Sale of a going concern: what transfers, and what does not

The French Commercial Code does not define the fonds de commerce head-on, but article L. 141-5 sets out its substance in connection with the seller's lien: sign, trading name, leasehold right, customer base and goodwill, to which are added equipment and stock. Two families, then.

• Intangibles — customer base and goodwill, sign, trading name, leasehold right, trade marks and patents in use. That is where most of the value sits.
• Tangibles — equipment, furniture, tools, and the stock in hand, which is dealt with separately.

The same article requires separate prices to be stated for the intangibles, the equipment and the stock. That apportionment is not an accounting formality: it sets the basis of the seller's lien, and it is the first thing an inspector looks at.

What the fonds does not contain is quickly said. Not the premises — selling the walls is a second transaction, requiring a notarial deed. Not the receivables or the debts. Not the contracts, save those the law transfers.

One point decides the rest: selling the fonds is not selling the company. Selling the fonds means selling assets, and the selling company survives with its past. Selling the shares means selling the company itself, with what it owes. That choice is made before the negotiation, and it is the first point on which having the sale agreement drafted and made safe changes the outcome.

Only two sets of rights follow the fonds automatically. They are not negotiable, and no clause can exclude them.

The commercial lease

The leasehold right is part of the fonds, and the landlord cannot stop it following. Article L. 145-16 of the French Commercial Code treats as unwritten any agreement seeking to prevent a tenant from assigning the lease to the buyer of its fonds de commerce. A flat prohibition clause is therefore of no effect.

What the landlord may require, on the other hand, is written in the lease: that it be a party to the deed, an approval as to form, service by a commissaire de justice — and above all a joint and several guarantee, under which the seller remains liable for the buyer's rent for a fixed period. It is the clause that most often takes people by surprise, because it outlives the sale the seller thought was closing the matter.

The lease is therefore read first, before any timetable is set. A term about to expire, or a permitted use that does not cover the buyer's activity, changes the value of the fonds more surely than any discussion about turnover.

The employment contracts

They all follow, with no formality and without anyone having to consent. Article L. 1224-1 of the French Labour Code provides that where the employer's legal situation changes, in particular by sale, all employment contracts in force continue between the new employer and the staff. Three consequences follow.

• You do not choose the workforce you take on: it passes as it stands, with accrued length of service.
• The obligations follow. The new employer is bound by those that fell on the old one on the date of the change, save in the cases the provision reserves — notably sauvegarde, redressement and liquidation judiciaire.
• A termination remains a dismissal, even where it is decided on the occasion of the sale.

To this is added a duty to inform the employees beforehand, laid down in articles L. 141-23 and following of the French Commercial Code, which allows one of them to make an offer to buy. That provision was recently amended and its scope no longer turns on a headcount threshold: it covers businesses not required to set up a social and economic committee. The applicable period is checked as at the date of the transaction.

This is the most expensive category, because it is invisible in the heads of terms and comes to light at the moment the business has to start up again under a new name.

Operating contracts do not follow the fonds. Supply, the till software subscription, maintenance, franchise, exclusive sourcing: each was entered into by the seller, and a contract can only be assigned with the consent of the party on the other side. Failing that, it stays with the seller — who goes on paying for it without running the business.

The rule applies just as much to things that look like assets: administrative authorisations attached to the operator personally, which have to be applied for again rather than transferred; bank accounts, payment facilities and insurance contracts tied to the seller.

The useful work is therefore an inventory, done early: list the contracts the business actually depends on, identify those requiring consent, and obtain it before signature. An essential contract whose counterparty refuses the transfer the day before the sale no longer has a contractual solution — it only has a price.

The seller's receivables stay with him: invoices issued before the sale remain his, and it is for him to collect them. The debts stay with him too. The buyer of a fonds does not take on the liabilities: it is buying assets, not a business with its balance sheet.

That is what justifies the mechanism that follows. The seller's creditors watch the asset they were counting on disappear, replaced by a sum of money that can evaporate. The law gives them a hold on the price — and it is that hold which blocks payment.

