Tips for a successful business sale step by step

The transfer of goodwill is a technical operation: it implies a perfect mastery of commercial leases, contract law, corporate finance and insurance law in particular. This is an important step in the life of a trader and it is better to take advice from a specialized lawyer. Find all our advice for a successful sale of business with complete peace of mind, step by step: enhance the business, negotiate the sale price, conclude a sales agreement (compromis de vente), then, if all the conditions precedent are lifted, the final act with the mandatory formalities.

The transfer of goodwill is an important step in the life of a trader.

For the person who sells the business, it is a question of separating from his working tool and his clientele after several years of operation: it is generally a moving and stressful moment.

For the one who acquires the goodwill, it will be necessary to give a new dynamic to the company, to innovate while being part of continuity, since the customers and the brand already exist.

This is what distinguishes the sale of business assets from the sale of leasehold rights: the sale of business assets relates to all of the constituent elements of the fund, all of the trader's working tools ( the goodwill being a legal universality including the sign, the customers, the right to the lease, the equipment, etc.).

In addition, unlike a transfer of shares or transfer of securities, it is essentially a transfer of assets, the debts of the transferor not being taken over by the transferee. On the other hand, as for a transfer of company, the employment contracts are included in the transfer of goodwill: the transferee will thus have to anticipate the takeover of the employees.

The transfer of goodwill is thus a more complex operation than it seems at first glance, with legal and financial consequences that must be mastered to avoid pitfalls.

It is strongly advised to be accompanied by a specialist in real estate law and contracts, in particular for the analysis of the commercial lease.

Here are some tips at each key step to make your sale of goodwill a success in complete safety.

I-The prior structuring of the sale of a business:

The parties in a sales contract must agree on the thing and the price. In a transfer of a goodwill, this agreement implies ab initio a negotiation, then a preliminary contract and finally the sales contract.

-The negociation :

Goodwill is a set of tangible and intangible elements contributing to constitute an economic unit. As part of a transfer of goodwill, it is important to evaluate this set of elements in order to have perfect information on the value of the fund, and its price.

To do this, it is possible to opt for the method of scales which – according to the Chamber of Commerce and Industry (CCI) – is based on a multiplier coefficient which varies according to the sector of activity and which applies to the figure the fund's business often expressed excluding tax (HT). However, this method does not make it possible to have a perfect assessment of the value of the goodwill, in particular its profitability with regard to its location or its notoriety.

To compensate for this deficiency, it is possible to use the Gross Operating Surplus (EBITDA) method, which represents the cash flow generated by the main activity of a business and measures its economic performance. EBITDA can be average, weighted or restated. But to know the profitability of a goodwill, a coefficient is applied to the average EBITDA (or net results of the last financial years) before bringing a weighting allowing to take into account the location or the notoriety of the Commercial property.

The idea being the same – ie, valuing the goodwill – it is also possible to use the method by comparison or that of the correction by net assets.

Ultimately, it will be necessary to compare the results obtained to have an approximate value of the goodwill. This result must be weighted with regard to the geographic area (or catchment area) of the goodwill and all of its characteristics.

Added to this evaluation of the value of the goodwill is that of the commercial lease. The rent, the charges and the duration play an important role in its commercial value and in the negotiations. Indeed, it is common for a rent to be undervalued or overvalued compared to the competition, for the charges to be exorbitant or for there to be risks surrounding the term of the lease and its renewal. So many elements requiring special attention, above all, the legal and economic expertise of a professional.

Be careful not to confuse evaluation of the goodwill and fixing of the price!

The valuation of the fund is a financial operation, making it possible to determine a range of value, according to objective elements (according to ratios based on turnover and EBITDA in particular).

The price is the amount that the two parties will finally accept in return for the transfer: the price will depend on the negotiation between the parties, on the one hand what the purchaser will agree to receive to sell his business; on the other, what the seller will be willing to pay to acquire it.

Negotiation, valuation and price are therefore related concepts, but not exactly similar, and it is not uncommon for there to be discrepancies between the valuation and the price finally paid, depending in particular on the economic situation.

- The preliminary contract: promise and compromise of sale of goodwill

In law, the contract of sale is perfect when the parties agree on the thing and the price. It is also possible to use a preliminary contract intended to prepare the sales contract. This is the case of the promise of sale or the sales agreement in a transfer of goodwill. Its drafting requires certain stipulations relating to the contractual technique.

