What to check in a small business transaction

Understanding the transaction: asset sale vs. share sale

The first thing to clarify in any small business transaction is what is actually being sold. In France, there is a fundamental difference between buying the assets of a business (a cession de fonds de commerce) and buying the company itself through its shares (cession de parts sociales or actions). In an asset sale, you acquire specific elements such as the client base, the trade name, the lease rights, equipment, and stock, but you generally do not inherit the seller's past debts. In a share sale, you buy the legal entity as a whole, meaning you step into everything it owns and everything it owes, including hidden liabilities. This distinction changes your entire risk profile. For example, if you buy the shares of a small bakery and it later turns out the company owed several years of unpaid social contributions, that debt is now effectively yours. Buying the fonds de commerce instead would usually leave those obligations with the seller. Before you look at anything else, confirm in writing which type of transaction is proposed, and make sure the language of the offer matches your understanding. Many disputes start simply because one party assumed they were buying the assets while the other was selling the company.

Reviewing the seller's financial records and statements

Once the structure of the deal is clear, the financial picture deserves careful attention. Ask for the last three years of balance sheets (bilans), profit and loss accounts, and tax returns. Consistency matters more than a single strong year: a business that shows one exceptional period surrounded by weak ones may have been dressed up for sale. Look at the trend in revenue, the gross margin, and whether the profit depends heavily on the current owner's personal involvement or relationships. A small consulting firm whose entire turnover comes from three clients tied to the founder may lose most of its value the day that founder leaves. Compare the declared figures against practical evidence such as bank statements, VAT declarations, and supplier invoices. Watch for unusual items: sudden drops in stock value, large owner loans to the company, or expenses that seem artificially low. If the seller is reluctant to share documents or offers only summaries, treat that as a warning sign. You are not being difficult by asking for records; you are doing what any reasonable buyer must do to understand what you are paying for.

Checking legal status, licenses, and permits

A business is only worth what it is legally allowed to do. Confirm that the company is properly registered, that its Kbis extract is current, and that the person selling actually has the authority to sell. For an asset sale, check that the trade name and any intellectual property are genuinely owned by the seller and not licensed from a third party. Many small businesses depend on specific authorisations: a restaurant needs its licence to sell alcohol and compliance with hygiene rules, a transport company needs its operating licences, and a regulated craft activity may require proof of qualifications. These permits are not always automatically transferred to a new owner. Verify whether each authorisation follows the business or must be reapplied for, and how long that process takes. A gap in a required licence can mean weeks of forced closure right after you take over. Also confirm that the premises are used in accordance with local urban planning rules and the co-ownership regulations of the building, since a non-conforming use can be challenged later.

Examining existing contracts, leases, and supplier agreements

The value of a small business often lies in its contracts. The commercial lease (bail commercial) is usually the single most important document, because it determines where you operate, at what cost, and for how long. Check the remaining term, the rent and how it is revised, any restrictions on the type of activity permitted, and whether the landlord's consent is needed for the transfer. A short remaining lease or a restrictive activity clause can seriously limit your plans. Beyond the lease, review supplier and client contracts to see if they contain change-of-control clauses that let the other party walk away when the business is sold. A favourable distribution agreement is worthless if it terminates the moment ownership changes. Look also at maintenance contracts, subscriptions, franchise agreements, and any exclusivity commitments. For each key contract, ask three questions: does it transfer automatically, does it require someone's approval, and can it be cancelled early? The answers tell you how much of the business you can actually keep after the sale.

Verifying liabilities, debts, and outstanding obligations

Liabilities are where surprises hide, especially in a share sale. Request a full list of debts: bank loans, supplier arrears, tax obligations, social security contributions, and any leasing or financing arrangements. Check whether the business has pledged assets as security, because a piece of equipment on the balance sheet may already be committed to a lender. Ask about ongoing tax audits and whether any reassessment could still be issued for past years. In France, tax and social authorities can review earlier periods, so a clean current situation does not guarantee there are no claims to come. Warranty clauses in the sale agreement, particularly the garantie d'actif et de passif, are designed to protect a buyer if a liability from before the sale surfaces afterwards. But such a warranty is only useful if it is well drafted and if the seller has the means to honour it. Do not rely on verbal reassurances that everything is paid; ask for official statements from the tax office and social bodies confirming the situation.

