment.

The Allure and the Danger: Why Due Diligence is Non-Negotiable

The Ecuadorian legal system aims to protect all parties in a transaction, but the onus of discovery—the due diligence—falls squarely on the buyer. Unlike acquiring a new asset, an existing business carries a history that is legally attached to it. This history includes contractual obligations, tax debts, labor disputes, and regulatory infractions that can transfer to the new owner, depending on how the sale is structured. Ignoring this is the single most catastrophic mistake an expat investor can make.

The Legal Framework: Key Ecuadorian Legislation

Your due diligence must be grounded in a firm understanding of the governing laws. A superficial review is insufficient; you must know which specific articles and entities hold the answers you need.

The Civil Code (Código Civil): Governs the fundamental principles of contracts and obligations. The structure of your contrato de compraventa (sale and purchase agreement) will be dictated by its provisions.
The Companies Law (Ley de Compañías): Essential if you are buying a registered company (e.g., a Compañía de Responsabilidad Limitada, Cía. Ltda. or a Sociedad Anónima, S.A.). You must verify the company's status with the Superintendencia de Compañías, Valores y Seguros (SUPERCIAS) to ensure it is "Activa" and not "En liquidación."
The Labor Code (Código del Trabajo): This is a critical area for hidden liabilities. Article 95 of the Labor Code establishes the principle of sustitución de empleador (substitution of employer). This means that even in an asset sale, if the business continues to operate, the new owner inherits the labor obligations, including seniority, of all existing employees. This is a non-negotiable legal reality that many foreign buyers misunderstand.
The Tax Code (Código Tributario) & Organic Law of the Internal Tax Regime (Ley Orgánica de Régimen Tributario Interno - LORTI): These laws govern all tax obligations. The Servicio de Rentas Internas (SRI) is the primary entity, and its records are paramount.
Municipal Ordinances (Ordenanzas Municipales): In Cuenca, the GAD Municipal de Cuenca has its own set of rules. The most important permit is the Licencia Única de Actividades Económicas (LUAE), which consolidates several permits, including the operating license (Patente Municipal) and fire department inspection. A business operating without a valid LUAE can be shut down immediately.

A Step-by-Step Due Diligence Process for Expats in Cuenca

Navigating Ecuadorian bureaucracy requires a structured, meticulous approach. Follow these steps precisely.

Step 1: Preliminary Investigation and Document Gathering

Before committing funds, begin with a comprehensive request for information.

Corporate Documents: Request the escritura de constitución (deed of incorporation), any amendments, and the nombramiento (appointment) of the current legal representative, duly registered. Verify these documents against the public records on the SUPERCIAS website.
Financial Records: Demand financial statements for the last 3-5 years, audited if available. Also request the company's Registro Único de Contribuyentes (RUC) to verify its tax status and registered activities with the SRI.
Operational Overview: Understand the business model, key suppliers, and customer contracts. Ask for copies of the most significant agreements.

Step 2: Financial Due Diligence – Unearthing Monetary Skeletons

This is where a qualified local accountant is indispensable.

SRI Tax Compliance: Do not accept a simple printout from the seller. You or your representative must obtain an official Certificado de Cumplimiento Tributario directly from the SRI. This certificate confirms that no outstanding tax declarations or debts exist. A common mistake is only checking the company's RUC; you must also verify the tax status of the legal representative, as personal liabilities can sometimes encumber a business.
Accounts Payable and Receivable: Scrutinize the age of all accounts. Are receivables realistically collectible? Are there overdue payables that could trigger lawsuits from suppliers?
Debt and Lien Review: Obtain a complete list of all loans and credit lines. A crucial, often-overlooked step is to check for liens against the company's assets or legal prohibitions against the owner at the Registro Mercantil. This simple check costs approximately $15 and can reveal if the company's assets are pledged as collateral.

Step 3: Legal and Regulatory Compliance Check

This phase ensures the business can legally operate tomorrow as it does today.

Licenses and Permits: Demand to see the current, paid LUAE. In Cuenca, this is a non-negotiable document. If the business handles food, verify the ARCSA (Agencia Nacional de Regulación, Control y Vigilancia Sanitaria) permits. An expired permit isn't a small issue; it's a reason to halt operations and can involve significant fines to reactivate.
Contractual Obligations: Review every significant contract, especially property leases. Look for clauses related to transferability (cesión de contrato), automatic renewal, and penalties for early termination.
Intellectual Property: Verify trademark registrations with SENADI (Servicio Nacional de Derechos Intelectuales). Assuming a business name is protected without official registration is a frequent and costly error.

