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LEGAL AND GENERAL
Setting up in Romania: some simple, commonsense dos and don'ts

by Alina Rosca
December 2004

I have met many people who say that Romania is not a country to be trusted because their business or investments went completely wrong. If you ask them the reason for the failure the answer will invariably be the legislation, the legal system and untrustworthy people they have in Romania. This sentiment is also echoed by Romanians who have lived abroad and who have returned to set up a business or invest. I do not say that this cannot be the case for some investors, but for others it is surely not the case. So where is the problem?

There is no perfect response to cover all situations but most probably the most common reasons for failure are those which will be covered in this article.

Firstly, there are people who do not 'feel the business' at all. If they ever made money out of any kind of business or investment, this was probably done so by accident. These people are usually the kind who invest in the shares of a company at or near the point at which the share price has peaked, after whch the value of the shares can go nowhere but lower.

Sometimes ñ if they are lucky ñ people invest in a company or enterprise at the right time. But to do so at the right time is not always enough. If it is a business which needs hands-on maintenance, staff will have to be employed, trained and supervised. Your supervisors and or managers may not do the perfect job as it is not their own business. Even if you have a local business partner do not forget that leaving all the decision making to him can be an invitation for trouble. Unless we are talking about a licensing or franchising arrangement it is almost impossible to control a business from outside the country; this is the case everywhere, including Romania.

An investor should make sure that all the necessary due diligence is done before making a decision. People with long-term experience of an industry can often 'feel' if the investment is worth it or not. If you are not a seasoned professional in the industry ñ and it is important to be sincere to yourself ñ then you have to make sure that you receive the appropriate advice from lawyers, accountants, and bankers. Although to pay a professional for advice might seem expensive, the prospect of losing money or spending years battling a court case might be far more expensive and time-consuming.

Approach people cautiously ñ just as you would anyone, anywhere ñ and make them earn your trust. Although Romanian culture can be different, human behaviour is not so different. It is not difficult to run background checks on an individual or company. For instance, the Registry of Commerce will give access to all public information about a company. Moreover, you can always ask a prospective partner to provide character references or company bank statements.

Don't eliminate worthy partners while the business is booming, when you might believe you can do better without them. It takes a lot of effort to build a good business, and just a little to destroy it.

Sometimes it can be amazing to see people who pretend that they made a lot of money in their own countries behave so stupidly once they get here. For instance, it is incredible ñ to me, anyway - how someone can buy a property using a contract drafted in Romanian language by a notary employed by the vendor. It is not only that that person cannot understand the content of the contract but it is obvious that the notary of the seller will be subjective and draft all the small print to the advantage of the seller. Moreover, how can anybody conclude a pre-contract or sale-purchase contract before establishing whether there are any encumbrances over the property? Whenever it is possible (and you should make sure that it is possible) you should sign the pre-contract and contracts, as well as any documents, both in English and Romanian languages.

It is also amazing how somebody can buy the assets of a company or acquire its shares without any due diligence and without making sure that all the requirements imposed by commercial law for such transactions have been properly fulfilled. Similarly surprising can be the practice of some companies which take it upon themselves to draft contracts without checking whether they make any sense from a legal point of view.

In the West you wouldn't blindly invest in shares traded on the stock exchange without researching any information about that particular company or without knowing the reasons why the shares have been highly recommended by an adviser. So why do it here? Sometimes, the shares are highly recommended by traders because the public company pays a higher commission when the shares are aggressively marketed.

As for taking advice, I am never able to understand how somebody can take for granted the advice of their compatriots only because they have lived for a longer period of time in Romania. To listen to advice is not wrong but to actually invest on the advice of a compatriot without doing your own due diligence is completely wrong.

On the other hand, don't go to the other extreme. It is good if one is careful before investing or entering a new venture, but not to the point of paranoia. If you became paranoid you will never invest in anything; or when you finally decide to take the necessary steps it will be too late.

There is no recipe for success but there are some ingredients that include hard work, a serious, focused approach, and the necessity to seek out professional advice ñ don't forget that the Big 4 accounting firms have been established in Romania for many years, as are a number of international law firms. For those who do not want to pay the fees of these professionals a number of local firms charging lower fees and dispensing good advice and knowhow can be highly recommended.

I have met many foreigners and Romanians who lived abroad for many years who are very successful in their business and their investments in Romania. These people have almost invariably taken time to understand the system and follow the universal business rules. I'm reminded of the old saying that,'it is much easy to blame a non-success on somebody rather than recognise the mistake in yourself'. Therefore, if you do spend the time to come and look for business opportunities or start a business in Romania make sure that you understand the new legislation, the improved quality of the services, strong local consultancies and a much improved banking system.

Alina Rosca is a lawyer in private practice.