Business Goodwill Valuation in Paris

A French fonds de commerce is not the same thing as a company's shares. It is a set of intangible assets (customer base, trade name, sign, leasehold right) and tangible assets (equipment, fit-out) dedicated to an activity. It can be sold without selling the operating company, and that distinction changes everything, both value and tax.

Three mistakes recur among sellers:

• Confusing revenue with value. Two businesses with identical revenue can be worth three times one another depending on margin, owner dependence and lease.
• Applying a multiple without normalising. A multiple applies to normalised revenue, not to the raw revenue of an atypical year.
• Forgetting that the owner has to be paid. An operator drawing a very low salary shows flattering earnings that vanish the day a salaried manager replaces them.

Hayot Expertise, chartered accountant and statutory auditor in Paris 8, produces the reasoned, quantified valuation used to sell, to buy, to gift or to defend a value.

The choice depends not on the size of the business but on the use of the document. Forming a view before going to market is not the same work as defending a value before the tax authorities.

Trade multiples#

Every activity has its benchmarks, expressed as a percentage of annual revenue: a bakery, a restaurant, a pharmacy, a hair salon, a garage or a tobacconist are not valued on the same coefficient. These benchmarks, published by legal publishers and used as an indication by the French tax authorities, are market references, not a rule of law.

They provide a starting point. They say nothing about actual profitability, which is why a highly profitable business sells above the benchmark and a low-margin one below.

For coefficients by activity, see our reference article on the French goodwill valuation scale.

The earnings method#

This is the one that decides a bank-financed buyer. We start from EBITDA and normalise it:

• owner remuneration restated to the real cost of a salaried manager;
• intragroup or off-market rent restated to market rental value;
• personal costs carried by the business, removed;
• non-recurring items, neutralised.

That normalised figure is then capitalised at a multiple reflecting the risk of the activity and its dependence on the owner.

Comparables#

Recent transactions in the same trade, in the same catchment area, at comparable size. It is the most persuasive method in negotiation and the hardest to document, as France has no exhaustive public database.

• The commercial lease: rent against the local market, permitted use (broad or narrow), expiry, assignment clauses. A favourable lease is an asset; a constrained lease is a discount.
• Owner dependence: the share of revenue tied to the seller personally, how transferable the customer base really is, and how long a handover is needed.
• Customer concentration: a business where three customers make half the revenue is not worth one with a diffuse customer base.
• Condition of equipment and fit-out: investment needed within two years, compliance upgrades.
• Transferring staff: employment contracts attached to the business pass automatically to the buyer, with their seniority and acquired benefits.
• Inventory: valued separately from the business, on a joint stocktake.

The sale of a fonds de commerce triggers registration duties payable by the buyer, on the progressive tariff of article 719 of the French Tax Code. It also places the buyer under a temporary joint liability with the seller for certain taxes, under article 1684 of the same code, which in practice justifies escrowing part of the price.

On the seller's side, the gain falls under the professional capital gains regimes, with relief mechanisms whose availability depends on the value of the business, how long it has been operated and the owner's situation. These parameters are checked before signing: afterwards, the choices are locked.

• Selling: positioning before setting a price, preparing the information pack.
• Buying: checking the asking price holds, before or alongside an acquisition due diligence.
• Gifting or transferring: establishing a defensible value for a gift or a family transfer.
• Contributing the business to a company: this falls under the regulated contribution auditor engagement.
• Disputes: shareholder exit, divorce, litigation with a buyer.
• Financing: producing a documented value for a bank.

If you hold the business through a company and the question is whether to sell the shares rather than the business, the valuation changes nature: you are then valuing a company, with its cash, its debt and its contingent liabilities. That is the subject of our business valuation engagement.

Choosing between the two routes is primarily a tax decision, and it is settled before going to market, not at signing. Our business sale advisory covers that arbitrage.

One input is routinely mishandled before any calculation is run. French trade benchmarks are most often expressed as a percentage of annual turnover including VAT: applying a coefficient designed for a VAT-inclusive base to a VAT-exclusive turnover, or the reverse, distorts the result. And the turnover used is smoothed over three financial years, never taken from the best one.

1. Scoping. Use of the document, exact perimeter (the business alone, the business and the stock, the business and the premises), recipient, timing constraints.
2. Gathering and testing the records. We rework the accounts rather than take them at face value: consistency between trial balance and tax return, cut-off between financial years, personal costs carried by the business.
3. Restatements and calculations. Each method is applied to the same file, then set against the others: it is the gap between their results, more than any single result, that fixes how wide the range has to be.
4. Analysis of the factors specific to the business and their quantified effect on the multiple retained.
5. Delivery. A reasoned range, written assumptions, weak points named.

The documents requested at the outset:

• tax returns for the last three financial years;
• trial balance and general ledger for the current year;
• the commercial lease and its amendments;
• staff register and employment contracts;
• supplier, franchise and licence agreements;
• equipment schedule and finance lease repayment plans;
• stock position;
• operating licences and permits, including the licence IV for a drinks outlet.

One point sellers often discover late: not everything follows the business in the same way. The lease is assigned with the business. Supplier, franchise and licence agreements, by contrast, pass only with the agreement of the other contracting party (article 1216 of the French Civil Code). A business whose profitability rests on a non-transferable contract is not worth what the benchmark suggests.

The engagement is document-based, so it can be run remotely: the business does not have to be in Paris. Where the condition of the equipment or of the location weighs on the conclusion, a site visit is warranted; it is then set out in the scoping of the engagement.

A business, a leasehold right and a freehold can all point to the same premises without the sale carrying the same thing. The confusion is expensive: it goes to the object of the contract itself, and so to what is being priced.

The sale procedure itself is covered in our complete guide to selling a fonds de commerce.

A valuation does not stop at the figure. How that figure is quoted to the buyer, and how it is then split in the deed, is paid for afterwards.

The all-inclusive quote. Stock is paid for on top of the business itself, and it is only priced definitively at the stocktake, a few days before the deed. Quoting one global figure without saying so invites a late argument: the buyer finds an extra where they thought they had a total. Quote the stock separately from the moment the business goes on the market.

The allocation of the price in the deed. Splitting the price between the business itself, the equipment and the stock is prepared before the deed. Improvised on the day of signing, an allocation is hard to defend if it is challenged.

A valuation read by the tax authorities, by a departing shareholder or by a court is not judged on its conclusion but on its method: where the data came from, restatements justified one by one, written assumptions, cross-checked methods rather than a single figure.

That work of justification is what explains the difference in fees between our two deliverables.