Valuation of a Business (Fonds de Commerce): Methods and Price Disputes

The valuation of a business (fonds de commerce) almost always concentrates most of the tension in a sale: the seller overestimates the value of the business, and the buyer fears paying too much for a customer base that could melt away after the seller's departure. Yet there is no "official" price for a business as a going concern, only a range of values arising from competing methods, which the seller, the buyer, the tax authorities and, sometimes, the court assess differently. This guide sets out the three main valuation methods used in practice (turnover, gross operating surplus, professional scales), then deals with price disputes: what to do when the buyer considers, after the sale, that they have been deceived or have made a mistake, and on what legal grounds to act.

What a business covers and why its valuation is delicate

Before understanding how to value a business, one must know exactly what is being bought. A business (fonds de commerce) is a set of assets brought together for the operation of a commercial activity. These include intangible assets (the customer base, the shop sign, the trade name, the leasehold right (droit au bail), licences and administrative authorisations, transferred contracts, patents or trade marks) and tangible assets (equipment, fixtures and fittings, tools). Stock in trade is, in principle, valued and sold separately.

The customer base is the central element: without customers, there is no business as a going concern, only isolated assets. It is also the hardest element to quantify, because its value depends on its loyalty, on whether it is captive or volatile, and on its attachment to the seller personally. A dental practice, a neighbourhood restaurant and a bakery do not have the same "transferability" of customers: it is precisely this parameter that explains why two businesses showing the same turnover can sell at very different prices.

The valuation of a business is therefore never a mechanical calculation. It combines objective accounting data (turnover, results, gross operating surplus for recent financial years) and qualitative assessments (location, remaining lease term, state of the equipment, dependence on a key individual, local competition). The rigour of this analysis directly determines the legal soundness of the transaction: a poorly justified price exposes the parties to a tax reassessment as much as to a dispute between themselves.

Method 1: valuation by turnover

The most widespread method consists in applying a percentage to annual turnover, generally calculated on the average of the last three financial years to smooth out cyclical variations. This percentage varies strongly by business sector and reflects an economic reality: the more profitable the activity and the more loyal its customers, the higher the multiple applied.

Take a concrete illustration. Imagine a hairdressing salon with an average annual turnover of around €200,000. If the sector scale uses a range between 40% and 80% of annual turnover including VAT, the value of the business will lie within a wide span, the position within that range depending on location, subscribed customers and the state of the premises. The same reasoning applied to a tobacconist and newsagent or to a pharmacy will give very different multiples.

This method has the merit of simplicity and speed. It is often the first benchmark used by intermediaries and by the tax authorities. It nevertheless has a major weakness: turnover says nothing about profitability. Two businesses with the same turnover may produce opposite margins, one very profitable, the other breaking even or even loss-making. Relying on turnover alone amounts to valuing an activity without checking whether it makes money, which is precisely the first cause of later challenges to the price by a disappointed buyer.

Method 2: valuation by gross operating surplus (EBE)

The so-called profitability method corrects this flaw by starting no longer from turnover, but from the business's capacity to generate a result. The reference indicator is the gross operating surplus (excédent brut d'exploitation, EBE), which measures the wealth generated by operations before depreciation, provisions, financial charges and tax. EBE is calculated from the operating surplus, adjusted for the manager's remuneration and charges to obtain an "adjusted" EBE reflecting the real profitability transferable to the buyer.

The value of the business is then obtained by applying a multiplier to this adjusted EBE, a multiplier that expresses the number of years of profitability the buyer agrees to pay for. A business regarded as secure and lasting will be paid for at several times its EBE; a fragile business, dependent on a single customer or a short lease, will be paid for at a lower multiple.

Returning to our example, if a restaurant generates a stable adjusted EBE and a multiple of three to five years is adopted given its location and the remaining term of its lease, the value will be deduced directly from this profitability. This method is more refined than the turnover method, because it links the price to economic performance. It is of particular interest to the buyer who finances the acquisition by borrowing: it is indeed EBE, and not turnover, that will have to cover the loan repayments and the buyer's remuneration.

