Buying a French business: 20 financial checks to run before signing the LOI

Updated 28 April 2026.

The Letter of Intent (LOI) already locks down roughly 80% of any future deal: indicative price, adjustment mechanism, exclusivity, legal structure of the acquisition. Once signed, walking back on valuation is legally possible but commercially expensive. Yet many SME buyers in France sign their LOI on the strength of a tax return (liasse fiscale) and a sell-side teaser. That is exactly when nasty surprises slip in: inflated EBITDA, understated working capital, mis-defined net debt, dormant litigation, hidden customer concentration.

This checklist lists the 20 financial points a buyer — or their French expert-comptable — should have validated before signing the LOI. It does not replace post-LOI due diligence, but it prevents LOIs that need rewriting and aggressive renegotiation rounds.

Before signing the LOI, validate: (1) the quality of EBITDA and its add-backs, (2) adjusted net debt, (3) a realistic normative working capital, (4) revenue quality (concentration, recurrence, churn), (5) off-balance commitments and latent tax. These five blocks cover the 20 points below and drive the real equity price paid.

Adjusted EBITDA is the reference aggregate for multiple-based valuation. Its reliability sets the price.

Point 1 — Seller CEO compensation. Identify the gap between the seller's actual compensation and the market salary of an equivalent salaried CEO. An over-paid owner artificially inflates costs; a historically under-paid owner inflates EBITDA. This adjustment is systematic in French SMEs.

Point 2 — Personal expenses run through the company. Spouse's car, holidays, lifestyle expenses, family-extended health coverage: these "grey" charges disappear post-acquisition. A prudent buyer normalises them — without over-correcting, since some will need to be replaced by genuine operating spend.

Point 3 — Non-recurring items. Severance, settled litigation, exceptional grants, asset disposal gains, insurance proceeds: any one-off must be isolated. EBITDA boosted by a residual COVID indemnity or a one-shot tax refund is not repeatable.

Point 4 — IFRS 16 / lease accounting. If the target rents premises, vehicles or equipment, IFRS 16 (or a comparable French GAAP read-through) reshapes EBITDA and net debt. Check multiple consistency: a post-IFRS 16 multiple is not comparable to a French GAAP multiple.

Point 5 — Capitalised R&D. A French SME that capitalises development costs (PCG art. 212-3) inflates EBITDA and net income. Read the notes: capitalisation rate, amortisation, alignment with project nature. Reverting to opex can erase 10–20% of EBITDA.

Point 6 — Depreciation and provisions policy. Under-provisioned receivables, ignored product warranties, depreciation stretched beyond economic useful life: classic cosmetic levers. Adjust before applying any multiple.

Our French accountant's view. In French SMEs, the gap between published and adjusted EBITDA typically falls between −5% and +15%. At a 6x multiple, a 10% EBITDA cut equals 60% of one EBITDA year of price wiped out. That is the real pre-LOI stake.

The LOI almost always sets a price on enterprise value. The cash actually paid to shareholders is Equity Value = EV − adjusted net debt. Underestimate net debt and you overpay for equity.

Point 7 — Gross financial debt. Bank loans, shareholder loans (comptes courants d'associés), capitalised finance leases, recourse factoring, overdrafts, convertible notes. Don't miss implicit debt: unpaid profit-sharing, year-end bonuses payable, rescheduled URSSAF arrears.

Point 8 — Available cash vs trapped cash. Not all cash is free: deposits, escrow, pledged cash, non-repatriable foreign currency, cash trapped in a foreign subsidiary. Only genuinely free cash deducts from debt.

Point 9 — Debt-like items. Litigation provisions, unfunded retirement indemnities (IFC), earn-outs owed from a previous acquisition, latent labour liabilities (mis-classified contracts, unpaid overtime). The LOI must define them explicitly.

Point 10 — Shareholder loans. Shareholder loans are legally repayable on demand under the French Commercial Code. They must be either repaid at closing, converted to equity pre-closing, or kept under a written agreement. The LOI must decide — an "overlooked" €800k shareholder loan changes the equity price materially.

Point 11 — Normative working capital. The normative WC is the average level required to operate ex-seasonality. It anchors the price-adjustment clause. A seller who "optimised" WC at closing (cash collections accelerated, supplier payments delayed) hands over an over-cashed, under-stocked target.

Point 12 — Seasonality. Compute WC over a 24-month rolling window, month by month. A January closing on a November-December peak business is not the same as an April closing. Demand monthly detail.

Point 13 — Customer/supplier payment terms. A 90-day customer DSO when the market is at 45 days signals either deteriorated customer quality or dormant disputes. A 120-day DPO signals cash strain or abusive supplier credit (sanctions possible under French commercial code, art. L.441-10 et seq.).

Point 14 — Customer concentration. If the top 5 clients represent more than 40% of revenue, churn risk is severe. Verify each major account's tenure, frame contracts and change-of-control clauses.

Point 15 — Recurrence and churn. For SaaS, subscription, maintenance or framework contract targets: demand audited ARR/MRR, net retention (NRR), monthly churn over 24 months. NRR < 90% combined with churn > 2%/month materially changes valuation.

Point 16 — Gross margin by segment. Consolidated gross margin often hides one star product and several loss-makers. Demand a segment-level, key-account, contract-level analysis. The future mix must be realistic, not extrapolated from history.

Point 17 — Documented sales pipeline. Is the seller's forecast based on a weighted, signed pipeline or on "hopes"? Cross-check with CRM, firm orders and ongoing renewals.

Point 18 — Off-balance sheet commitments. Guarantees given, on-demand bonds, retirement indemnities, "chapeau" pension plans, long-term leases not capitalised. The PCG annex (art. 832-9) and the management report list them — not always exhaustively.

Point 19 — Latent tax. Latent gains on real-estate assets, carryforward losses (transferability conditional under CGI art. 209 II), unused tax credits, ongoing tax audits, upcoming statute-of-limitations periods. Demand the audit history of the past 6 years (standard 3-year recovery period plus extensions).

Point 20 — Quantifiable legal risks. Labour-court disputes, customer/supplier litigation, ongoing URSSAF audits, post-termination disputes (non-compete clauses, etc.). Ask the target's lawyer for the open file list and price a worst case.

On the SME deals we advise, the valuation gap between an LOI signed "blind" and one signed after these 20 checks routinely reaches 15–25% of equity price. It is not a haggling exercise: it is the quantified reality of legitimate adjustments the seller did not anticipate. Pre-LOI is also when you set adjustment mechanics (locked box vs completion accounts) and define cash-free / debt-free precisely — every word matters.

The most frequent risk is not fraud — it is the stack of small adjustments missed individually, which combined wipe out 10–15% of EBITDA. At 6x, that is 60–90% of one EBITDA year shaved off the price. A buyer who finds these in post-LOI due diligence must then either renegotiate hard (risking the deal) or absorb the gap on future margin.

1. Mandate a pre-LOI review (NP 3000 or contractual audit), even light.
2. Choose between locked box (locked reference date) and completion accounts (closing-date adjustment).
3. Define precisely in the LOI: perimeter, cash-free / debt-free, normative WC target.
4. Impose a short exclusivity (4–8 weeks) to avoid being burned by a competing bid.

• Mandatory B2B e-invoicing: from 1 September 2026, reception is mandatory for all French companies. Check target compliance (PDP, formats, archiving).
• CSRD / ESG: for in-scope mid-caps, extra-financial data is now audit-grade.
• Higher financing cost: BPI and bank conditions are stricter than in 2022; direct impact on LBO structure.
• Roll-over relief reform (CGI art. 150-0 B ter): reinvestment conditions to monitor in apport-cession holding structures.