Entrepreneurship is usually associated with the creation of businesses. From the combination of a new idea, a specific talent, and a sense of adventure, a product, service or company is born. There is nonetheless another way to become an entrepreneur: buying an existing business. Owning your business and managing it in your own way does not always involve the creation of something brand new. At the contrary, one’s desire to own his/her own business can just as well come from meeting someone, or being offered quality services. Yet, how to buy a business in France remains quite mysterious, even for the most informed entrepreneurs.
After a few years, some business owners start to neglect the potential of their company. We’ve all seen a perfectly located shop with a not so appealing showcase; a company with strong potential, but poor marketing; partners losing their appetite; managers simply not willing to make an effort anymore… We’ve also encountered fantastic business owners, who just want to meet the right person to take over the fruit of a lifetime… These are all entrepreneurship opportunities: for you to become a business owner or, if you already are, to expand.
Furthermore, buying a business in France can be a very exciting prospect. The diversity of our craftsmen, small shops, bed & breakfasts, restaurants … is simply mesmerizing. Taking over a business here can thus be the start of a fantastic experience.
If you have the entrepreneur mindset, or have been asking yourself “what if I bought this business?”, this article is definitely for you. You will find below how to buy a business in France and what concrete steps it requires.
1. The two main avenues to buy a business in France: the sole fonds de commerce vs the whole company
There are essentially two modalities of SME acquisition in France: to purchase the fonds de commerce on the one hand or the whole company on the other hand.
Buying the fonds de commerce means to purchase the material (stocks, equipment, tools…) as well as immaterial (clientele, tenant rights…) assets relating to a commercial activity. This first method is relevant for buyers who already have a company of their own or who do not wish to expose themselves to the liabilities of the business acquired. To a certain extent, it also allows to pick and choose, in the course of the negotiations, which assets to buy and which not to (eg. in the purchase of a construction company, an additional truck may not be needed by the buyer).
More flexible and less risky from a liability standpoint, buying the fonds de commerce nonetheless presents some disadvantages. Firstly, there will be checks and formalities in any case. Checks will especially concern the securities placed on the assets bought (pledges, liens…). Formalities will be relative to publicity of the purchase for third parties (except for craftsmen), tax registration of the transaction and update with the registrar. Secondly, the overall taxation of the transaction can be higher under certain circumstances.
Buying the whole company means to acquire all, or the majority of, the shares within the company through which the commercial activity is pursued. Becoming majority or exclusive shareholder(s) allows the buyer(s) to take the capitalistic control of the business. The operation per say can be simpler, as it only requires to buy the shares, which can be done quite easily in some types of company (eg. SAS). It can also be advantageous from a tax perspective as compared to the acquisition of the fonds de commerce. However, buying the shares naturally implies to also buy the debts and liabilities of the company. Indeed, transfering the shares does not affect third parties’ rights, as the life of the company goes on. Hence, this operation requires a higher level of due diligence and warranties.
2. The concrete steps to buy a business in France
Now that we’ve covered the two main avenues for business acquisition, let’s consider the concrete steps of the purchase. These steps are generally the same whether buying the assets only or the company shares. However, what will need to be done precisely will depend on the method chosen. Not all the steps below are legal per say, however we find it useful to share a few extra tips which may help to reach completion.
2.1. Planning the business acquisition ahead
In our opinion, the first step consists of becoming aware of what the economic activity entails and acknowledging the difficulties involved in any business transaction. In other words, preparing yourself for this important life decision. This will also be the right time for you to do a market and competition analysis, look for targets and meet potential sellers. You’ll most certainly find that, in the process of planning the acquisition, you will develop new ideas and reach a more sophisticated understanding of your business.
2.2. Information taking, diagnostic, first valuation and negociations
Once you’ll have found the business to acquire, it will be helpful to gather as much information about it as possible. The more precise your knowledge of the business, the easier you’ll position yourself and decide whether you want to buy it or not. This will help you make a first valuation and set your maximum price. It will also help you to grasp some intangible aspects of the business, such as the goodwill, the repute of its owner(s), and the way it’s been managed.
Then comes the negotiations. Sometimes easy, sometimes energy consuming, the first discussions between you and the potential seller will have great impact on the overall operation. Depending on the outcome of these talks and – very importantly – how you perceive who you are actually negotiating with, the operation will, or will not, go forward and be formalised.
