Many of our E-2 clients choose to purchase an established business as their E-2 investment. The purchase of an established business comes with significant benefits, such as an established revenue base and book of business, and the business does not have to be started from scratch. While the purchase of a business has certain benefits one complication with these applications involves certain wording, provisions and prohibitions that must be included in the purchase sale agreement.
Click here for key considerations of buying a business in the United States.
What is a Purchase Sale Agreement?
A Purchase Sale Agreement is a legal document that sets forth all the terms and conditions related to the purchase and sale of a company or the company’s assets. The document outlines the parties to the transaction, the purchase price and method of payment, and any terms, conditions and contingencies the transaction may be subject to. Most agreements of this nature contain various contingencies designed to protect a party if the other party fails to comply with a particular aspect of the contract. Though most business attorneys will draft contracts to protect their client’s interests, the E-2 investment requirement does not always permit the attorney to shield his or her client from risk.
For a detailed discussion on the key elements of a Purchase Sale Agreement, click here.
What Must a Purchase Sale Agreement Contain for E-2 Compliance?
In order to qualify for an E-2 investor visa, the investor applicant must have “invested, or be in the process of investing” a substantial amount of capital. The concept of investment for E-2 purposes means the funds or other capital invested must be subject to risk of loss and the funds or assets used for the purchase of the business must be committed and irrevocable. In short, you have to spend the money and transfer that money to a third party. If the money has been transferred to the seller, the purchase sale agreement may contain certain contingencies but the contract should be clear that the funds are committed and the buyer is subject to the risk of losing the money. This can be a scary proposition for some buyers though as the buyer would have to transfer money to a seller before the visa is issued. As such, if the visa was not granted or a contingency was not satisfied, the buyer would have to try to get the money back from the seller and this could be problematic. To mitigate this risk, buyers often use an escrow arrangement.
What is an Escrow Arrangement?
Instead of transferring funds directly to the seller, a buyer can instead find a third party (escrow agent, lawyer, bank) to transfer the money to. Coincident with the transfer, the buyer and seller would enter in to an escrow agreement where the escrow agreement would state that the funds would be released to the vendor only if the E-2 visa is approved. If the visa is not approved, the funds go back to the seller.
For more information about Escrow Agreements, click here.
If you utilize an escrow agreement, one key thing to note is that in order to qualify as an E-2 investment, the purchase sale agreement and the escrow agreement cannot contain ANY business or due diligence contingencies that could unravel the transaction and the only contingency can be the approval of the E-2 visa. As such, all due diligence and contingencies must be signed off prior to filing the E-2 application. Needless to say, this requirement may be counterintuitive, as mitigation of risk is a key tenet of most business transactions. However, since placing the investment funds at risk is an inherent requirement to qualify for the E-2 visa, the agreements must reflect that level of risk. You should keep in mind that the other option is to pay the money to the vendor and hope the visa gets approved but this also presents risk.
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- Considering Buying a Business in the United States? What are the Key Documents Associated with the Purchase of a Business?
- What is an Escrow Agreement and How Can it be Used for an E-2 Visa? What if my E-2 Visa does not get Approved when I have Bought a Business?
- Considering Buying a Business in the United States? What are the Key Elements of a Purchase Sale Agreement for a Business?