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.

Spanish property woes highlight security of French system

Although Spain is still the number one choice for British overseas property buyers - ahead of France - recent reports in the Daily Telegraph and elsewhere continue to highlight the many uncertainties surrounding property purchase there, in comparison with France's highlys secure system of property buying and selling.

Headlines such as 'Britons lose millions on the Costa homes that never existed' or 'Nearly 400 Britons lost £43 million in property deal' appear almost daily in the property columns of the daily and Sunday newspapers. Among the most recent scandals has been the failure of some regional Spanish banks to provide the financial guarantees (against deposits paid) which are required under Spanish law 57/1968 designed 'to protect the funds paid by the buyer into a special account and ensure they are used solely for the purpose of building the property'.

Speaking of a recent ruling by a provincial court in Cantabria, Charels Svoboda - head of an action group in Valencia - noted "While this is an improvement, and it does make me hopeful, it is important to remember that half of the Spanish banks are in financial trouble and many of the developers have gone out of business or simply disappeared - so where is the money going to come from to pay them back?"

According to recent figures there are some 683,000 new-build properties in Spain seeking buyers, plus an estimated 700,000 homes for sale by their owners, according to consultancy RR de Acuna. Several Spanish banks, who have repossessed properties from owners unable to keep up repayments, are now trying to offload them at 50% of their original price. The same report notes that out of 60,000 property companies, some 23,600 have gone bust, owing 137 billion euros to the banks.

Could this happen in France? The answer is a resounding No! In the case of off-plan developments, a minimum of 50% of the proposed properties (such as apartments and villas) have to be sold before work can begin. Purchasers then pay a small deposit and a series of stage payments only when building work progresses - foundations, first floor, roof etc - which are verified and authorised by independent lawyers ('notaires') in charge of the transaction. It is rare for a building company, many of whom are large multi-nationals, to run out of funds and for work to cease.

Because of its system of land registry, existing properties and their ownership can be verified by consulting the 'plan cadastre' on-line or at the local Mairie. Part of the duties of the Notaire handling the transaction is to ensure that the property exists and that the owner/vendor has has true title. Any additions or alterations can also be checked to make sure the appropriate planning permission was obtained. Building work undertaken by correcntly registered French artisans will be covered by insurance guarantees of up to 10 years.

Buyers should exercise reasonable care particularly when purchasing new-buildss or off-plan property, either for occupation or investment, and as a minimum personally visit the site of the proposed development and samples of recent properties built by the constructor.

Sources: Sean O'Hare, Daily Telegraph 23 December 2010; Graham Norwood, The Observer, 26 December 2010.

Auto-entrepreneurs - shock tax, resolution!

Many people opting for the comparatively new French self-employment regime (known as 'auto-entrepreneur') suffered a nasty shock this autumn when they received huge bills for a new local tax (CFE*) which replaces the old 'taxe professionnelle' levied on all commercial and professional enterprises, including those run from home. This despite the fact that many of the newly created enterprises had little or even a nil turnover, and had relied on the French government's promise (when the scheme was launched in January 2009) of 'no turnover, no tax' - including exoneration from the 'taxe professionnelle' or its equivalent for the first three years of operation.

The problem, as is often the case, lay in the small print, in this case buried within the auto-entrepreneur registration form, which basically offered two distinct options for paying income tax and social security contributions. Both of these are based on a fixed percentage of revenue - 13% in the case of 'commerce' (basically businesses that buy and sell) and around 23% for services and professions. Of these amounts the majority comprises social security contributions and the remainder (1% - 2%) income tax.

The registration form offered two methods of payment of the tax element, either by three-monthly declarations (along with the social security payments) or at the end of the tax year, together with any other income tax. The latter option appeared attractive to those on very low incomes or a pension, who might end up paying no income tax at all. (For a single person, earnings up to nearly 10,000 euros do not attract tax, and for a couple the amount is around 15,000 euros).

What many signatories missed when completing the form was the provision that the exemption from 'taxe professionnelle' - replaced in 2010 by the new CFE - only applied to those electing for the system of three-monthly payments - known as 'prélèvement forfaitaire libératoire' - a term not easily understood by the average French person, let alone an English speaker resident in France. Those that had opted for the once-off annual income tax payment were as a result suddenly faced with a huge CFE bill, often when they had not generated any income from their newly created auto-enterprise.

Further anomalies arise as the former 'taxe professionnelle' and its new replacement the CFE are calculated on notional values of property owned by local businesses, whereas many auto-entrepreneurs work from home and already pay 'taxe habitation' and 'taxe foncière' - personal taxes applied to domestic properties and their owners/occupiers! Many auto-entrepreneurs also point out that they do not actually work at home but at their clients' base (such as those offering services delivered in their clients' home or business premises) or at most use a few square metres in their living room, occupied by a computer.

Fortunately after vigorous protest and a lot of adverse publicity, the government has amended the law and on 6 December, as part of the budget for 2012, announced that all auto-entrepreneurs would be free of the new tax, during the early years of startup.. Anyone who had paid the tax already, ahead of the 15 December deadline, would be reimbursed. There are ongoing discussions about paying a contribution towards local business training programmes.

While the decision has been welcomed by auto-entrepreneurs, it is regrettable that a basic form of self-employment has become so complicated in the hands of French bureaucrats.

The French discussion forum http://www.auto-entrepreneur.fr/ is an excellent source of information about the auto-entrepreneur regime, including the new EIRL** version available from January 2011, which offers an element of limited liability, similar to a company, for the individual auto-entrepreneur, by separating (and protecting) personal assets from those of the enterprise.

(*'cotisation foncière des entreprises')  (**'entreprise individuelle à responsabilité limitée')