A novlaw pratical guide to the sale of a business in France

How to Successfully Sell your Business in France

A Real Estate Lawyer’s Five Step Process to Selling a Business in France

When selling your business in France it is important to distinguish between the sale of your business activity and that of the property and walls in which the business activity takes place. The ‘fonds de commerce’ under French real estate law is understood as constituting the intangible elements of personal property needed for the proper functioning of the business. Components such as the customer base, the trade name, the right to assign the lease or ‘droit au bail’, employment contracts and in certain cases the equipment, are typically included in the sale of a business’ “fonds de commerce”. It is to be distinguished from the sale or lease of the walls themselves. (See article on the Five French Legal Terms to Know when Selling your Business)

The regulations surrounding the sale of a business in France have recently been modified by the law of July 19, 2019. The terms of sale of a businesss have become increasingly flexible under French law following the elimination of the requirement for the mandatory information formerly provided for by article L141-1 of the Commercial Code.

In a quick overview of the top tips to ensuring a successful sale of your business in France, it is recommended to hire a real estate lawyer capable of tending to your specific needs and procedural requirements. Our team at Novlaw has extensive experience in the industry and is available to help with any-and-all concerns in the negotiation, writing and final formalities of all necessary legal proceedings.

Practical Guide to Ensuring the Successful Sale of your Business in France

Step 1: Always be prepared for the negotiations…

As with any sale of assets, selling a business is often preceded by an important period of negotiations. At the heart of the matters typically negotiated are the pricing and asset evaluation of the various tangible and intangible elements constituting the essence of the business. Negotiations with the buyer are customarily centered on the evaluation of the value of the business and its assets, as well as on the legal soundness of the attached commercial lease.

When looking to sell your business it is fundamental to begin by negotiating a fair assessment of your business’ assets. It may also be a good idea to have a professional evaluation done for the assessment of the solidity of your commercial lease in case changes need to be made. Issuing a professional evaluation into the substantive elements of your lease agreement, such as the cost of rent, property expenses and the term of the lease, may considerably increase your chances at a profitable sale of your business.

Step 2: …by evaluating the value of your business’ assets

There are two methods typically employed in France for evaluating your business’ assets in the framework of a sale or transfer of a business. The first is known as the scale method, most often employed by tax authorities. It relies on the use of a multiplication coefficient to the business’ revenue with the amount varying according to the specific industry. This method is recognized as being the most straightforward but is limited in that it fails to reflect neither the profitability of the business nor its specific characteristics such as its location, brand reputation etc. The second method relies on profitability and is typically employed by banks. It consists in applying a coefficient to the average EBITDA (gross operating surplus) or net results of the past fiscal years in order to evaluate the profitability of the business and its capacity to reimburse its contracted debts.

In addition to these two methods of evaluation, we can also mention a few others such as the comparison method, consisting of evaluating the business by comparing it to the prices of similar businesses for sale in the vicinity, or that of the method of correction by net assets, consisting in evaluating the company based on the sum of the value of its assets (license, machines, stock, receivables…) minus the value of its debts.

In all cases, it is advisable to use a combination of these different methods, in order to properly analyze and compare results. Following these initial assessments, you will then have to weigh the final figure obtained with a certain number of secondary elements. In evaluating a business and its assets it is essential to investigate the breadth of its so-called catchment area, i.e., the area of attractiveness of the original point of sale and the geographical area of its primary client base. The location becomes in this way an essential element of price assessment depending on the district in which its located, the attractivity of the location and its local development policies. Elements such as the state of the business’ equipment, the compliance of the premises with applicable standards, the presence of a license for the sale of alcohol, the right to install a terrace or the need for renovations.

Step 3: … and evaluating the solidity of your commercial lease

Another key element to look into is your commercial lease.

