Turkey is an important manufacturing hub for investors seeking access to European, Middle Eastern and regional markets. Foreign investors may generally acquire shares in Turkish companies under the same basic rules applicable to domestic investors. Turkey’s Foreign Direct Investment Law is based on the principles of freedom of investment and equal treatment.
However, purchasing an existing factory or manufacturing business in Turkey requires more than checking the company’s turnover, machinery and purchase price.
Before completing the acquisition, foreign investors should conduct comprehensive legal and financial due diligence.
1. Check the Ownership of the Factory and Land
The first question should be whether the factory property is:
- owned by the company;
- leased from a third party; or
- owned personally by one of the shareholders.
If the property is owned by the company, the land registry records should be reviewed for mortgages, liens, annotations, easements and other restrictions.
Special rules may also apply where a Turkish company becomes at least 50% foreign-owned or foreign investors obtain certain management-control rights.
The investor should therefore verify the real estate position separately from the company acquisition itself.
2. Conduct Legal Due Diligence
Before buying the factory, the investor should investigate the legal history of the target company.
The review should generally include:
- Trade Registry records;
- shareholder structure;
- company debts;
- tax liabilities;
- SGK liabilities;
- pending lawsuits;
- enforcement proceedings;
- bank loans and mortgages;
- supplier and customer contracts;
- employee claims;
- guarantees provided to third parties; and
- regulatory investigations.
A profitable factory may still contain substantial hidden liabilities.
3. Review Licences and Operating Permits
Manufacturing facilities may require various licences, permits and administrative approvals depending on their activities.
The buyer should determine whether the factory has all necessary:
- workplace licences;
- production permits;
- environmental permits;
- fire-safety approvals;
- zoning documentation;
- occupancy permits; and
- sector-specific authorisations.
The investor should also verify whether these permits will remain valid following the acquisition.
A factory without the necessary operating permissions may have considerably less value than its financial statements suggest.
4. Check Environmental Risks
Environmental liability can be particularly important when purchasing an industrial facility.
The investor should investigate whether the factory has previously faced:
- environmental penalties;
- waste-management violations;
- emissions problems;
- soil or groundwater contamination;
- hazardous-material issues; or
- administrative proceedings.
Historical environmental problems can result in substantial costs after the acquisition.
5. Review Employees and Employment Liabilities
Manufacturing companies often employ large numbers of workers.
The buyer should review:
- employee numbers;
- employment contracts;
- salaries;
- seniority;
- overtime;
- annual leave;
- severance liabilities;
- workplace accidents;
- occupational health and safety compliance; and
- SGK records.
Particular attention should be paid to long-serving employees because accumulated employment liabilities may significantly affect the real value of the company.
6. Verify Machinery and Equipment Ownership
The presence of machinery inside a factory does not necessarily mean that the company owns it.
Certain equipment may be:
- leased;
- financed;
- pledged to a bank;
- purchased under instalment arrangements; or
- owned by another group company.
A detailed asset list should therefore be prepared and ownership of significant machinery should be confirmed.
7. Review Major Commercial Contracts
The value of a manufacturing business may depend heavily on several important customers or suppliers.
The buyer should examine major:
- customer agreements;
- supply agreements;
- distribution agreements;
- export contracts;
- energy agreements;
- logistics contracts; and
- financing agreements.
Special attention should be given to change-of-control provisions that may allow another party to terminate a contract when ownership of the company changes.
8. Decide Between a Share Deal and an Asset Deal
Foreign investors should also decide whether they want to purchase:
the shares of the existing company, or
specific factory assets and business operations.
In a share acquisition, the existing company continues with its historical assets and liabilities.
An asset acquisition may allow the investor to select particular assets, but Turkish law may still impose certain liabilities depending on how the business transfer is structured.
The appropriate transaction model should therefore be selected after due diligence.
9. Protect the Buyer in the Purchase Agreement
Once risks have been identified, the acquisition agreement should protect the foreign investor.
Important provisions may include:
- seller representations and warranties;
- protection against undisclosed debts;
- tax indemnities;
- employee liability indemnities;
- conditions precedent;
- escrow or holdback arrangements;
- purchase price adjustments;
- non-compete provisions; and
- termination rights.
For example, if a significant tax investigation is already pending, the agreement can specifically require the seller to compensate the buyer for liabilities relating to the pre-acquisition period.
Conclusion
Buying a factory or manufacturing company in Turkey can provide significant opportunities for foreign investors, but the transaction should not be evaluated solely by looking at machinery, turnover or the asking price.
Before completing an acquisition, investors should verify:
Who owns the property?
Who owns the machinery?
Are all licences valid?
Does the company have hidden tax, SGK or employee liabilities?
Are there lawsuits or enforcement proceedings?
And will the key contracts continue after the acquisition?
A proper legal due diligence process before buying a factory in Turkey can identify these risks before the purchase price is transferred and allow the investor to address them through the acquisition agreement.
This article provides general information and does not constitute legal advice. Each investment should be reviewed according to the specific company, sector and transaction structure.
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