Buying a Business (Fonds de Commerce)

Acquiring a business (fonds de commerce) is a decisive step in developing an existing activity or starting out as an entrepreneur. This complex legal transaction binds the buyer over the long term and requires rigorous preparation to avoid pitfalls. This guide sets out the essential steps, the legal obligations and the precautions to take in order to buy a business safely.

Understanding the legal nature of the fonds de commerce

Definition and components of the business

The fonds de commerce is defined as a set of tangible and intangible assets devoted to carrying on a commercial activity. Contrary to a common belief, it does not include the business premises, which are the subject of a separate commercial lease (bail commercial).

The intangible assets form the core of the business: the customer base, the goodwill (achalandage), the leasehold right (droit au bail), the trade name, the shop sign, licences and authorisations. The tangible assets include equipment, tools, goods and commercial furniture.

This distinction is crucial because only certain assets are necessarily included in the sale. Article L142-1 of the French Commercial Code states that "Businesses may be pledged", confirming their nature as an autonomous pool of assets earmarked for a purpose.

Difference between a fonds de commerce and a company

The acquisition of a business does not automatically transfer the whole of the company. The buyer takes over the commercial activity but not necessarily the employment contracts, debts or commitments of the seller. This distinction protects the buyer against hidden liabilities while allowing the buyer to benefit from the established customer base.

Valuing the business

Recognised valuation methods

The valuation of a business rests on several complementary methods. The turnover method applies a multiplier to the turnover excluding tax of the last three years. This multiplier varies by sector: 0.3 to 0.8 for catering, 0.8 to 1.5 for retail businesses.

The earnings method analyses actual profitability by capitalising net profit. The asset-based method values the tangible and intangible assets separately. Finally, the comparative method relies on recent transactions involving similar businesses in the same geographical area.

Analysing profitability and prospects

The buyer must examine the accounts of the last three years to identify trends. A steady fall in turnover may reveal an erosion of the customer base or increased competition. Conversely, sustained growth justifies a higher valuation. The case of a business whose operation has ceased, and its consequences for valuation, is dealt with in our article on the sale of a business after cessation of activity.

The prospects for the local market directly influence value. An urban development project, the arrival of a competitor or a change in traffic flows have a lasting effect on goodwill.

Checking authorisations and compliance

Specific licences and authorisations

Certain activities require personal licences that cannot be transferred. The Class IV licence for the sale of alcohol, the authorisation for the carriage of goods or the health approval remain attached to the person of the holder. The buyer must therefore apply for its own authorisations before the sale takes effect.

Other authorisations are transferred with the business: the leasehold right, certain operating licences or shop sign authorisations. Their validity and the conditions of their transfer must be checked before anything is signed.

Compliance of the premises and installations

The buyer takes responsibility for bringing the installations up to standard. Safety, accessibility and environmental standards change regularly. A full assessment of the electrical installations, ventilation, fire safety and accessibility avoids unpleasant surprises after the acquisition.

Negotiating the terms of the sale

Price and payment arrangements

Price negotiation relies on the prior valuation but also takes into account local market conditions and the urgency of the sale. Payment in instalments over several years reduces the impact on cash flow while linking the balance of the price to future performance.

The earn-out clause makes part of the price conditional on maintaining or improving turnover. This formula protects the buyer against overvaluation while motivating the seller to facilitate the handover. How this deferred additional price works is detailed in our article on the earn-out clause in the sale of a business.

Seller's warranties

The seller must warrant the existence and free disposal of the assets sold. The warranty against eviction (garantie d'éviction) protects the buyer against claims by third parties. The liabilities warranty (garantie de passif) limits the buyer's responsibility for debts predating the sale.

These warranties are often accompanied by a retention of part of the price or a bank guarantee. Their duration varies according to the nature of the risks: six months for trade debts, three years for tax audits.

Securing the legal transfer

Preliminary sale agreement and conditions precedent

The preliminary sale agreement (promesse de vente) fixes the final terms while allowing a period for checks. Conditions precedent protect the buyer: obtaining finance, transfer of authorisations, absence of opposition by creditors.

The validity period of the agreement must allow all formalities to be completed. A period of two to three months is generally sufficient for standard businesses.

Mandatory legal publicity

The acquisition of a business requires publication in a legal notices newspaper. This publication protects the seller's creditors by allowing them to lodge an opposition within ten days. The deed of sale can be signed only after this opposition period has expired.

The publication must state the identity of the parties, the nature and location of the business, the price and the charges assumed by the buyer. Any omission or inaccuracy may result in the sale being void.

Arranging the financing

Available sources of financing

The acquisition of a business draws on several complementary sources of financing. The buyer's own contribution is generally 30 to 50% of the total price. A professional bank loan finances the balance over 5 to 10 years.

