HOW TO SECURE THE PURCHASE OF A BUSINESS IN THE HOSPITALITY INDUSTRY?
When purchasing the business of a bar, brasserie, hotel, café, restaurant, or nightclub, the buyer must take several precautions, as the commercial lease is transferred to them.
When buying a business, the buyer must take several precautions. First, they must check the lease: its terms and remaining duration, and the rent amount. The buyer must anticipate any risk of the rent being increased beyond the legal limit, whether the business activity stipulated in the lease is the same as the actual business carried out by the seller, and what the condominium regulations stipulate, particularly regarding maintenance and repairs.
1. The buyer must verify essential elements from the drafting of the preliminary sales agreement.
Before the law of July 19, 2019, the deed of sale of a business had to contain several mandatory details:
– 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 no longer renders the transfer agreement void.
An action for annulment remains possible for five years based on error, fraud, or duress. Furthermore, the buyer may also claim damages from the seller who failed to provide them with adequate prior information (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 that have been concealed by the seller can also lead to the sale being declared null and void: those that are important to the buyer. 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. (Cass, Commercial Chamber, January 6, 2021, 18-25.098).
2. The buyer can impose conditions precedent to protect their future purchase.
To secure the purchase of a business, conditions precedent can be included, such as 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: they failed to submit the loan applications with the required supporting documents on time, etc. Many other conditions can be included. The buyer can make the purchase of a business conditional upon:
• The signing of a commercial lease identical to the previous one: “renewal under the same conditions”
For example, a buyer agreed to acquire 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, they demanded a rent indexed to the index stipulated in the lease. The buyer attempted to withdraw from the agreement. The Court of Appeal dismissed their claim, as they were 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
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 activities can be transferred.
If the prospective buyer wishes to undertake a new activity, they must ask the seller to negotiate this new activity with the landlord (or to initiate a simple or full change of use procedure).
The buyer can also purchase the business and operate it themselves. In this case, the tenant risks a rent increase (or a rent increase beyond the current 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 to expand its business 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 suspensive clause regarding obtaining administrative authorizations
At the same time as purchasing the business, the buyer may wish to carry out renovations.
This could include, for example, improvements 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 sale or repay certain loans
Contracts transferred when purchasing business assets include the lease, property 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, a dismissal cannot be justified by the sale of a business. However, nothing prevents the contract from being terminated for another reason, such as misconduct or a mutually agreed termination.
• A clause stipulating that the seller or the buyer, or both, will conduct an audit between the preliminary agreement and the sale.
Finally, certain precautions must be taken regarding the valuation of the business. It is very often advisable to conduct a legal, social (particularly 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 business’s usual accounting firm.