Many people have dreams of opening a business in France – whether it be a café or restaurant, a clothes shop or somewhere selling artisan products. Whatever your line of business, if you’re going to be taking over a premises or carrying on where another entrepreneur left off, you’ll need to know the ins and outs of how to buy or sell a business in France.
Transferring a business in France requires some complicated administration, so whether you’re buying or selling a business (or parts of a business), drafting a letter of intent, a preliminary sales agreement or the final officially registered deed, our expert in French law Manuel Nadaud is here to answer the most frequently asked questions on the subject.
Transferring or buying a business in France
Euro Start: If I’m buying a business, what am I buying as part of the price?
Manuel Nadaud: There’s intangible elements such as the customer base, sign, commercial name, right to the lease, employment contracts, insurance and publishing contracts, literary, artistic and industrial property rights (for example patents, software, trademarks), administrative authorisations and licenses, domain name and transactions in progress. But please note - a commercial lease contract may require the approval of the lessor or even an obligation for the transferring tenant to guarantee the proper performance of the lease by the new business owner, particularly with regard to the payment of rent.
Then there’s the tangible elements (also called fixed assets) such as equipment, furniture and tools. They must be listed in a detailed inventory, the value of which must be declared at the time of the transfer. Also, the stock of merchandise is not included in the value of the business. It is valued separately and must be paid for separately, with an invoice drawn up without VAT. If the parties do not agree on the terms for taking over the stock and, in particular, on its value, you can either accelerate your policy for selling off and liquidating the stock before the transfer or keep it after the transfer, since it belongs to you.
ES: What is not passed on to the buyer of the business?
MN: The following items are not transferred with the business:
• monies owed, except if the buyer does not comply with certain obligations
• contracts (except those that are mandatorily transferable)
• accounting documents (but the buyer must be able to consult the accounts for the last three financial periods and the turnover since the start of the last financial period)
• the buildings
• books of accounts
• the right to occupy a terrace of a restaurant or public building (the authorisation to occupy the public domain is issued to each business owner personally so this right must be requested again by the new buyer of the business.)
ES: If I’m buying business, am I a liable for the seller’s debts?
MN: Normally the liabilities of a seller are excluded, unless the deed of transfer says otherwise. The buyer therefore cannot be held liable for any of the seller's commercial debts. This prevents the seller’s creditors taking action against the new buyer for the payment of his predecessor's debts, even if they are guaranteed by a registration on the sold business. There are, however, exceptions to this rule:
• a buyer who pays his seller without having accomplished the required formalities, or who has paid him before the expiry of the period of 10 days during which creditors can raise an objection, shall be liable for the debts of his predecessor,
• the purchaser is jointly and severally liable for 90 days, with the seller, for the payment of tax on the profits made by the seller in the last financial period. However, this period may be reduced to 30 days if the notice of sale of the business and the income tax return are sent to the tax authorities in a timely manner and if, on the last day of the month preceding the sale, the seller is up to date with his tax obligations.
ES: If I buy a business, what happens to the employees?
MN: The employees have a pre-emptive right on the transferred business so the buyer and seller of the business must therefore take steps to cancel employees' pre-emptive rights before proceeding with the final transfer of the business. Then, the employees can be transferred with the business to the new employer. Finally, it should be noted that the new business owner becomes liable for the payment of the paid holidays accumulated by the employees; so the new employer needs to make sure the seller gives him a cheque or bank transfer on the date of signing, a sum equivalent to the amount of paid holidays accumulated by all employees which will have been worked out by the seller’s certified accountant. (For more information the employee payments, see our article How does the payroll system work in France?)
ES: What registration paperwork and different stages are involved in buying a business?
MN: The buyer of the business must register the deed of sale with the tax department’s registration office where the business is located. The registration determines the amount of tax that will have to be paid when the deed of sale is drawn up. This is normally paid for by the buyer, even if the deed of sale has other conditions (for instance, payment by the seller or sharing of costs). The amount of the tax can be paid directly to the Service des Impôts des Entreprises (SIE – business tax service.)