Public aid completes the financing plan: honour loans from support networks, regional grants, Nacre or ACRE schemes. This assisted financing reduces the overall cost and reassures banks about the viability of the project.

Security required by lenders

Banks systematically require a pledge over the business acquired. Article L142-3 of the French Commercial Code states that "The privilege resulting from the pledge agreement is established by the mere fact of registration in a public register kept at the registry of the commercial court".

This pledge does not prevent the buyer from operating the business normally but limits its ability to resell. Additional personal security may be required: personal guarantee, mortgage over real property, death insurance.

Taking tax aspects into account

Registration duties

The acquisition of a business bears registration duties of 3% of the sale price. These duties apply to the whole price, including any stock included in the sale. The scope of these duties, the thresholds and the applicable allowances are set out in our guide to registration duty on businesses.

Certain exemptions benefit young companies or takeovers in priority zones. These schemes change regularly and should be checked case by case.

Buyer's tax regime

The choice of legal status directly influences the taxation of the future operation. A sole trader's business is subject to income tax on its profits in the BIC category (industrial and commercial profits). Setting up a company makes it possible to opt for corporate income tax and offers more flexibility in the remuneration of the manager.

The acquired business is amortised over its probable period of use, generally 10 to 20 years depending on the nature of the activity.

Managing the transition period

Non-competition clause

The seller generally undertakes not to carry on a competing activity within a defined area and for a defined period. This clause protects the customer base transferred but must respect the legal limits: geographical and temporal proportionality, financial consideration.

A poorly drafted clause may be annulled by the courts, depriving the buyer of this essential protection. The case law generally accepts a duration of 2 to 5 years and a radius of 1 to 10 kilometres depending on the nature of the activity.

Support from the seller

The support period facilitates the transfer of know-how and the retention of customer relationships. This temporary collaboration is the subject of a specific contract defining the duration, the remuneration and the respective obligations.

The support covers introductions to the main suppliers and customers, training in technical specificities and the transmission of customer files. Its duration varies from a few weeks to several months depending on the complexity of the activity.

Anticipating post-acquisition risks

Evolution of the customer base

Retaining the customer base is the main post-acquisition challenge. Changes in commercial habits, changes to the offer or the arrival of a new manager may cause a temporary erosion of turnover.

The buyer must provide sufficient cash to see through this period of adaptation. The first months often reveal gaps between forecasts and the reality of operation.

Employment obligations on the transfer of employees

If the acquisition involves taking over employees, Article L1224-1 of the French Labour Code requires the automatic transfer of the employment contracts. This obligation applies even if the buyer wishes to change the organisation of work.

Employees keep their acquired rights: seniority, paid leave, usual bonuses. Any substantial change to working conditions requires their express agreement.

Frequently asked questions

Can one buy a business without a personal contribution?

A personal contribution remains indispensable, generally between 30 and 50% of the price. Banks never agree to finance the whole of a business acquisition. The contribution demonstrates the buyer's commitment and reduces the risk for the lender.

Are the seller's debts automatically transferred?

No, the acquisition of a business transfers only the items expressly mentioned in the deed of sale. The buyer may nevertheless be liable for certain specific debts: social security contributions for the last six months, VAT due, business taxes. A liabilities warranty clause protects against these risks.

How long does it take to complete the acquisition?

The full procedure generally takes 2 to 4 months: 15 days for the preliminary checks, 1 to 2 months to obtain financing, a 10-day opposition period after publication of the legal notice, and a few days for the registration formalities.

Is stock included in the price of the business?

Stock is invoiced separately at cost price, determined by an inventory carried out in the presence of both parties on the day of the sale. It does not bear the 3% registration duty but is subject to VAT under the normal regime.

Can the activity be changed after the acquisition?

The buyer may develop the activity within the limits of its corporate purpose and the authorisations held. A substantial change of activity may require new authorisations and change the value of the leasehold right. The landlord may object to certain changes if they alter the nature of the activity originally authorised.

How can one be protected against unfair competition by the seller?

The non-competition clause is the main protection, supplemented by the sanctions in the French Commercial Code against unfair competition. The seller may not exploit its knowledge of the customer base to divert customers to a new competing activity.

Are bank guarantees mandatory?

A pledge over the business in favour of the lending bank is systematically required. Other guarantees may be required depending on the buyer's profile: personal guarantee, death insurance, mutual guarantee. These guarantees secure the financing but limit freedom in managing the business.

The acquisition of a business is a significant investment that commits the professional future of the buyer. Success depends as much on the quality of the preliminary checks as on the ability to retain and develop the existing customer base. Before signing anything, always have the accounts audited by a chartered accountant (expert-comptable) and the authorisations checked by a suitably qualified legal adviser.