Why the acquisition of a business is a fully-fledged transaction
Acquiring a business is much more than an ordinary business transaction. Business is a set of tangible and intangible elements — customers, lease rights, signs, equipment, stocks, trade names, intellectual property rights — that constitute the work tool of a merchant or entrepreneur. Its transmission is subject to specific rules, distinct from those applicable to the sale of a company or a building.
Acquired carelessly, a business can become a hidden liability: undeclared fiscal or social debts, customers who do not rely on the new operator, commercial lease whose approval conditions are precarious, or licenses that cannot be transferred. The legal security of the transaction is therefore an absolute priority.
Step 1 — The letter of intent and due diligence
The first step in any serious acquisition is the drafting of a letter of intent (LOI), which sets out the main lines of the transaction: envisaged price, suspensive conditions, exclusivity period and timetable. This document is generally not legally binding on the price, but it morally engages the parties and structures the negotiation phase.
The LOI paves the way for audit phase, also called due diligence. It is an in-depth analysis of the goodwill situation on several dimensions:
- Legal audit : verification of the commercial lease (remaining term, conditions of transfer, restrictive clauses), supplier and customer contracts, operating authorizations (licenses, approvals);
- Accounting and financial audit : analysis of the last three balance sheets, margins, changes in turnover and expenses;
- Social audit : situation of employees, employment contracts, applicable collective agreements, possible ongoing labour disputes;
- Tax audit : verification of the absence of tax debts and the regularity of past declarations.
The audit is not a formality: it is the phase that allows you to make an informed decision and to negotiate the necessary guarantees before signing.
Step 2 — Valuation of the fund
The valuation of a business is an exercise that cannot be reduced to the application of a multiple of turnover or EBITDA. It depends on the nature of the fund, its sector of activity, the quality of the clientele, the location and the potential for development.
In retail, valuation is often based on a coefficient applied to the annual turnover excluding taxes. In the service or catering sectors, practitioners also use EBITDA ratios (gross operating surplus). In all cases, the valuation must be compared to recent comparable transactions in the same sector and the same geographical area.
A particular point of attention concerns the Value of the right to lease. In strategic commercial locations, the value of the lease right can represent a very significant portion of the total price of the fund. It must be evaluated independently and take into account the current rent in relation to market rents and the remaining term of the lease.
Step 3 — Drafting the act of transfer
The act of transfer of business is a key document that must include a certain number of mandatory particulars set out in article L. 141-1 of the Commercial Code:
- the selling price of all intangible items, goods and equipment;
- the name of the previous seller, the date and nature of his act of acquisition, the price of this acquisition;
- the status of the privileges and pledges on the fund;
- operating results for the last three years;
- the lease, its date, duration, and the name and address of the lessor and the assignor.
The absence of certain mentions may result in the cancellation of the sale at the request of the purchaser, or give rise to an action to reduce the price.
Step 4 — Post-transfer formalities and warranty period
Once the act is signed, several formalities are mandatory:
- The publication of legal announcements in a newspaper, which opens a 10-day period of opposition from creditors of the seller;
- The registration of the act with the tax services, with payment of transfer duties;
- Employee information : in companies with less than 250 employees, prior information for employees is mandatory at least 2 months before the sale, to enable them to present a takeover offer (Hamon law).
The sale price is generally sequestered during the opposition period, which can last up to several months in the event of a dispute. It is only paid to the seller at the end of this period.
The sequestered price is not available immediately after signing. The management of the cash flow and working capital of the buyer must be anticipated from the start.
The law firm Aknin Associés intervenes at each stage of the acquisition of a business: drafting the letter of intent, legal audit, negotiation and drafting of the act of sale, post-sale formalities and management of possible post-acquisition disputes.
