Business as a going concern (fonds de commerce)

The fonds de commerce (the business as a going concern: goodwill, lease rights, fixtures, clientele) is not the premises: it is the trader’s working tool, made up of everything that allows him to attract and keep customers. French law gives no general definition but lists its elements: the clientele and passing trade, the trading name and business name, the leasehold right, furniture and equipment, stock, patents, licences and trade marks. The clientele is the essential element; without it, there is no business.

To value a business is to value the capacity of an operation to produce income at a given location. That is why the value of a business depends as much on its leasehold right as on its accounts. The business can be sold, pledged and passed on, and its valuation also comes into play in eviction compensation and in the compulsory purchase of commercial premises.

Where the rule comes from

Article L. 142-2 of the French Commercial Code lists the elements of the business that may be included in a pledge: trading name and business name, leasehold right, clientele and passing trade, commercial furniture, equipment or tools, patents, licences, trade marks, designs and models. Article L. 145-14 makes the market value of the business, determined according to the custom of the trade, the first component of eviction compensation.

The Charte de l’expertise en évaluation immobilière (French property valuation charter, Title II § 8.5) presents the valuation of businesses as a specialism practised by certain property valuers with the required competence, and describes in Title III the methods based on the trading accounts (§ 2.4) and on professional ratios (§ 2.9).

In a valuation report

I cross several approaches. The trade custom method applies to turnover a percentage specific to each activity, adjusted for profitability and location. The profitability method applies a multiple to adjusted EBITDA, after a normal remuneration for the operator. The value of the leasehold right is a floor: a business is never worth less than the right to occupy its premises. The report sets out the accounts of the last three financial years, the adjustments made, and justifies the rate or the multiple adopted by comparable sales.

Example

A hairdressing salon has an average turnover of €180,000 and an adjusted EBITDA of €32,000. Trade custom gives a range of 50 % to 100 % of turnover; I adopt 70 %, or €126,000. The profitability method, with a multiple of 4, gives €128,000. The leasehold right is estimated at €40,000. I conclude at a business value of €127,000, equipment included, stock extra.

Not to be confused with

The shares of the company that runs the business, whose value reflects the whole balance sheet, and the premises (murs), a separate property valued as a building.