Employees usually transfer with the business under French law when the activity continues, which means their contracts, seniority, and acquired rights come with them. Review each employment contract, the applicable collective agreement, salary levels, and any unusual clauses such as high severance entitlements or non-compete arrangements. Ask whether all social contributions are up to date and whether any employee is on long-term leave, in a dispute, or subject to a pending dismissal. A single ongoing labour case before the conseil de prud'hommes can carry a meaningful financial and time cost. Look beyond employees to other disputes: unpaid invoices being contested, disagreements with the landlord, or conflicts with suppliers or customers. Ask directly whether any litigation is pending or threatened, and get the answer in writing. A business that appears calm on the surface may be carrying commitments such as unused holiday accrual, bonus obligations, or promises made to staff that will fall on you. Understanding these social commitments before signing lets you factor them into the price rather than discovering them later.

Reading the sale agreement clauses carefully before signing

The sale agreement is the document that governs everything, and its clauses deserve slow, deliberate reading. Check the exact price and how it is allocated between the different elements, since this affects tax treatment. Look at the payment terms: is part of the price held back or paid over time, and under what conditions? Conditions precedent (conditions suspensives) are essential; they allow the sale to proceed only if certain events occur, such as obtaining financing or the landlord's consent to the lease transfer. Without them, you may be committed even if the bank refuses your loan. Pay attention to the non-compete clause binding the seller, so they cannot open a rival business next door, and to the warranty clauses covering hidden liabilities. Also confirm what happens to the price paid: in an asset sale, funds are often held by an intermediary for a legally set period so that creditors can be paid. Never sign a version you have not read in full, and never accept pressure to sign quickly. If a clause is unclear, that is precisely the moment to stop and ask.

Preparing questions for a legal or accounting professional

Even a careful buyer benefits from professional review, and coming prepared makes that review more useful. Gather your documents and write down concrete questions rather than general worries. For an accountant, ask whether the financial statements are consistent, whether the profit is sustainable, and whether any figures need explanation. For a legal advisor, ask whether the transaction structure suits your goals, whether the warranty clauses adequately protect you, and whether the lease and key contracts transfer cleanly. Bring up anything the seller was vague about, because a professional can help you frame those points into formal requests. It also helps to prepare questions about the process itself: what steps happen after signing, what registration and publication formalities apply, and how long before the funds are released. The goal is not to hand the entire decision to an advisor but to test your own understanding against expert eyes. A transaction you fully understand is one you are far less likely to regret.

Example

Key areas to check in a small business transaction and why they matter

Area to check	What to request	Main risk if ignored
Transaction type	Written confirmation of asset vs. share sale	Inheriting hidden debts
Financial records	Three years of accounts and tax returns	Overpaying for weak results
Licenses and permits	Current Kbis and authorisations	Forced closure after takeover
Contracts and lease	Commercial lease and key contracts	Losing clients or premises
Liabilities	Tax and social statements	Unexpected debts falling on you
Employees and disputes	Contracts and pending litigation	Costly labour or legal claims
Sale agreement	Full draft with all clauses	Committing under bad terms

FAQ

What is the difference between an asset sale and a share sale? An asset sale transfers specific elements such as the client base, lease rights, and equipment, and usually leaves the seller's past debts behind. A share sale transfers the company itself, meaning you inherit everything it owns and owes, including any hidden liabilities. Confirm in writing which type of deal is on the table before proceeding.

Why is the commercial lease so important in a business purchase? The lease determines where you can operate, at what cost, for how long, and what activities are permitted. A short remaining term, a restrictive activity clause, or a requirement for the landlord's consent can limit your plans or block the transfer. Always check the lease terms carefully before committing to the purchase.

Do employees transfer to the new owner automatically? In France, when the activity continues, employee contracts generally transfer with the business, carrying their seniority and acquired rights. Review each contract, the applicable collective agreement, and any pending disputes. Confirm that social contributions are up to date and factor any ongoing commitments into your assessment of the price.

What is a garantie d'actif et de passif? It is a warranty clause protecting the buyer if a liability from before the sale surfaces afterwards, common in share sales. It only helps if it is well drafted and if the seller has the means to honour it. Have a professional review the wording before you rely on it.

Should I hire a professional to review the transaction? It is strongly advisable to have an accountant review the financial statements and a legal advisor examine the structure, warranties, lease, and key contracts. Prepare concrete questions and gather your documents beforehand so the review is efficient. The aim is to test your own understanding rather than hand over the whole decision.