2.3. Letter of intention and confidentiality agreement
The letter of intention (LOI) is usually a non-binding document which summarizes the intentions of the parties, the background of their negotiations, a few agreements they have reached in terms of valuation, the process which they intend to conduct, and the main features of the business. Although usually not binding, the LOI is not legally void, as it materializes a genuine intent to negotiate in good faith the acquisition. It would therefore have evidentiary weight in a trial for wrongful termination of talks. The LOI also acts as a common thread in the acquisition process. It helps the parties, and their advisors, to orient themselves throughout this complex process.
In addition to the LOI, a confidentiality agreement is often signed by the parties. Indeed, the existence and/or nature of the negotiations can be strategic for the competition or other potential buyers. It is thus quite recommendable to make sure that the information relating to this operation is kept private. In case of wrongful disclosure, the victim party would be entitled to damages.
2.4. Due diligence
Buying a business, especially via a transfer of company shares, is obviously a bit more complex than buying our delicious French baguettes.
Legal, fiscal and accounting audits are usually recommended to get a clear and precise picture of the business. When working on a business sale, CITIZEN works hand-in-hand with accountants, to provide the client with a detailed analysis of the assets, debts, liabilities, compliance issues, on-going litigations, and other relevant information regarding the business. We could not stress enough how decisive this step is. Its results will help the parties refine the valuation of the business on objective grounds.
2.5. Business acquisition plan
Entrepreneurs are used to drafting business plans at a creation stage. In our opinion, to have a well-though business plan is just as important when taking over a business. Indeed, financing needs are usually greater when taking over, which explains why investors and bankers appreciate to know what the buyer’s plan is. Besides, this document can act as a true roadmap for entrepreneurs, who often face anxiety or hesitation. Broadly speaking, we recommend that you focus on: how to buy the business, and what strategy you will implement to make it grow.
2.6. Memorandum of understanding / compromis
The memorandum of understanding (MOU) – often called compromis de cession in French – is the first truly binding document enacting the agreements and concessions of the parties as to the acquisition. The conditions precedent (things that must be done before, and so that, the agreement takes full effect) must be carefully drafted. When the business acquisition is made via a transfer of company shares, they frequently concern: the waiver of pre-emptive rights and rights of first refusal, emptying partner’s current accounts, and the waiver of special acquisition rights that the law grants to employees in some circumstances…. When it’s done through a purchase of the fonds de commerce, they usually deal with the acquisition of some qualifications or titles necessary to the activity (especially for craftsmen), the agreement of the landlord to the transaction, obtaining loan offers in such terms and conditions, employees acquisition rights…
This step is called the “signing”. It’s indeed through the MOU that the buyer and seller covenant with each other to complete the sale, under the agreed conditions. It is quite important at this stage to cover the interim period, between the signing and the final closing and make sure that the seller maintains his/her reasonable, diligent and efficient management of the business. Additionally, it can be useful to put in place sophisticated mechanisms for the valuation and payment of the consideration, such as “earn-out” clauses. Thanks to these mechanisms, the final total price will match the objective value of the business on the date of completion.
2.7 Closing, representations, and warranties
Once all the conditions precedent have been realised or waived, the final transfer of ownership over the business can take place. This is formalised in an acte de cession définitif (whether a final share purchase agreement or sale contract for the fonds de commerce as the case may be). It is important to have the seller make several representations as to relevant aspects of the business. For example, that all declarations made or figures stated are true and sincere at the date of completion.
For sales of shares, it is usually advisable to put in place assets and liability warrantees. This entitles the buyer, in the event that any undeclared liability or underestimated debt show up after completion, to seek recovery and claim damages against the seller. The final agreement can put further obligations on the parties, but is generally in line with the MOU. Finaly, it allocates the subsequent formalities that the parties will have to undertake to give full effect to the transfer of ownership and make it opposable to third parties.
2.8 Subsequent formalities
Buying a business in France may require a few more formalities than in other Countries. Most of these formalities are designed to materialise the transfer (share transfer forms, update of company records), prevent third party claims (publicity), pay tax (registration with the tax authorities), or officialise the transaction (filling with the registrar). They are very important and must not be forgotten. Your lawyer or accountant will help you to complete them in a speedy manner.
2.9 Temporary tutoring
Parties to a SME purchase often put in place a temporary tutoring mechanism. This is to make sure that the seller accompanies the buyer for a short period of time (a few months generally) after the sale and shows how the business is done, introduces him/her to employees and generally provides help for the transition to go smoothly. This is indeed a very interesting formula, which can be formalised in a separate contract, which helps make the transition succesful.
3. Any questions on business acquisition ?
Should you have any questions as to business acquisition, whether you already have a plan or not, please contact us. We can also recommend qualified accountants or advisors for business sales.
We hope this article helped you understand how to buy a business in France!