The financial evaluation of the commercial lease will depend largely on the cost of rent. The rule is simple: the higher the rent, the lower the commercial value of the lease. Special attention should therefore be paid to the cost of rent, by comparing it to the usual rents issued for similar businesses in the same sector. This allows both you and your buyer to have a general idea of your business’ market value. The value of your commercial lease will be a determining factor in the success of your negotiations.The costs associated to additional rental fees should also be included in these evaluations, especially in regards to the applicable public policy provisions found in the 2021 Pinel Law which limit how high these fees can be raised.

The term of the lease is equally important as the law authorizes the lessor to proceed to a modification of the rent at its renewal. The tenant may therefore be exposed to the risks of rent control being lifted or the landlord’s refusal to renew the lease. For these reasons, it is important to carefully review the term of the lease before taking over the business. This element affects primarily the buyer but must remain an essential element of the evaluation of your lease in terms of the preparations for negotiation. We recommend seeking the help of a lawyer in evaluating the legal and economic bases of your lease prior to negotiation proceedings.

Step 4: Formalize your agreement

After having agreed on the price and object of the sale, the parties will proceed to formalize their agreement through two successive deeds: the first of which is the preliminary agreement of sale or promesse de vente, followed by, if everything goes according to plan, the final act of sale or the acte de vente. Here again, special attention must be paid to a certain number of essential elements included in the writing process of the different legal formalities.

Step 5: Establish a preliminary sales contract

At the initial promise stage, special attention should be paid to the suspension clauses or ‘let out’ clauses conditioning the final sale of the business. In order to properly establish a preliminary agreement of sale it is important to verify with your lawyer the following conditions.

Will the municipality wave their mandatory right-of-first refusal?

The sale should be made conditional on the waving of any applicable pre-emption rights. This applies in particular to the possible exercise of the municipality’s right of first refusal in regards to any sale of a business or commercial lease within the local business preservation area, in accordance. This right is covered by articles L214-1 and following of the French Urban Planning Code. If this is the case, before selling the business you must first declare your intention to the municipality who will then have a 2-month period to exercise its right of first refusal. In this case silence is understood as a rejection. This prior declaration is compulsory. If left undeclared the sale will be automatically found null and void after 5 years. It is therefore essential for the parties to make the final act of sale conditional on the municipality’s waving of this prerogative.

Have you or your buyer fulfilled the statutory information obligations regarding the business’ employees?

In a similar reasoning, if there are employees, the parties must make the sale conditional on the seller informing them in advance, in accordance with articles L141-23 et seq. of the French Commercial Code.

This prior information obligation applies to all companies with less than 249 employees. In case of failure to comply with this information obligation, a liability action may be brought, and the court seized of the matter may, at the request of the public prosecutor, impose a civil fine of up to 2% of the amount of the sale. Therefore, the parties should ensure that the seller has properly discharged this obligation to provide information, by indicating this in the preliminary agreement.

Have you properly framed the financing clauses within the purchase agreement?

Another essential clause of the agreement is that relating to the sale’s financing by the purchaser. In most cases, the buyer will want to finance the acquisition by obtaining a bank loan. There is then a risk for the seller to see the transaction fail if the buyer does not obtain the expected credit loan.

It is therefore essential that this clause be properly framed in order to prevent the purchaser from using it to attempt to renounce the purchase at a later date, by claiming not to have obtained the necessary financial assistance. The promise should therefore indicate precisely the essential criteria of the desired loan: the amount borrowed, the interest rate and the term. And the buyer should be obligated to apply for a loan from several banking institutions (generally at least three) to maximize the chances of obtaining financing.

The security deposit or indemnité d’immobilisation

The real estate sector’s take on the traditional security deposit is a necessary component on the preliminary sales agreement or promesse de vente in France. The indemnity d’immobilisation is essentialy a sum paid by the potential buyer to the seller in order to ensure the transfer of property. It is understood as a form of compensation in case of damages or failure of the sale. The conditions for its return must be clearly stated within the agreement in order to avoid any risk of future disputes. In cases like this, the most prudent thing to do is to deposit this sum in escrow, for example in a lawyer’s Carpa account.