Then, a compulsory press announcement needs to be made in the form of an advertisement which declares the registered deed of sale in the following two legal publications:
• JAL: The announcement of the sale must be made in the Journal des Announces Légales (JAL) by the buyer or the company benefiting from the contribution, within one fortnight of the date of the sale.
• Bodacc: The buyer must ask the clerk of the commercial court, within three days of the announcement in the JAL, to publish a notice in the Bulletin Officiel des Annonces Civiles et Commerciales (Bodacc) legal gazette. The publication of the announcement allows the creditors of the former owner of the business to raise, within a period of ten days, any objection to the payment of the selling price to the latter. An objection made after this period is null and void.
Then the buyer of the business must either create a new company or declare a secondary branch, if he is already running this type of business. Within 30 days of the first publication of the sale (45 days for those not liable for VAT), the buyer must contact their local French business registration centre called the CFE (Centre des Formalities des Entreprises). Legal and administrative declarations will also need to be made to the trade register (RCS), the National Business Register (Siren), the tax authorities and the Social Security for the self-employed (ex-RSI).
Selling a business or company shares in France
ES: What are the different ways of selling your business in France?
MN: A director who wants to sell their business has two options: sell the business or sell the shares of the company. Shares are called “actions” if it’s a joint stock company (SAS - société à actions simplifié) or “parts sociales” if it’s a private limited company (SARL - société à responsabilité limitée.)
Selling a business consists of selling the tangible and intangible assets necessary for company to function: machines, merchandise, customer base, leasehold rights, customer files, etc. The rules and administration need to be respected and the proceeds from the sale must go to the company, not to the selling shareholder. Selling company shares implies selling off its assets and liabilities: the buyer takes over the company by buying the majority of the shares that make up the company's capital. The buyer has to respect all the company's commitments (loans, suppliers, etc.) without needing to wind it up.
ES: What are the disadvantages of selling your business?
MN: When a business is sold, the seller cannot immediately receive the proceeds from the sale. This is in fact blocked in an escrow account by an escrow agent for three to five months while all the paperwork and administration are finalised. During this period, the creditors have the possibility of drawing directly on the proceeds if the seller has not paid all his debts. (This period is extended by 60 days if the seller does not file his declaration of profits with the tax authorities within 60 days of the date of publicly announcing the sale). The escrow agent is the representative of the buyer of the business but the escrow agent retains the proceeds of the sale on behalf of the seller. Consequently, the fees and expenses of the escrow agent may be charged to one of the parties or shared between them which might incur another expense for the seller.
The tax cost is also particularly high for the seller since capital gains are liable for corporate tax rates based on the balance sheet value of the business, but there are many exemption schemes. A second tax is also levied when the business owner receives the proceeds from the sale of the business by distribution or winding-up, since these proceeds are still held by his company, not by him. Finally, a word of caution - the registration fees are sometimes higher than the actual amount in the transfer of company shares.
ES: What are the advantages of selling your company shares in France?
MN: The seller immediately recovers the proceeds from the sale of shares: it is not necessary to block the proceeds because the creditors have no right to claim against the proceeds of the sale of shares in a company. Less tax is levied on a transfer of shares than on the transfer of a business: the capital gains tax on shares is either according to a progressive scale or at the flat rate of 30%.
There are also several tax provisions that allow this capital gains to be reduced or exempted (transfer of a family business, holding by a holding company, retirement, length of time the shares have been held, etc.) and the registration fees for the transfer of shares (“actions”) in a simplified joint stock company (SAS) are lower than for a transfer of shares (“parts sociales”) in a private limited company (SARL) or for the transfer of a business.
ES: What at the disadvantages of selling your French company shares?
MN: A transfer of company shares leads to the transfer not only of the assets but also the liabilities of the company, in particular any monies owed. All the contracts included by the company are also transferred with it, which may be a problem if there are some that do not suit the share buyer: he will have to terminate these if the conditions allow it.
