Key points
- Acquiring a business (fonds de commerce) does not transfer the seller’s debts, save for statutory exceptions, but an insufficient audit exposes the buyer to situations inherited from the past.
- The commercial lease is often the most valuable asset: check its remaining term, the rent, the renewal and assignment conditions, and any restrictive clauses.
- Turnover for the last three financial years must be cross-checked against the tax returns (liasses fiscales) and VAT returns, then analysed in terms of real net profitability.
- Employment contracts of staff attached to the business transfer automatically, with length of service and accrued rights; check headcount, disputes and paid leave.
- The buyer must obtain the statement of registered charges and pledges over the business and check whether the required administrative authorisations can be transferred.
Acquiring a business (fonds de commerce, i.e. a business as a going concern) can be a real commercial opportunity, but it carries specific risks that the buyer must assess before committing. Unlike a share sale, the acquisition of a business does not transfer the seller’s debts to the buyer, save for statutory exceptions, but it can still expose the buyer to situations inherited from the past if due diligence is insufficient.
The commercial lease
The commercial lease is often the most valuable asset of the business, sometimes more valuable than the customer base itself in certain locations. Before committing, you need to check the remaining term of the lease, the renewal conditions, the amount of rent and the indexation clauses, the conditions for assigning the lease (some leases provide for the landlord’s approval or involvement; however, a clause prohibiting assignment of the lease to the buyer of the business is deemed void (réputée non écrite), Article L. 145-16 of the French Commercial Code (Code de commerce) (in French)), restrictive clauses on the permitted activity and the state of relations with the landlord.
A lease nearing expiry or containing restrictive clauses can significantly affect the value of the business.
Turnover and profitability
Since Law No. 2019-744 of 19 July 2019, the deed of sale no longer has to state the turnover for the last three financial years. On the day of the sale, however, the seller and the buyer initial a document showing the monthly turnover achieved since the end of the last financial year. The seller must also make the accounting books for the last three financial years available to the buyer for three years (Article L. 141-2 of the Commercial Code (in French)). In practice, the buyer obtains these figures during the negotiations. This information must be cross-checked against tax filings (tax returns, VAT returns) to verify that it is consistent. The profitability of the business, beyond gross turnover, must be analysed: what is the net profit after the manager’s remuneration, rent, expenses and depreciation? Is the business genuinely profitable at its sale price?
Existing contracts
Some contracts transfer automatically with the business (in particular the employment contracts of staff attached to the business, Article L. 1224-1 of the French Labour Code (Code du travail) (in French)). The commercial lease, for its part, passes by express assignment, under the conditions set out in the lease. Other contracts (with suppliers, customers, service providers) may contain non-assignment or approval clauses that govern their transfer. You need to identify them and check the conditions for their continuation.
Employees and employment liabilities
Employment contracts of staff attached to the business transfer automatically to the buyer, with their length of service and accrued rights preserved. The buyer must check the actual headcount, the employment contracts, any pending labour court (conseil de prud’hommes) disputes, the applicable collective agreements and the status of accrued paid leave. Outside insolvency proceedings, the new employer is bound by the obligations that were incumbent on the former employer at the date of the transfer (Article L. 1224-2 of the Labour Code (in French)).
Registered charges and pledges
The buyer must obtain the statement of registered charges (liens and pledges) over the business, which the deed has no longer been required to state since Law No. 2019-744 of 19 July 2019. These security interests, which the seller may have granted to creditors, follow the business into whoever’s hands it passes (Article L. 143-12 of the Commercial Code (in French)) and can restrict the buyer’s freedom to dispose of it. You must make sure that these charges will be released at the time of the sale or taken into account in calculating the price.
Administrative authorisations
Some activities require administrative authorisations (licences, approvals, operating permits) that are not automatically transferable with the business. If the business’s activity depends on an authorisation personal to the seller, the buyer must check that they can obtain one in their own name before the sale.
For assistance with your acquisition, see our dedicated page: fonds de commerce sale and purchase lawyer.
For assistance: fonds de commerce sale and purchase lawyer.
