When purchasing a business, the buyer must take several precautions.
First, the lease: its terms and remaining term, and the rent amount.
He must anticipate any potential rent increases, whether the business activity stipulated in the lease matches the actual business activity carried out by the seller, and what the condominium regulations, particularly regarding maintenance and repairs, provide.
Verify Essential Elements from the Drafting of the Preliminary Agreement
Before the law of July 19, 2019, the deed of sale of a business had to contain several mandatory clauses:
– the name of the previous seller, the date and nature of their acquisition, and the purchase price for intangible assets, inventory, and equipment;
– the status of any liens and pledges on the business;
– the turnover achieved during the three financial years preceding the year of the sale, this period being reduced to the duration of ownership of the business if it was less than three years;
– the operating results achieved during the same period;
– the lease, its date, its duration, and the name and address of the lessor and the transferor, if applicable.
If any of these details were omitted, it could render the sale void. This action could be brought within one year.
Since the law of July 19, 2019, the absence of one of these details does not automatically invalidate the transfer agreement.
An action for annulment remains possible on the grounds of error, fraud, or duress. This action is available for five years. Furthermore, the buyer may also claim damages from the buyer who failed to properly inform the seller beforehand (Article 1112-1 of the French Civil Code).
In practice, the buyer will benefit from requesting all of these details to secure their investment.
These details will also protect the seller, who cannot be held responsible for failing to disclose them.
However, other elements can also lead to the sale being declared null and void if they have been concealed by the seller: those that are important to the buyer. Thus, the buyer would not have entered into the contract if they had been aware of these elements at the time of signing.
For example, the sale of a restaurant and its lease was annulled because the seller had not informed the buyer of minutes from a condominium owners’ association meeting that restricted the restaurant’s operations to serving ready-to-eat meals until 8 p.m. (Court of cassation, Commercial Chamber, January 6, 2021 (18-25.098)).
The buyer can include conditions precedent (CPs) to protect their future purchase:
To secure the purchase of a business, conditions precedent can be included, for example, the future buyer obtaining a bank loan. If the bank loan is not obtained, the buyer has the right not to purchase, unless, of course, they are at fault, for example, if they failed to submit the loan applications with the required supporting documents on time.
There can be many other conditions.
The buyer can make the purchase conditional. The purchase of a business is contingent upon:
– the signing of a commercial lease identical to the previous one: “renewal under the same conditions”
For example, a beneficiary committed to acquiring a business, specifically subject to the condition precedent that the commercial lease be renewed under the same conditions.
The landlord agreed to the renewal between the preliminary agreement and the sale.
However, the landlord demanded a rent indexed to the index stipulated in the lease. The beneficiary attempted to withdraw from the agreement. The Court of Appeal dismissed the claim, as the beneficiary was aware of this indexation clause when signing the preliminary agreement (CA Douai, May 31, 2018, No. 16/04360).
– A clause authorizing the landlord to add a new activity:
Before purchasing a commercial property, it is advisable for the buyer to request the condominium regulations, which specify the permitted activities, to avoid any surprises.
Furthermore, only the activity, or one of the activities, stipulated in the lease or any addendum, can be carried out by the tenant and therefore only these can be transferred.
If the prospective buyer wishes to undertake a new activity, they must ask the seller to negotiate this new activity with their landlord (or to initiate a simple or full change of use procedure).
The buyer can also purchase the business assets and do so themselves. In this case, the tenant risks a rent increase (or the removal of the rent cap) from the landlord.
In any event, the tenant can negotiate with their landlord all the activity clauses permitted by the condominium regulations.
For example, signing an addendum to the lease authorizing a crêperie-waffle shop business to expand its operations to include a restaurant (a pizzeria).
Of course, the landlord must ensure the premises comply with regulations and install an extraction duct that meets the requirements for the newly permitted restaurant activity.
– A clause precedent making the sale contingent upon obtaining administrative authorizations:
At the same time as purchasing the business, the buyer may wish to carry out renovations.
This could include, for example, minor renovations requiring a permit or major structural work requiring a building permit.
If the prospective buyer does not have these authorizations, they can withdraw from the purchase without penalty.
This is particularly important for large investments.
A suspensive clause stipulating that the seller must terminate certain contracts upon
the sale or repay certain loans:
Contracts transferred when purchasing a business include the lease, property damage insurance policies, publishing contracts, and employment contracts.
The buyer may wish to terminate certain contracts.
If these contracts are not terminated or these loans are not repaid, the buyer can withdraw without penalty. Regarding employment contracts, dismissal cannot be justified by the sale of a business assets. However, nothing prevents termination of the contract for another reason, such as misconduct or a mutually agreed termination.
A clause stipulating that the seller, the buyer, or both will conduct an audit between the preliminary agreement and the final sale:
Finally, certain precautions must be taken regarding the valuation of the business, and in particular, it is very often advisable to conduct a legal, social (especially employment contracts), tax, and financial audit before the purchase. This audit will be carried out by a specialized law firm, possibly in collaboration with the establishment’s usual accounting firm.