The transfer of company shares also implies the transfer of its history and responsibilities (management mistakes, accounting errors, accounts that do not give a true picture of the business). This is why it is generally accompanied by the signing of an asset and liability guarantee clause, which allows the buyer to be covered against any decrease in assets or increase in liabilities originating prior to the transfer and whose effects would be felt after the date of transfer, and which would not have been funded in the value of the company was based.
ES: Do I need to involve the city council and local authorities if I want to sell my business?
It’s advisable to email the city council’s planning department to notify them of the sale and any cancellation of pre-emptive rights. Please note that some local authorities are reluctant to accept the idea of a change in the activity of a transferred business, or may be particularly strict regarding the nature of the business or geographic location. (See the step below for more information.)
ES: What are the steps to be taken before selling my business?
These are the steps in selling a business in France:
• Prior notification of employees in companies with fewer than 250 employees.
In a company with up to 249 employees, the employees must be informed of the planned sale of the business or the company shares at least two months before the conclusion of the sales agreement. (In the case of sale of shares, this is only when it amounts to more than 50% of the shares of a SARL or in the case of an SAS, shares giving access to the majority of the capital of a SAS.) The employees, who are bound by an obligation of discretion, then have time to make an offer to buy the business or the shares, or to make an offer to take over the company.
• Declaration at the Town Hall
If the sold property is located within the perimeter of preservation of local shops and craft traders, it may be subject to a pre-emptive right of the city council where the council has the right to buy it first and then sell it back to a trader or craftsman. So first of all, the seller must inform the mayor of the intention to sell. The mayor has a period of two months to exercise the council’s pre-emptive right. If he exercises this right, there are two possibilities: the council and the seller agree on a price, then the sale is concluded. Or the council and the seller do not agree on the price. The council can then waive the purchase or refer the matter to the expropriation judge. The seller can always waive the transfer.
ES: What information should be included in the officially registered deed of transfer?
MN: It is imperative for the deed of transfer, whether notarised, drawn up by a lawyer or in the form of a private agreement, indicates the following :
• The selling price of the business.
• The detailed origin of the business - the name of the seller's immediate predecessor, the date of the document by which the seller himself acquired the business, the nature of this document and the price at which the seller bought the business. If it was the seller who created the business, this must be indicated in the deed of transfer.
• The statement of preferential rights and pledges.
• The turnover and operating results achieved over the last three financial periods, and since the start of the last financial period.
• The information concerning the commercial lease: the date and duration of the lease as well as the name and address of the lessor and transferor.
ES: In France, can the landlord (lessor) of the building where the business is located oppose the transfer?
MN: Any clauses contained in the lease contract that prohibit the tenant from transferring his right to the lease at the time of the transfer of the business are not legal. When a seller decides to transfer his business to a person who takes over the same commercial activity and the same customer base, the landlord does not have the right to oppose the sale. Also, if the seller or lessee transfers his business in its entirety, the lessor cannot forbid him from transferring his right to the lease at the same time as the business.
However, the transfer may be subject to certain conditions, for instance, an approval clause or a clause that authorises the transfer of the lease only in the event of a sale of the business in its entirety. An approval clause may also require the lessee to obtain the agreement of the lessor before any transfer. The purpose of this clause is to limit the transfer and it is not intended to prohibit the lessee from making the transfer.
The contract may also contain a joint and several clause. This means that the original lessee (seller of the business) and the new lessee (buyer) will be jointly and severally liable to the lessor for the payment of rents and charges, and the respect of the lease obligations.
In the event of non-payment of rent by the new tenant, the lessor will ask the original tenant to pay the rent arrears. The lessor can only invoke this joint and several guarantee for three years as of the transfer of the lease. However, the lessor must inform the original tenant within one month of the date on which the rent should have been paid.
We hope that’s helped you on your way to buying or selling a business in France. If you need further help, take a look at our legal services page or please get in touch via our contact page and we’ll be happy to refer you to our legal experts. Or download our free guide below on how to open a company in France.