Selling a loss-making company: valuation and negotiation

Quick answer. A loss-making company can be sold, but rarely on an earnings multiple. It is valued through its revalued net assets and its recovery potential. Beware: carry-forward losses (art. 209, I of the French Tax Code) do not follow the share buyer and are lost if the actual business activity changes (art. 221, 5).

Selling when the accounts are in the red often triggers one reflex: believing the company is worth nothing. That is almost always wrong. A loss-making business holds assets, goodwill, contracts, sometimes cash, and a recovery potential a better-capitalised buyer can unlock. The real question is not whether value exists, but how to quantify it and structure a price both parties accept.

At Hayot Expertise, a firm registered with the Île-de-France Order of Chartered Accountants, we regularly support directors who want to sell a weakened business without giving it away. This article explains how to build a defensible business valuation, the real fate of tax losses, and the structures that unlock a negotiation.

A buyer does not pay for a loss: they pay for what remains after it. Three sources of value almost always survive.

• Revalued net assets. Real estate, equipment, inventory and recoverable receivables have a market value, often above or below their book value. This is the foundation for valuing a company in the red.
• Recovery potential. A buyer with cash, synergies or better market access can bring the business back to break-even. They buy that path, not the past.
• Intangibles. Customer base, brand, recurring contracts, commercial leases, approvals or licences keep a use value independent of the year's result.

The three valuation methods used before a sale (asset-based, earnings, comparables) remain usable, but their weighting changes radically: on a loss-making target, the asset-based approach through revalued net assets prevails over earnings methods, which are inoperative when the result is negative.

This is the most misunderstood point in sales of distressed companies. Many sellers believe they are selling a stock of losses to the buyer. The legal reality is more nuanced.

What the law says#

When shares are sold, carry-forward losses stay within the sold company. The corporate income tax payer, the legal entity, does not change: a mere share sale entails neither cessation of business nor loss of the deficits (BOFiP BOI-IS-CESS-10, art. 221, 5 CGI). They are therefore not "transferred" to the buyer as a claim; they simply continue to exist within the same company, whose capital has changed hands.

The carry-forward of these losses is itself capped: offsetting against a profit is limited to €1,000,000 plus 50% of the portion of profit exceeding that million (art. 209, I CGI), but the carry-forward is unlimited in time.

The underestimated risk#

The right to carry forward is definitively lost if the buyer triggers a change in actual activity treated as a cessation of business (art. 221, 5 CGI). Two objective situations characterise it:

1. the disappearance of production means for twelve months, or followed by a transfer of the majority of the voting rights;
2. a substantial change in activity (addition, abandonment or transfer) causing a variation of more than 50% in turnover, or in average headcount and gross fixed assets.

In other words, a buyer acquiring a loss-making shell to house a completely different business loses the deficits they thought they had bought. Approval from the Budget Minister remains possible where the operation is indispensable to continuing the activity, but it cannot be assumed.

Our reading. Losses are worth money only if the buyer continues the same activity and returns to profit. It is a conditional future tax saving, not a cheque. Presenting it as a certain asset during negotiation invites disappointment, or even a reassessment if the tax authority requalifies the operation.

When the result provides no reliable multiple, the price is negotiated differently. Two structures recur in our business transfer files.

A well-structured earn-out aligns interests: the seller believes in the recovery, the buyer pays for potential only if it materialises. Conversely, a severely impaired sale can shift towards a takeover for a symbolic euro, where value lies in assuming the liabilities and keeping the business alive.

In practice: the vendor loan and tax#

The vendor loan completes the buyer's financing plan; it does not replace the bank loan. Its tax trap is well known: the seller's capital gain is taxed in full in the year of sale, even if the price is collected over several years. The seller may nonetheless request deferral of the payment of their tax (art. 1681 F CGI), reserved for companies with fewer than 50 employees whose balance sheet or turnover does not exceed €10m, for sales covering the majority of the capital. The deferral runs until 31 December of the fifth year following the sale and requires recovery guarantees. It applies to the payment of the tax, never to its base.

Common case. Recently, a director of an industrial SME asked us to sell a company posting two loss-making years but owning its premises and holding a recovering order book. The buyer's initial reflex was to offer a nil price "since there is no profit". Valuation through revalued net assets, including the real value of the real estate and machinery, set an objective floor. The recovery-linked portion was handled through an earn-out indexed on the margin of the two following years. The deal closed at a price far from the initially suggested zero.

Trade-off: selling shares or the business? On a loss-making company, selling shares transfers the structure with its liabilities and its losses, but exposes the buyer to latent liabilities, hence the importance of an asset and liability warranty. Selling the business isolates the operating assets and leaves the liabilities with the selling company, but triggers taxation of the professional capital gain at company level. Our full analysis appears in the article on selling the business or the shares. On a loss-making target, the value of the losses often tips the balance towards a share sale, provided the buyer maintains the activity.

What the tax authority looks at. A sale of loss-making shares followed by a radical change of activity draws attention: the authority checks whether the operation's real purpose is to capture the losses. Continuity of the business must be documented and genuine. Our role, alongside your legal counsel, is to secure that consistency within our tax support for the sale.

A distressed company worries the buyer by default. Organised transparency reassures more than a file that disguises the losses.

1. Make the accounts of the last three years reliable and explain each source of loss.
2. Establish the revalued net assets line by line, with valuation evidence.
3. Document the carry-forward losses, their amount and the conditions for keeping them.
4. Build a quantified recovery business plan, distinct from the past.
5. Prepare the asset and liability warranty and anticipate the buyer's due diligence.
6. Map the latent liabilities (tax, social, litigation) to avoid any surprise.

Upstream work, carried out with your firm and in line with a growth and valuation strategy, turns an anxiety-inducing file into a readable proposal.

• Losses are only valuable if the actual activity is maintained: never price them as an acquired asset.
• The vendor loan does not erase the capital gains tax of the year of sale; check eligibility for the deferral under article 1681 F CGI.
• The earn-out is taxed in the year it is received; anticipate its effect on the reference taxable income and any exceptional contribution on high incomes.
• The asset and liability warranty is the central tool on a fragile target: its cap and duration are negotiated line by line.
• A change of activity after purchase can trigger the definitive loss of the deficits (art. 221, 5 CGI).