Step 4: Labor Law Compliance – The Expat's Biggest Blind Spot

Ecuadorian labor law is highly protective of employees. This is the number one source of post-purchase lawsuits.

IESS Contributions: You must obtain a Certificado de Cumplimiento de Obligaciones Patronales from the Instituto Ecuatoriano de Seguridad Social (IESS). This is the only document that proves all social security contributions are current. Failure to pay IESS results in fines and interest (multas y moras) and can prevent you from obtaining other permits.
Employee Records: Review the employment contracts (contratos de trabajo) and salary payment records (roles de pago) for every employee. Verify that payments for the thirteenth salary (decimotercer sueldo) and fourteenth salary (decimocuarto sueldo) are current.
Severance Liability Calculation: Calculate the liquidación (severance payment) liability for every employee. This includes desahucio (a form of notice pay) and potential despido intempestivo (unjust dismissal) costs if you plan to restructure. The seller is responsible for these liabilities up to the date of sale, but as the new employer, you are jointly and severally liable for them for two years after the transfer. This is a critical negotiating point.
Pending Labor Disputes: Your attorney must check with the Ministerio del Trabajo for any registered labor disputes (actas de finiquito or ongoing claims) against the business.

Step 5: Property and Asset Verification

Property Title: If real estate is part of the sale, an attorney must conduct a title search at the Registro de la Propiedad of Cuenca. Request a Certificado de Gravámenes, which costs around $10 and provides a complete history of the property, showing any mortgages, liens, or legal prohibitions against selling it. A common expat mistake at the Cuenca office is not bringing a copy of the property's tax ID (clave catastral), which significantly speeds up the process.
Asset Condition: Physically inspect all major equipment. For vehicles, run a check with the ANT (Agencia Nacional de Tránsito) to ensure there are no outstanding fines or registration issues.

Legal Checklist for Cuenca Expats Purchasing a Business

Use this checklist to ensure a structured and thorough process:

Financials & Corporate:

[ ] Official Certificado de Cumplimiento Tributario (SRI) for the company and legal representative.
[ ] SUPERCIAS Certificate of Good Standing (Certificado de Cumplimiento de Obligaciones).
[ ] Reviewed tax declarations (VAT, Income) for the last 3 fiscal years.
[ ] List of all outstanding debts, verified with a Certificado de Gravámenes from the Registro Mercantil.
[ ] Current financial statements (Balance Sheet, P&L).

Legal & Regulatory:

[ ] Valid and current Licencia Única de Actividades Económicas (LUAE) from the GAD Municipal de Cuenca.
[ ] All industry-specific permits (e.g., ARCSA, Tourism).
[ ] Copies of all significant contracts (lease, key suppliers, clients).
[ ] SENADI registration for any trademarks.

Labor:

[ ] Official Certificado de Cumplimiento de Obligaciones Patronales (IESS).
[ ] List of all employees, with contracts and seniority dates.
[ ] Calculation of accrued severance liability (liquidación).
[ ] Check for pending disputes at the Ministerio del Trabajo.

Assets:

[ ] List of all significant physical assets.
[ ] If real estate is included, a Certificado de Gravámenes from the Registro de la Propiedad.
[ ] Verification of vehicle status with the ANT.

⚠️ Legal Alert: Red Flags That Demand an Immediate Halt

Stop the process and consult your attorney immediately if you encounter any of the following:

Seller Hesitation: Any resistance to providing official certificates (SRI, IESS, SUPERCIAS) or direct access to records.
Discrepancies: Financial statements that do not align with SRI tax declarations.
Informal Labor Practices: Employees being paid in cash "off the books" or without proper IESS affiliation. This is a massive, unquantifiable liability.
Pressure to Sign: Any attempt to rush you into signing a promesa de compraventa (promissory agreement) without completing due diligence. These documents often carry significant financial penalties if you back out.
Missing LUAE: The business is operating without a valid municipal license.

A comprehensive legal and financial due diligence report from a qualified firm in Cuenca typically costs between $800 and $2,500, depending on the size and complexity of the business. This is not an expense; it is insurance against a potentially ruinous investment.

Securing Your Investment in Cuenca

Purchasing an existing business in Cuenca is a viable and often rewarding path for expat entrepreneurs. However, success is not accidental. It is the direct result of meticulous, expert-led due diligence. By understanding the specific legal framework, demanding official documentation from the correct government bodies, and recognizing the critical importance of labor law compliance, you can confidently uncover and mitigate hidden liabilities, ensuring your entrepreneurial dream in Ecuador is built on a solid legal foundation.