There are at least two ways of buying a business in France:
1) the purchase of a majority stake in a company
2) the purchase of the business as a going concern
In the latter case the purchaser buys the assets and the business, known in France as a “fonds de commerce”, without purchasing the shares of the company operating the business; this purchase may occur after an interim period during which the purchaser operates the business under an operating lease arrangement (“location gérance”).
In the share acquisition scenario, the purchaser takes control of the company’s shares which represent both the assets and the liabilities. The business of the company itself is unchanged by the change of control and consequently the purchaser takes over, within the company, liabilities incurred prior to the purchase.
The important difference between the two kinds of transaction is that the purchaser of a business takes over only assets (or such liabilities as he accepts to assume). The sale of a business usually includes the following assets: the customer base, the trade name, logo, commercial fixtures and fittings, equipment and machinery, inventory, related intellectual property rights (patents, licenses, trademarks, drawings and models….) Only employment contracts, leases, insurance and publishing contracts are automatically transferred with the business. Other contracts have to be specifically included in the conveyance in accordance with the special conditions required for each type of contract. The purchaser will need to review which other assets and contracts are required for the business.
The purchase of a business gives rise to a series of formalities the object of which is to guarantee that the purchaser is properly informed about the business and also to protect the vendor’s creditors.
For this reason the sales contract contains a certain number of mandatory elements relating to the business and guaranteed by the vendor, over and above a non-compete provision and a guarantee against undisclosed liabilities or defects which would prevent the purchaser from operating the business as intended.
In addition, there is a mechanism whereby part of the sales price is blocked and information concerning the sale gazetted so liabilities and the vendor’s creditors, including the tax and social security authorities, may be paid off. For more than three months the vendor receives no part of the sales price or, if he does, the purchaser runs the risk of paying it twice!
On the face of it, a share purchase may seem more straightforward than that of a business. In fact there are several stages to a share purchase, each requiring documentation. Even during the initial stages, that is before any final contract is entered into, the parties are required to act in good faith and, on pain of an action for damages, not to break off negotiations in an abusive manner.
The initial negotiations are generally followed by “due diligence” in the form of various audits to identify any areas of risk in the target company and also to validate the price for the shares.
As the basic legal guarantees given to the purchaser only apply if the company has lost the essence of its underlying business or if the vendor has been fraudulent, the purchaser will require that the vendor provide other guarantees in the form of declarations and warranties, the object of which is to indemnify the purchaser (and/or the target company) against liabilities, the cause of which was prior to the acquisition but which only come to light subsequently, such as a tax or social security audit, commercial claims, liability suits etc.
These may take the form of:
-a straightforward guarantee whereby the vendor undertakes to pay off creditors or reimburse the company in the amount which it pays out to creditors only appearing after the sale, or
-or a price revision clause, whereby the vendor undertakes to repay to the purchaser the difference between the price actually paid and the undisclosed liability, the result being a reduction in the purchase price.
From a taxation point of view, the sale of a business is subject to registration duty at 5% assessed on that part of the sales price in excess of 23,000 euros, whereas the sale of shares bears duty at the rate of 1.1% with a ceiling of 4,000 euros except in the case of so called “personal” companies (SARL, SNC, civil companies and companies, irrespective of their form, whose assets are made up principally of real property) where the 5% rate applies to that part of the price in excess of 23,000 euros.
If the purchaser of a business subsequently wishes to contribute it to a company in formation the transaction is fiscally neutral if accompanied by an undertaking to retain the shares received in return for at least three years.
For more information on buying a business in France click here
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