Two exceptions, and they are the only ones: the joint tax liability under article 1684 of the French General Tax Code, set out below, and the obligations attached to the transferred employment contracts.

The seller signs, hands over the keys, and is not paid. That is the normal position, and the one least well explained beforehand. The price is placed with an escrow holder — the drafting lawyer or an agreed third party — and released once three periods have run.

Publication. The sale is published in a legal announcements journal and then in the BODACC, within fifteen days of its date (article L. 141-12 of the French Commercial Code). Nothing runs before it: late publication pushes everything else back.

Creditors' objections. Within the ten days following the last publication, any creditor of the previous owner, whether the debt has fallen due or not, may object to payment of the price, by extrajudicial act or by recorded delivery letter (article L. 141-14). The objection must state, on pain of nullity, the amount and the grounds of the debt, and give an address for service. The landlord, for its part, may not object in respect of rent, notwithstanding any stipulation to the contrary.

Two safeguards complete the scheme: a copy of the deed remains available at the address for service for twenty days after publication in the BODACC (article L. 141-19), and a payment made to the seller before publication does not discharge the buyer as against third parties (article L. 141-17). A buyer who pays direct therefore pays twice.

Joint tax liability. This is what governs the real duration, and the point almost nobody plans for. The buyer may be held jointly liable for tax on the profits made by the seller, up to the price of the fonds, and may only be pursued for ninety days (article 1684 of the French General Tax Code). That period does not run from the sale: it runs from the filing of the profit return provided for in article 201 of the same code — or, failing that, from the expiry of the time allowed.

Now article 201 gives the seller forty-five days to notify the tax authorities of the sale — a period which, for a fonds de commerce, runs from the day of publication in the legal announcements journal — and sixty days to file its profit return under an actual-basis regime.

And those ninety days can fall to thirty. This is the provision that changes everything and that is rarely read: the same article 1684 cuts the period for pursuing the buyer to thirty days where three conditions are met together — the notice of sale provided for in the second paragraph of article 201 has indeed been sent to the authorities; the profit return has been filed within the time allowed; and the seller is up to date with its filing and payment obligations on the last day of the month preceding the sale. If one of the three is missing, the period reverts to ninety days.

End to end, the escrow therefore commonly runs from three to five months — and can be shortened by two full months. The lever is not where people look for it: the ten days for objections pass quickly, whereas joint tax liability only starts on the filing of the profit return. A seller who files late delays being paid, day for day; a seller who files on time, who has sent the notice of sale and who is up to date with tax goes from ninety days to thirty. It is the only variable he controls, and the one he acts on least.

In cases of this kind, the difficulty almost never moves onto the price. It moves onto three points, always the same ones.

1. Negotiating before reading the lease. The unexpired term, the permitted use and the seller's joint guarantee weigh more than a point of margin. They come to light in ten minutes of reading and are rarely put right afterwards.
2. Underestimating the contracts. They are what keeps the business running, and precisely what the law does not transfer. The inventory is done at the letter of intent stage, not in the week of signature.
3. Forgetting the escrow. A seller counting on the price to fund the next venture needs to know he will not have it for several months. It is the law holding it back, not the buyer.

Composite example, for illustration only. No real case. A restaurateur sells his fonds and expects to be paid on signature so as to open elsewhere three weeks later. The lease contains a three-year joint guarantee, which he discovers on reading the deed. His profit return goes in six weeks late. He remains liable for his successor's rent, and his price is released nearly six months after the keys change hands. Both effects were negotiable three months earlier.

We act on both sides of the table, never on the same deal: drafting and negotiating the agreement, reading the lease and obtaining third-party consents, holding the price in escrow and following the formalities through to release of the funds.

Most of the useful work happens before the deed: the inventory of contracts, the reading of the lease and the apportionment of the price decide what the transaction will be worth.

The scope and the amount are announced and accepted before the work begins — our fees are announced before the engagement. We give no undertaking as to the outcome of a negotiation: our professional rules forbid it, and no one can seriously give one.

If you do not know whether your transaction is about the fonds or about the shares, that is what a first conversation establishes.