Buying a business in France - 'murs et fonds' explained

As part of their search for a new lifestyle, some property buyers in France are also interested in buying and taking over an existing French business - perhaps as an alternative to starting a business of your own. The idea has its attractions as well as being a potential minefield of problems, as the new owner will inherit not only the business, but also its premises, equipment, stock, leasehold or freehold premises, existing staff, suppliers, customers and good will, plus any ongoing contracts and possibly outstanding debts and loans.

All of the above are included in term 'fonds de commerce', to which might be added 'les murs' (literally the walls), meaning that the purchase would include a freehold property, as well as fixtures, fittings, stock and goodwill ('les fonds'). Arriving at a valuation of 'les fonds' can be difficult and will depend to a large extent on the accuracy - and honesty - of the owner's financial records. Businesses receiving a high percentage of payments in cash, such as bars, restaurants, retail shops etc, are routinely suspected of concealing part of the takings, in order to reduce tax and other liabilities.

In order to arrive at a correct valuation of 'les fonds' the would-be purchaser will have to rely on his/her own expereicne of running a similar business, the opinion of an expert valuer and personal observation - for example, is the café or restuarant you are thinking of buying really full on Saturday evenings?  What would be the total takings if you added up the number of customers multiplied by the price of an average meal from the menu?

Goodwill may be difficult to establish, relying as it does on customer loyalty. If for example the current owners of the restaurant you have your eye on are going to re-open another one just a few streets away or even in the next town, a lot of their existing customers may follow them. If you are contemplating buying a rundown business or considering making a radical change, the value of the existing customer base may be very little - say, you are turning a traditional French café into a brash English pub!

Businesses located in holiday resorts and existing on seasonal trade rely on an annual influx of mainly new customers, with very little repeat business year on year. The exceptions may be some hotels, gites or camp sites, but the percentage of holidaymakers returning every year to the same resort is very low. Consequently there is little goodwill that can be assigned a monetary value, although turnover from previous years can give an indication of what might be exprected in succeeding years.

In conducting your search for a business reliant on passing trade, you enquiries should include any future plans for the neighbourhood that might affect the location - for better or worse. New road schemes can affect traffic flows or the prospect of a new lycée oppostive your premises may be good or bad news depending on your trade.

Business owners tend to exaggerate the value of goodwill, including location, but careful observation can help establish what this aspect of a business - largely unpredictable and totally intangible - is really worth to you. You might in the end decide to acquire you own premises and start your business from nothing. It may be the cheaper option in the long run.

French Property News - January 2011

In this month's issue I look at ways in which buyers of homes in France can hang on to their property, during a time of recession and when many owners contemplate selling-up and returning home. This is often not the best solution, particularly at a time when the market is depressed and there may be a glut of secondhand properties for sale. Even heavily discounting the selling price may not be sufficient incentive to off-load a property quickly if other factors are present which prevent a quick sale - poor location, state of repair, size and disposition of rooms etc.

Instead I suggest ways of reducing costs, and looking at the possibility of letting a second home long-term or for the summer season. There is still a good rental market for the right type of property in the right location - larger family homes close to public transport and conurbations where people travel to work, studios and smaller apartments in university towns, and holiday rentals on the Mediterranean and Atlantic coasts. Property seekers and workers on temporary assignment are also potential users of furnished rented accommodation over the short and medium term.

Downsizing is not always a cost-effective option, due to high transaction costs in France. If you are thinking of selling one property and buying another, you need to facor in two sets of agency fees (5 - 10 per cent of the sale/purchase price) and the Notaire's fees and other costs (around 7% of the purchase price). You may find that you are spending 20,000 euros or more - money that is not recoverable or reflectded in tangible assets such as a home extension or a new kitchen! - just to make the move, when it might be wiser to stay put and wait for the market to improve.

Source http://www.french-property-news.com/

Self-employed with limited liability

From 01 January 2011, those running a small business in France can opt for the new statute - an individual enterprise with limited liability (EIRL). Those who are already self-employed or auto-entrepreneurs as well as new business creators can choose this format.

This new business model is designed to protect the entrepreneur's personal assets (such as his home) in the case of business failure, by separating personal from business assets. In the event of a business failure leading to legal action by creditors, only those assets previously declared for use exclusively in the business - known as the patrimoine d'affectation -  could potentially be seized in order to repay creditors. Typical business assets would include business premises, the value of a lease, machinery and equipment.

In registering the new enterprise at the local centre de formation d'entreprise (CFE), a list of business assets is drawn up and items with a value exceeding 30,000 euros require professional valuation. Forms are available from local CFEs and registration is effected by chambers of commerce, chambers of trade etc as appropriate according to the nature of the business or occupation. Registration costs are expected to be around 55 euros.

The newly constitued EIRL is required to open a separate business bank account and to maintain proper accounts. There is also an obligation to file annual accounts and statements of affairs, details of which have yet to be published.

The owner of the EIRL can choose to be taxed individually on his revenue from the business, or the EIRL can choose to be taxed under the corporation tax régime (IS or impot sur les sociétés). The latter option offers a number of advantages if the EIRL wishes to retain funds (reserves) in the business. It is not however open to auto-entrepreneurs.

Although slightly more complicated to set up and run, the EIRL offers considerable protection to the business owner, which is similar to the position of directors of limited iability companies such as the French SARL, and guarantees protection of his personal assets such as his home.

Further information can be found on http://www.eirl.fr/ and a declaration can be made online at http://www.guichet-entreprise.fr/ or by visiting your local CFE.

Source: APCE (Agence Pour la Création d'Enreprises), January 2011.

New rules for French estate agents

The French government has introduced new leglisation, applicable from 01 January 2011, concerning the receipt of client funds by registered estate agents. In addition to declaring 'sur l'honneur' that they do not intend to receive client funds, agents electing for this option will have their carte professionnelle marked accordingly. The form of wording will be 'non-détention de fonds' as well as 'absence de garantie financière' as appropriate.

French estate agencies which accept funds from clients - such as the traditional 10% deposit paid by the buyer when making an offer on a property - are required to provide guarantees and insurance cover for the amounts likely to be received, and to display a certificate at their premises indicating the name of their insurers, the sum insured and the policy reference number.

Many agencies choose not to accept client funds, and in this case any monies paid on account - such as the purchase deposit noted above - by a client, are instead paid to the Notaire appointed to handle the transaction,  and held in their special sequestered client account, to which the balance of the purchase price will eventually also be transfered.

The new legislation helps to distinguish clearly between agencies authorised to receive deposits and those which are not. The French estate agency sector is already highly controlled by legislation and licensed by the regional Prefecture, and the new rules offer an additional safeguard for clients using their services.

French property discounts average just 5.21%

According to a recent report by the French estate agency group Century-21, the average discount negotiated by buyers of French property is just 5.21% - down from nearly 7% in 2009, and probably less than most potential buyers imagine when embarking on the process of acquiring a French property. Apocryphal stories abound of 'bargains' picked up for half their original asking price but the hard evidence appears to confirm the reality that there is relatively little room for manoeuvre even in a sluggish property market.

The highest average discount of 6.63% is attributed to Marseilles but still down from 8.16% in 2009, and the lowest at 2.56% in Paris (4.36% in 2009).

The average price per square metre is now 2,515 euros - the highest since before the recent property crisis. During 2010 prices actually rose by an average of 8.69% across France, and double that amount (at 18.46%) in Paris.

Despite these figures, buyers it seems will find it difficult to secure a reduction of more than 5% off the property's asking price.

Source: Mireille Weinberg, Les Echos.fr 04 January 2011.