Acquisition Due Diligence in Paris

An acquisition is rarely decided by the headline valuation. It is decided by what surfaces between the letter of intent and signing: earnings inflated by one-off items, net debt heavier than the borrowings line, structurally understated working capital, a live employment claim, a provision never booked.

Acquisition due diligence turns those uncertainties into numbers. Its purpose is not to produce a compliance document but to answer three operational questions: is the asking price justified, which risks survive completion, and which of them belong in the warranty package rather than in the price.

Hayot Expertise acts in Paris 8 on French SME and business acquisitions, for buyers and for sellers.

Financial workstream#

This is the core of the engagement, and the part that moves the price.

• Quality of earnings: normalising EBITDA and operating profit to separate recurring from non-recurring items (exceptional income, owner remuneration off market, intragroup rent, personal costs carried by the company).
• Real net debt: borrowings, shareholder current accounts, finance leases, factoring, rescheduled tax and social liabilities, off balance sheet commitments.
• Normalised working capital: average working capital across a full cycle, not the 31 December snapshot, which is often the most flattering date of the year.
• Receivables: aged balance, revenue concentration, doubtful debts not provided for.
• Inventory: physical reality, turnover, obsolescence, valuation method.
• Cash: separating available cash from the cash the business needs to operate.

Tax workstream#

• Review of returns for open years and consistency with the accounting records.
• Uncertain tax positions: VAT on complex transactions, deductibility of charges, favourable regimes applied without meeting every condition.
• Current or past audits, reassessments, settlements.
• Tax cost of the transaction itself: transfers of shares fall under article 726 of the French Tax Code, at a rate that varies with the company's form and the nature of its assets. This is settled before signing, not after.
• When buying a fonds de commerce, the purchaser is jointly liable with the seller for certain taxes under article 1684 of the French Tax Code. This is a standard reason to escrow part of the price.

Employment workstream#

• Actual headcount, contracts, seniority, acquired individual benefits.
• Correct collective bargaining agreement, grades, minimum pay.
• Overtime, day-rate arrangements, accrued paid leave.
• Live employment claims and latent exposure.
• Where a business or a line of activity is acquired, the attached employment contracts transfer automatically to the buyer under article L. 1224-1 of the French Labour Code. Employment liabilities follow the activity, so they are reviewed before, not after.

We quote after an initial discussion on the target and the timetable. The quote is fixed: we do not bill time against an open-ended budget.

A findings report built as a decision document rather than a stack of schedules:

1. Findings ranked by financial impact, each one quantified.
2. An explicit split between what should be negotiated in the price (normalised working capital above the assumed level, understated net debt) and what should be covered by warranties (a probable but unliquidated tax exposure, a live claim).
3. The points requiring a specific clause in the warranty and indemnity package, with the amount to secure.
4. Operational recommendations for the first hundred days.

Samuel Hayot is a chartered accountant registered with the Ordre des experts-comptables de Paris Ile-de-France and a statutory auditor registered with the Compagnie regionale des commissaires aux comptes de Paris. That dual registration has a practical effect on due diligence: the habit of reviewing accounts under professional liability, a disciplined approach to sampling and audit evidence, and the ability to read a French tax return beyond what it states.

Acquisition due diligence is not a statutory audit, and we say so plainly in the report. But it is run with the same evidential discipline.

• Before the price is set: our business valuation engagement produces a defensible range.
• On the sell side: our business sale advisory prepares the file and runs the process.
• If the acquisition runs through a holding company: structuring and the tax regime fall under our holding company engagement.
• For the detailed method, workstream by workstream: our acquisition due diligence guide.

• A manager or executive buying a French SME, alone or alongside a fund.
• A group acquiring a competitor or a supplier.
• A buyer of a fonds de commerce, a professional practice or a pharmacy.
• An investor taking a stake in a private French company.
• A seller who wants to de-risk the sale by auditing the business before presenting it.

Acquisition due diligence starts once the letter of intent is signed and exclusivity is granted, and finishes before the share purchase agreement (protocole de cession) is signed. Any earlier and you are spending fees on a target the seller can still show to someone else. Any later and your findings have lost their negotiating value, because price and warranties are already drafted.

What we review depends on what you are buying: shares, meaning a company with its entire history, or a fonds de commerce, meaning identified assets.

The two structures are not bought or reviewed in the same way. This is the buyer's first structural decision, and it drives the scope of the work as much as its budget.

On a share purchase you inherit everything, so reviewing the exposure for open years is what gives you the material to argue the price, and what it uncovers is covered by the warranty and indemnity package. On a purchase of the fonds, you are asking different questions: is the customer base attached to the trading name or to the seller in person, does the lease allow the business you intend to run, is the stock worth what the inventory says it is.

A quantified finding is worth something only once it becomes a clause. The report sorts each point to one side or the other, and the contract gives effect to that sorting.

What belongs in the price. Any gap that is both certain and quantifiable, on working capital as on net debt, is settled through the price adjustment mechanism. Completion accounts draw up accounts at the completion date and adjust the price for the difference. A locked box fixes the price on an earlier reference balance sheet, with the buyer taking the economics from that date, supported by a clause prohibiting leakage to the seller. Which one you use is negotiated, and it changes who carries the risk between signing and completion.

What belongs in the warranties. Anything that is not certain and quantifiable is not deducted from the price, it is covered. The garantie d'actif et de passif appears in no French code: it is entirely contractual. Its cap, its de minimis, its threshold, its duration and its security (escrow, bank guarantee) exist only because they are written down, and a warranty with no security is worth exactly the seller's solvency on the day you call on it.

These parameters have to be read together. As a purely arithmetical illustration: an exposure quantified at €80,000 in the report returns nothing to the buyer if the negotiated de minimis is €100,000. The clause exists, and it does not bite. That is why findings are quantified one by one before drafting, not after.