Step 6: Review the final deed for a last revision of essential provisions

Once we have arrived at the stage of the final sale it becomes important to pay special attention to the essential clauses regarding the price and object of the contract.

Review the price and terms of payment

When finishing up the formalities it is important to remember to verify the fine-print. With the sale of a business existing as combining both tangible and intangible goods, the price can be fractioned accordingly to the value of each respective entity. These elements vary depending on your business and should be specified accordingly in your preliminary sales agreement in order to avoid unnecessary disputes at the final signing. In addition to the price, attention should be paid to the clauses relating to the terms of payment and turnover guarantees.

Review the possible takeover of existing contracts linked to the business

The takeover of existing contracts is a fundamental point of negotiation in the sale of a business. Questions such as whether the business is linked to a franchise agreement, whether it is necessary to provide for a takeover of existing contracts or whether the seller is bound by distribution contracts or whether the business depend on specific authorizations (such as a license IV or a terrace right for a restaurant).

When concluding the sales agreement, it is important to draw your buyers’ attention to one final point – the takeover of existing employment contracts. In the context of a transfer of your business, the takeover is automatic and is a matter of public policy in accordance with article L1224-1 of the French Labor Code. It is therefore important for the seller and the buyer to anticipate its legal and economic consequences.

Anticipate and prepare as much as possible the above-mentioned issues

If all of these questions must be settled by the time you enter into the final act of sale (price, payment terms, ongoing contracts, etc.), it always preferable to address them as early as possible in the process. The best-case scenario for you and your buyer would be to address the issues as soon as the preliminary agreement of sale is made up in order to avoid any future dispute.

In practice we recommend you first draft a sales agreement, and you make it as precise and complete as is possible. Following this, the final act of sale will need only to reiterate the conditions agreed on in the initial stages of the contract.

Step 7: Remember to take care of the post-sale formalities – they’re important !

We have reached the final steps in the sale of your busines. The formalities are numerous and time-consuming and differ substantially for the buyer and the seller.

The buyer must first register the sale and pay the registration fees within a month from the date of the final act of sale or that of occupation of the premises if earlier than the date of the act. The second formality consists of the sale’s publication intended to inform third parties and guarantee the respective rights of creditors involved. The sale must be published in a legal journal, at the buyer’s request, within 15 days of the final act of sale.

The seller on the other hand is required to contact the clerk of the commercial court within 3 days so that the latter may proceed with the publication of a notice in the Bulletin Officiel des Annonces Civiles et Commerciales. This publication starts a ten-day period during which creditors may file an objection.

In France, the law provides for an overriding principle of fiscal solidarity between both the buyer and seller in regards to both income and apprenticeship taxes for a specified period of time, typically estimated at 90 days but can be reduced to 30 days when the following conditions are met:

The notice of sale of the business was sent to the tax authorities within 45 days of the publication of the sale in the legal journal;
The income tax return was filed within 60 days of the publication of the sale in the legal journal;
On the last day of the month preceding the sale, the seller is up to date with his tax declaration and payment obligations.

For this purpose, the sale price is held in escrow by a third-party so that it can be issued to the relevant tax authorities if the accountant in charge of collection so requests. This mission is typically entrusted to a lawyer or a notary. The escrow procedure is also useful in guaranteeing the payment of other creditors, who may turn against the buyer if the seller becomes insolvent. The time period for the freezing of the funds and the terms of mission must be specified in the assignment contract in order to have a clear understanding of the proceedings.

The sale of a business in France remains a complex procedure despite various attempts at its simplification. For all the above-mentioned reasons we recommend you involve a specialized lawyer in the various proceedings, drafting and evaluations needed to successfully sell your business in France.

A NovLaw Practical Guiding to the Sale of a Business in France