Its main pitfall lies in the quality of the adjustments. A seller may have understated charges, undervalued their own remuneration or included exceptional income that artificially inflates the profitability shown. Hence the importance of an in-depth review of the accounts for the last three financial years, ideally carried out with a chartered accountant (expert-comptable), to adjust for non-recurring items and make the EBE used as the basis of the calculation reliable.

Method 3: professional scales

The third approach relies on scales drawn up by business sector, regularly published in specialist works and used by practitioners in business transfers. These scales most often express a range of percentages of annual turnover, specific to each trade, sometimes supplemented by an EBE-based approach. They contain distinct ranges for a bakery, a hairdressing salon, a hotel, an accountancy practice, an estate agency or a restaurant business.

These scales have a twofold usefulness. They offer a quick point of comparison, making it possible to check that a proposed price is not manifestly out of line with the market. They are also frequently invoked by the tax authorities to assess the market value of a business and, where appropriate, to found a reassessment for understatement of price.

Their limit lies in their generic nature. A sector scale reasons on a national average and ignores local specificities: the exact location, nearby competition, the quality of the lease, the state of the equipment, the reputation of the establishment. Two bakeries with the same turnover, one on a busy thoroughfare with a long lease, the other in a declining street with a lease close to expiry, are not worth the same price, even if the scale applied the same percentage to them. The scale is therefore a framing tool, never a stand-alone valuation method. The methods and scales used to quantify the compensation owed to an evicted tenant are the subject of our article on the calculation of eviction compensation.

How to combine the three methods in practice

Professional practice never consists in choosing a single method, but in cross-checking them. A serious valuation of a business applies the three approaches in parallel, then compares the results to arrive at a coherent range. Where the three methods converge, the price is solidly supported; where they diverge strongly, the gap signals a point of attention (low profitability despite high turnover, or the reverse) that must be explained before fixing the price.

Several corrective factors then adjust the value within the range:

• the remaining term of the commercial lease and the amount of the rent compared with the market
• the dependence of the activity on the seller personally, which affects the transferability of the customer base
• the condition and age of the equipment and fittings
• the existence of transferable strategic contracts and their legal soundness
• the competitive environment and the outlook for the sector

This valuation phase is not a matter of accounting calculation alone: it prepares the legal security of the transaction. A documented price, based on cross-checked methods and on adjusted accounts, protects the seller against a later action by the buyer and the buyer against a tax reassessment. Conversely, a price set "by gut feeling" or on the seller's statement alone is the breeding ground for the disputes we now examine.

The price before the tax authorities: the risk of understatement of price

Even before any dispute between the parties, the price of a business is scrutinised by the tax authorities, because it serves as the basis for the registration duties payable by the buyer. Under Article 719 of the French General Tax Code, these duties follow a progressive scale: exemption up to €23,000, then a rate of 3% on the portion of the price between €23,000 and €200,000, and 5% above €200,000. The scope of these duties and the possible allowances are set out in our guide to registration duties on the sale of a business.

The tax authorities have the right to adjust the declared price when they consider it lower than the actual market value. This is the procedure for understatement of price, based on the audit powers provided for by the French Tax Procedure Code (livre des procédures fiscales). In practical terms, if the parties deliberately understate the stated price to reduce registration duties (and, on the seller's side, the tax on the capital gain), the tax authorities may reconstruct the market value from comparisons and scales, claim the additional duties, together with late-payment interest and, in the event of deceitful conduct, penalties.

This risk imposes a twofold requirement: to set a price consistent with the real value of the business and to keep the material that justifies it (adjusted accounts, calculations under the three methods, location and lease information). This documentation, useful against the tax authorities, is just as useful if the price is later challenged by the buyer.

