How to buy a business in France: a brief guide

Important note: Citizen Avocats has produced this article as part of our collaboration. The contents do not constitute legal advice by SO Legal and are not intended as a substitute for legal advice.

Introduction

From restaurants to retail, tech to tourism, France has dynamic enterprises in many areas, but the apparent complexity of French law often challenges foreigners wishing to make acquisitions. 

Having a presence in France and the EU is an increasingly attractive option for many UK business owners – reducing some of the barriers and red tape caused by Brexit.  

In this article, Simon Deceuninck of Bordeaux-based Citizens Avocats explains the basics of buying a business in France.

Buying the fonds de commerce vs the whole company

There are essentially two methods of making a business 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 purchasing the material assets (stocks, equipment, tools etc.) and immaterial assets (clients, tenant rights etc.) 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 they are acquiring. 

To a certain extent, it also allows the buyer to pick and choose which assets to buy and which not to (e.g. in the purchase of a construction company, the buyer may not need additional vehicles and equipment).

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. Checks will especially concern the securities placed on the assets bought (pledges, liens etc.). 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 acquiring all, or the majority of, the shares in the company. Becoming the majority or exclusive shareholder allows the buyer to take capitalistic control of the business. 

The operation per se can be more straightforward, as it only requires you to buy the shares, which can be done quite easily in some types of company (e.g. SAS). It can also be advantageous from a tax perspective compared to the acquisition of the fonds de commerce.

However, buying the shares implies also buying the debts and liabilities of the company. Indeed, transferring the shares does not affect third parties' rights, as the company's life goes on. Hence, this operation requires a higher level of due diligence and warranties.

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 se; however, we find sharing a few extra tips that may help you reach completion is beneficial.

1. Planning for the business acquisition

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 will most certainly find that, in planning the acquisition, you will develop new ideas and reach a more sophisticated understanding of your business.

2. Information taking, diagnostics, first valuation and negotiations

Once you 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 can position yourself and decide whether you want to buy it or not. This will help you do an initial valuation and set your maximum price. 

It will also help you grasp some intangible aspects of the business, such as the goodwill, the reputation of its owners, 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 significantly impact the overall operation.

Depending on the outcome of these talks and – very importantly – how you perceive who you are negotiating with, the operation will, or will not, go forward and be formalised.

3. Letter of intention and confidentiality agreement

The letter of intention (LOI) is usually a non-binding document that summarises the parties' intentions, the background of their negotiations, a few agreements they have reached in terms of valuation, the process they intend to conduct, and the main features of the business. 

Although usually not binding, the LOI is not legally void, as it materialises 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 orientate themselves throughout this complex process.

In addition to the LOI, a confidentiality agreement is often signed by the parties. Indeed, the existence and 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.

4. Due diligence

Legal, fiscal and accounting audits are usually recommended to get a clear and precise business picture. When working on a business sale, Citizen Avocats works hand-in-hand with accountants to provide the client with a detailed analysis of the assets, debts, liabilities, compliance issues, ongoing litigations, and other relevant information regarding the business. 

We cannot stress enough how decisive this step is. Its results will help the parties refine the valuation of the business on objective grounds.

5. Business acquisition plan

Entrepreneurs are used to drafting business plans at the creation stage. In our opinion, having a well-thought 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 knowing the buyer's plan. Besides, this document can act as a true roadmap for entrepreneurs, who often face anxiety or hesitation. 

We recommend that you focus on how to buy the business and what strategy you will implement to make it grow.

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 partners' 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 etc. 

This step is called the "signing". Through the MOU, 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 their 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.

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 défi nitif' (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, all declarations made or figures stated are true and sincere at the completion date.

For sales of shares, it is usually advisable to put in place assets and liability warrantees. If any undeclared liability or underestimated debt show up after completion, this entitles the buyer 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. Finally, 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.

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.

9. Temporary tutoring

Parties to an 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 (a few months generally) after the sale and shows how the business is done, introduces them 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 successful.

Buying a business in France?

SO Legal has an exclusive collaboration with Bordeaux-based law firm Citizen Avocats. The agreement affords our clients greater access to legal expertise in France and the EU while giving Citizen's clients enhanced access to our specialist legal services in the UK. Find out more here.

Citizen Avocats' expertise includes various areas, including advising UK businesses on company formations, business acquisitions, business disposals, and corporate structures.

Citizen can also provide legal services to support you as your business in France evolves – including advice on commercial contracts, commercial leases, restructuring, shareholders' agreements, share sales, and more.

For more information on the collaboration between the two law firms, contact Hamed Ovaisi at hovaisi@solegal.co.uk or Simon Deceuninck at s.deceuninck@citizenavocats.com.