Acquisition of a business: legal steps

Several essential legal steps can be distinguished in a business transfer operation.

Stage of identifying the target and establishing a letter of interest

Once the target has been identified, the buyer must ask the right questions and seek advice, including legal advice. He then defines his project and must formalize his interest with the seller. At this stage, it is preferable for the acquirer to establish a letter of intent expressing the financial conditions and the essential conditions of the desired sale or acquisition of a business. This initial phase is crucial, as it provides the basis for the transaction and avoids any further ambiguity on the terms of the agreement.
Legal Audit

Stage

It is recommended to entrust a lawyer with a legal audit assignment. The role of the latter is to identify the risks and needs of the parties. It reviews and analyses the contracts taken over by the purchaser, in particular employment contracts, and pays particular attention to the commercial lease.

In this context, the seller of the business must, as part of its obligation to provide information, allow the prospective buyer and its lawyer to analyse the various contracts, licences and approvals attached to the business. This obligation is fundamental and incurs the liability of the seller in the event of default.

The seller must also communicate the mandatory diagnostics (DPE, asbestos diagnosis, ERP), as well as the diagnostics relating to the operation of the electrical and gas installations, or any specific diagnosis depending on the activity transferred.

For example, for bakery, catering or hotel activities, the purchaser must be able to ensure the working condition of the essential equipment (cold room, extraction, etc.). It is desirable to require technical reports on their state of operation, which can be integrated under suspensive conditions.

In general, the purchaser must obtain reports demonstrating that the premises are suitable for the transferred activity.

In addition, it is recommended that he seek advice from experts in the figure.

Stage of the establishment of a promise and the formalization of the conditions precedent

Depending on the complexity of the project, it is necessary to consider the need to conclude an act prior to the transfer of ownership, that is to say a promise to sell or compromise.

In practice, it is very rare for the parties to conclude an assignment directly without going through a compromise. The duration of the latter makes it possible in particular to obtain financing, to collect urban planning authorizations, to seek the agreement of the co-ownership, to purge the right of pre-emption of the Municipality and the lessor, to inform the employees of the transfer and to obtain the diagnoses provided for as conditions precedent.

Thus, almost systematically, a synallagmatic promise of assignment is established by providing for conditions precedent to be lifted. At this stage, the lawyer takes care to formalize these conditions, which must be met for the sale to take place. Conditions precedent include:

• The financing condition: The granting of a loan requires significant delays. It is recommended to allow about four months for the purchaser to file several applications and obtain the formal agreement of a bank. This condition protects the purchaser who does not have all the necessary funds.
• Carrying out the work recommended in the reports (design offices or specialised companies), so that the necessary work is carried out before taking possession.
• Purge of the right of pre-emption: The Municipality may benefit from a right of pre-emption involving the sending of a declaration of intention to alienate. It may exercise this right or expressly waive it. In the absence of a response within two months, silence shall constitute a waiver. This administrative procedure requires special vigilance.
• Obtaining administrative authorizations: sign, work, necessary training (in particular for drinking establishments), registration of a company with the registry of the commercial court.
• Informing employees, which is an inescapable legal obligation: it must take place at least two months before the sale and guarantees the protection of employees’ rights in the context of the transfer of a company.

Stage of lifting the conditions precedent

The conclusion of a promise of assignment can take place quickly and depends on the diligence of the parties. On the other hand, the time required to lift the conditions precedent often depends on third parties.

Once the promise has been signed, the conditions must be lifted within the agreed deadlines. In this context, the lawyer actively accompanies this process and becomes a real facilitator of the operation.

In the case of a prior deed, the period to acquire a business is about four months. This period may seem long, but it is essential to complete all the formalities and lift the conditions precedent in good conditions.

The final sale therefore depends on the fulfilment of these different conditions. When they are all lifted, the final deed of transfer may take place.

Stage of the final deed of sale and the reiteration of the sale

Once the conditions precedent have been lifted, the deed of sale, called “repetitive”, organizing the transfer of ownership and the payment of the price, can be regularized. The drafter, often a lawyer, draws up the final deed and ensures payment of the price.

From the point of view of the purchaser, the transfer is made on the date of transfer of ownership and possession of the land. Conversely, as indicated below, the seller does not immediately receive the transfer price.

The buyer benefits from several legal guarantees weighing on the seller:

• The release and peaceful enjoyment of the land, in its tangible and intangible elements. The transferred fund must correspond to the characteristics agreed in the deed.
• The guarantee against hidden defects, resulting from Article 1641 of the Civil Code.
• The guarantee of the accuracy of the statements contained in the deed, provided for in Article L.141-3 of the Commercial Code. These warranties protect the purchaser from hidden defects in the fund or inaccuracies in the seller’s representations.

Stage of completion of post-transfer formalities

After the signing of the deed, registration and mandatory advertising must take place. These formalities are mandatory and condition the validity of the assignment with regard to third parties.

Stage of sequestration of the transfer price and settlement of objections

The lawyer is generally entrusted with the assignment of sequestration. It collects and settles objections before paying the price to the transferor. This assignment protects both the buyer and the seller against any claims from creditors, who have a legal period to assert their rights.

Indeed, the Seller’s creditors may object to the payment of the price at the address chosen by the buyer, within 10 days after the last date of the legal advertisements, namely:

• publication in a legal announcement newspaper (after registering with the tax authorities),
• publication in the Official Gazette of civil and commercial announcements.

In addition, the buyer is jointly and severally liable with the seller for the payment of the apprenticeship tax, income tax (IR) or corporation tax (IS) relating to the profits made by the seller until the transfer. The solidarity period is in principle 90 days but may be reduced to 30 days if three cumulative conditions are met, namely:

• if the tax administration is notified of the transfer of goodwill by filing the declaration of transfer within the legal period of 45 days,
• if the seller has filed his statement of results, whether under the real or micro scheme, within the legal period of 60 days,
• if the seller complies, on the last day of the month preceding the sale or transfer of the fund, with its tax reporting and payment obligations.

In the context of a transfer of business, the key words must be safety and efficiency. The time required to achieve the transfer of ownership varies according to many factors, specific to the parties or external. Support by a specialist lawyer remains the best guarantee of the success of this major strategic and patrimonial operation.