First, if the business is located in an area where the Town Hall has decided on a right of pre-emption, the operation must be conditional on the prior purging of the right of pre-emption by the municipality. In practice, a DIA (declaration of intention to alienate) is sent to the Town Hall with the signed promise and the lease, and the Mayor will have two months to let it be known whether or not he intends to pre-empt the property (after this period, the silence of the municipality is equivalent to a refusal to preempt).

On the other hand, it is preferable to supervise the clauses related to financing when the promise is conditional on the obtaining of a bank loan by the purchaser. To prevent the latter from withdrawing without real and serious reasons, it is advisable to indicate precisely the essential criteria of the credit, namely: the rate, the duration, the amount borrowed, and the number of banks to be solicited for maximize the chances of obtaining a bank loan.

Finally, it is also advisable to accompany the promise of sale with an immobilization indemnity corresponding to the exclusivity granted to the beneficiary. Particular attention must be paid to the amount of this compensation – generally set at 10% of the sale price, so as not to run the risk of reclassification under a penalty clause. The expertise of a professional is decisive at this stage of the negotiations to secure the conditions for keeping or returning the compensation.

The precision and the complete drafting of the clauses of the promise of sale are a guarantee of speed at the stage of the final drafting of the sales contract.

-The sales contract:

It is mainly written around the selling price and the thing sold.

The price reflects the value of all the tangible and intangible elements constituting the goodwill. It can be global or divided between the constituent elements of the goodwill. Also, the terms of payment must be provided. The list of clauses on the price that can enrich this contract is not exhaustive.

As for the thing sold, in addition to the aforementioned elements, it will be important to position oneself on the takeover or termination of a franchise or distribution contract if a contractual link exists. In addition, it will be necessary to anticipate the resumption of employment contracts upstream – which is automatic and of public order in terms of the transfer of goodwill.

Regarding the payment of the price, it is generally provided "cash", paid in full on the day of the sale (by deducting the amount of the immobilization indemnity paid obviously). However, it is not excluded to provide for payment in installments, and deferred over time: this is called seller credit. In this case, special guarantees must be taken to protect the seller: privilege of the seller of goodwill, pledge, specific insurance, bond or bank guarantee on first demand.

I-The formalities of the transfer of a goodwill:

The transfer of a goodwill involves declarative formalities, substantive and formal conditions and publicity.

For the substantive conditions, the parties must have the capacity and the power to transfer goodwill. They must also give consent that is free from defects. In addition, if the transferor is married under the community regime, the consent of his spouse is required. Otherwise, an action for nullity is open to the latter.

For the conditions of form, the parties must – in the drafting of the deed of transfer of business assets – state the imperative mentions of public order. Namely: the sale price, the origin of ownership of the business sold, the turnover and the conditions of the lease. Although it is no longer mandatory to mention the results of the last 3 years, it is still strongly recommended.

For reporting formalities, companies with less than 250 employees (without a works council) are responsible for informing their employees two months before the conclusion (signature) of the deed of transfer. Failure to comply with this obligation is sanctioned by a civil fine representing 2% of the amount of the sale.

Regarding the formalities after the signing of the final act, they differ according to the parties involved.

On the buyer's side, the latter is required to pay the registration fees and publish the transfer in a legal announcement newspaper within 15 days of the signing of the deed. As soon as his company takes up business, the Registry will also advertise the transfer to BODACC. As of the publicity of the assignment, the assignor's unpaid creditors have a period of 10 days to file a possible opposition on the assignment price.

The assignor will have to deregister his company and declare his results to the tax authorities. In this regard, the General Tax Code establishes a principle of fiscal solidarity between assignor and assignee for a period of 90 days (which may be reduced to 30 days under conditions).

This is why the seller does not receive the transfer price immediately after the sale of the business. This price must be sequestered in a specific account (generally the Carpa Account of the seller's lawyer) until the expiry of the creditors' opposition period and the tax solidarity period.

Note that it is possible for the seller to request a partial release from the receiver to obtain part of the sale price immediately (usually 30%). To do this, the seller must produce a certificate of tax regularity and request from his Chartered Accountant a certificate that his client is up to date with all his social and tax charges.

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