When the price is challenged after the sale

The most frequent dispute does not involve the tax authorities but pits the buyer against the seller, once the sale has been completed. The typical scenario is well known: a few months after the takeover, turnover collapses, the announced customer base proves much less loyal than expected, or the buyer discovers that the accounts presented had been embellished. The buyer then considers that they paid too much and seeks to challenge the sale or its price. Civil law offers two main routes: fraud (dol) and mistake (erreur), both defects of consent.

It should be noted at the outset that Law No. 2019-744 of 19 July 2019 simplifying company law removed the mandatory particulars that used to appear in the deed of sale (turnover and results for the last three financial years, in particular). This removal of the disclosure formalities has not reduced the seller's duty to inform the buyer fairly: on the contrary, disputes have shifted to the ground of the general law of contract.

Fraud and fraudulent concealment

Fraud (dol) is defined by Article 1137 of the French Civil Code as a party obtaining the other's consent by deceitful tactics, lies or the concealment of decisive information. Its second paragraph expressly covers fraudulent concealment (réticence dolosive):

The intentional concealment by one of the parties of information that it knows to be decisive for the other party also constitutes fraud.

Applied to the sale of a business, fraud covers for example a seller who presents falsified accounts, who conceals the imminent loss of a major customer, who hides the forthcoming opening of a direct competitor nearby, or who masks a dispute with the landlord threatening the renewal of the lease. A buyer who manages to show such intentional conduct may seek annulment of the sale, which entails repayment of the price, and claim damages for the loss suffered.

The evidential difficulty is real: the buyer must establish not only the inaccuracy of the information, but also the intentional nature of the concealment and its decisive nature, that is, that, better informed, the buyer would not have contracted or would have paid a lower price. This is why keeping the pre-contractual exchanges, the accounting documents supplied and the seller's statements is decisive.

Mistake

Where intent to deceive cannot be proved, the buyer may rely on mistake (erreur), governed by Articles 1132 et seq. of the French Civil Code. A mistake as to the essential qualities of the performance, if it is excusable and decisive, also entails nullity of the contract. In the context of a business, the mistake may relate to the real profitability, to the actual existence of a transferable customer base or to a substantial characteristic of the business.

Mistake nevertheless has a classic limit: it does not protect a negligent buyer. An inexcusable mistake, one that a reasonably diligent buyer could have avoided by carrying out the usual checks, is not sanctioned. In practice, a professional buyer who has not had the accounts audited, nor examined the lease, nor checked the competitive environment is liable to have their own imprudence held against them. Conversely, a mistake relating to information that only the seller held, and that no reasonable diligence would have uncovered, will more easily be upheld.

It should also be recalled that a simple mistake as to value, that is, the mere fact of having paid too much compared with the market price, is not enough on its own to obtain nullity if consent was otherwise informed. It is the quality of the information on the objective elements of the business, and not economic regret, that founds the action.

The available actions and the time limits to observe

A buyer who challenges the price has several graduated options. The buyer may seek nullity of the sale, which restores the parties to their previous position with reciprocal restitution, a radical solution that is often difficult to implement in practice where the activity has continued. The buyer may prefer to maintain the sale while claiming damages to compensate for the excess value paid, which amounts economically to a price reduction. These claims are frequently put forward as principal and alternative claims in the same proceedings.

The limitation period is a point of capital vigilance. An action for nullity for defect of consent is time-barred after five years, this period running, for fraud as for mistake, from the day the defect was discovered, and not from the date of the sale. A buyer who discovers a concealment late therefore retains the possibility of acting, provided that the buyer gathers the evidence quickly and does not allow a situation of tacit acceptance to develop.

Prevention remains the best strategy. An asset and liability warranty clause, a price revision clause or a deferred price clause indexed to future results (an earn-out type mechanism), together with a serious acquisition audit, considerably reduce the risk of dispute. They make it possible to deal contractually, upstream, with the uncertainties that litigation later settles painfully.

