The other day we did a post on how to shut down a China WFOE, entitled, How To Shut Down Your China Operations. In that post, we mentioned the possibility of selling your China WFOE to an employee or employees or selling it to another foreign company looking to go into China.
We got the following comment/question to that post:
Is there really a market for existing WOFEs? We have been operating for five years now and we are certainly fully aware of how hard it is, but I do not intend to quit, but certainly there will come a time when we need to exit China. One option is sale, but I really doubt that is possible. Does anyone know of examples? Also partial sale to key staff, for a peppercorn perhaps, seems to be a good idea from a business point of view. Does anyone know if this is possible?
I responded to that comment with the following comment of my own:
Not much of a market at all. The problem is that to buy a WFOE requires that the buyer essentially want to do exactly what the seller has been approved to do. So for example, if I want to do a consulting business in Qingdao, I must buy a consulting business in Qingdao. And then I also have to make sure that the costs of my doing due diligence on the WFOE and the risks of buying into the liabilities and problems of the WFOE, do not outweigh the advantages of taking over a WFOE, as opposed to forming a new one.
I am going to expound on my comment a bit here.
It is possible to sell a WFOE and our China Lawyers have been involved with a couple such sales and they are not particularly difficult from a legal perspective, but they are very difficult to justify from a business perspective and, in fact, none of the deals on which we have worked have actually closed.
You can sell your WFOE to a Chinese company (and this would include to an employee) and then it converts to a domestic company. Again, this is not terribly difficult legally, but such sales are rare because usually the employee knows exactly why the WFOE is closing down and usually the employee can choose to essentially take over the WFOE after the foreign company has left, and do so “informally” and without any payment.
You can sell your WFOE to a foreign company looking to do business in China, but that too has all sorts of difficulties, many of which we detailed in a previous post, entitled, Buying And Selling China WFOE Shell Companies. Not In My Lifetime?
In that post, we talked of how our China attorneys are always getting emails and calls from someone asking us if any of our clients might be interested in buying a China WFOE and of how our usual answer is “no.”
The people trying to sell their WFOE usually tout it as being completely liability free and therefore ready to go much faster and at a much lower price than if someone were to have to form their own China WFOE. For what it takes to form a WFOE in China, check out the following:
- Forming A China WFOE. How Long Will That Be Going On?
- How To Start A Business In China — WFOE
- How To Start A Business In China — The Minimum Capital Requirements For A WFOE
- How To Form a China WFOE. Scope Really Really Matters.
- How To Form a China WFOE. Scope Really Really Matters, Part II.
If you read any of the above posts, you will no doubt conclude that forming a WFOE in China is a convoluted and time consuming process, and it is. Therefore, buying an off the shelf WFOE must be much easier, right?
To quote from our previous post on selling a WFOE:
The thing about off the shelf WFOEs is exactly that: they are off the shelf and not customized. And that is where all of the problems arise. Let’s take as an example a WFOE that someone tried to interest me in many months ago. That company was in the IT outsourcing business in a second tier city. So right there, its only real potential buyer is someone who is interested in doing IT outsourcing in that second tier city. Because if the buyer of that WFOE is interested in doing anything other than IT outsourcing, it will need to petition the government to expand or change its business scope. Similarly, if the buyer is interested in doing IT outsourcing in some other city, it will need to petition the government to move its WFOE or it will need to set up a branch in that other city, and thereby have to maintain two offices. When you throw in the fact that anyone buying a WFOE will need to conduct due diligence on it to make sure that it truly does have no liabilities of any kind (including, tax, employee, environmental, tort, etc.) and you can quickly see why forming a WFOE is going to be safer and probably equally as fast and cheap. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.
In the post, “How To Form a China WFOE. Scope Really Really Matters,” we discussed the importance of a WFOE having a proper scope:
BUT — and this is why I am writing this post now — if you under or overreach on the description of your business scope, you might find yourselves in big trouble. We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that were not mentioned in the business scope section of their initial WFOE.
In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much easier.” In some cases, the scope of the business changed after the application was submitted and the company had failed to secure approval in advance for the change. And in some cases, the company probably would never have been approved at all had it been upfront and honest in its application. In nearly all instances, the companies had managed to secure local approval but were now in trouble with Beijing, which constantly is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.
I cannot go into any more detail on these matters, but I can give this advice: applying for a WFOE in China involves a heck of a lot more than just filling out a form and getting approval. It does matter for what you get approved and you (or whomever you are using for your WFOE application) need to know China’s foreign investment catalog inside and out before applying. You then must tailor your application to meet both the requirements of the foreign investment catalog AND the reality of what you will be doing in China. A failure to comply on both fronts will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.
The odds of a shell WFOE’s city and scope lining up perfectly with that of a potential WFOE buyer are low and we are not aware of any website that tries to match up WFOE sellers with potential WFOE buyers. We also are not aware of a single deal where someone has purchased a shell WFOE.
So yes, buying a WFOE is possible, but difficult. But we do find the idea of selling a WFOE to an employee appealing as it can make for a smooth transition all around. But the real question (again) is not the legalities, its the practicalities and the desires, and for that we will need to wait and see.
What are you seeing?