Conclusion: a price must be justified as much as negotiated

The valuation of a business is not an exact science, but neither is it arbitrary. The three methods, turnover, EBE and professional scales, are not opposed: they complement each other, and it is their cross-checking that produces a defensible range. The turnover method frames, the EBE method links the price to real profitability, the scales check consistency with the market. None of these approaches, taken in isolation, is sufficient to found a solid price.

The position of this guide is clear: the legal value of a sale lies less in the final figure than in the traceability of the reasoning that leads to it. A price documented by adjusted accounts and by the three methods protects simultaneously against a tax reassessment and against the buyer's action for nullity. Conversely, an opaque price feeds the double suspicion of the tax authorities and the buyer.

Before signing, on the seller's side as on the buyer's, have a cross-checked valuation prepared by a chartered accountant, have the deed and its warranty clauses secured by a French lawyer (avocat), and keep all the pre-contractual exchanges. This justification file is your best insurance, whether the challenge one day comes from the tax authorities or from the other party to the contract.

Frequently asked questions

How can a business be valued reliably?

A reliable valuation cross-checks three methods: a percentage applied to the average turnover for the last three financial years, a multiple of the adjusted gross operating surplus, and a comparison with the professional scales for the sector. The result is then adjusted according to the lease term, the location, the state of the equipment and the dependence on the seller personally. Convergence of the three approaches gives a defensible price range; their divergence signals a point to be explained before concluding.

What is the difference between valuing by turnover and by EBE?

The turnover method applies a sector percentage to annual turnover: it is quick but ignores profitability. The EBE method starts from the adjusted gross operating surplus and applies a multiplier to it, thus linking the price to the business's real capacity to generate a result. The second is of most interest to a buyer financing the purchase by borrowing, because it is EBE, and not turnover, that will repay the loan.

What registration duties apply when buying a business?

Under Article 719 of the French General Tax Code, the buyer pays duties on a progressive scale: exemption up to €23,000, a rate of 3% on the portion of the price between €23,000 and €200,000, and 5% above €200,000. The tax authorities may reassess the declared price where they consider it lower than the actual market value, with late-payment interest and, where applicable, penalties.

What should I do if I discover after the sale that the price paid was too high?

A distinction must first be drawn between mere economic regret, which is not enough, and a genuine defect of consent. If the seller concealed decisive information or falsified the accounts, an action for fraud under Article 1137 of the French Civil Code makes it possible to seek nullity of the sale or damages. If the inaccuracy relates to an essential quality without intent to deceive, mistake under Articles 1132 et seq. may be relied on. Quickly gather the accounts supplied and the pre-contractual exchanges, and consult a French lawyer.

What is the time limit for challenging the price of a business?

An action for nullity for fraud or mistake is time-barred after five years. This period does not run from the date of the sale, but from the day the buyer discovered the defect, that is, the concealment or the mistake. A buyer who discovers a deceitful act late therefore retains the possibility of acting, provided that the buyer does not delay in gathering the evidence.

Can the seller's fraudulent concealment annul the sale?

Yes. Article 1137, second paragraph, of the French Civil Code treats as fraud the intentional concealment of information that the seller knows to be decisive for the buyer. Hiding the imminent loss of a major customer, the forthcoming opening of a direct competitor or a dispute threatening the renewal of the lease may amount to fraudulent concealment. The buyer must nevertheless prove the inaccuracy, its intentional nature and the fact that, if informed, the buyer would not have contracted or would have paid less.

How can the price be secured to avoid a dispute after the sale?

Prevention involves a serious acquisition audit of the accounts for the last three financial years and of the commercial lease, carried out with a chartered accountant. Contractually, an asset and liability warranty, a price revision clause or a deferred price indexed to future results allocate the risk between the parties. Keeping all the documents and pre-contractual exchanges is finally the best protection, whether the challenge comes later from the tax authorities or from the other party.