Buying goodwill allows you to avoid all connection with former liability and therefore the risks that are associated with this. The seller takes charge of this. In consequence this corresponds to buying some assets.
It is composed of intangible (clientele, right to lease, the sign, the commercial name, intellectual property rights: patents, licenses, brands…) and tangible (equipment, stocked merchandise) elements.
Buying goodwill allows the buyer to choose the elements that they want to buy. However, they will have to keep certain contracts, which are transferred by right with the goodwill sold:
– The commercial lease
– Insurance contracts (the buyer can terminate them)
– The publishing contracts
-The employment contracts (on predetermined conditions)
As far as employment contracts are concerned, in certain cases, the buyer could be obliged to pay employees what the seller should have paid. On the other hand, the seller will have to reimburse the buyer except if a contrary clause exists.
Other contracts will be sold. Indeed, the contracts necessary for the pursuit of the business will remain. Each of the contracts will be studied in detail so that the buyer knows exactly what is involved.
It is necessary to determine the value of each tangible and intangible asset in order to work out the global value. The value of the goodwill is the market price, which is established by comparing it with similar goodwill.
The value of tangible assets is the market price. As far as intangible assets are concerned, it is possible to consult estate agencies and professional reckoners, which will help to calculate a price, which will be more specific depending on the company’s characteristics.
Buying goodwill is carried out in two stages:
– The pre-contract
– The definitive contract
The first stage allows each party to bring necessary elements together (administrative documents for the vendor and banking authorisations for the buyer, for example). This pre-contract can take the form of a unilateral promise to sell or a preliminary sales agreement (or bilateral promise to sale).
The preliminary sales agreement means the two parties wish to commit to the process. However, a fofeit clause can be included in this pre-contact allowing the buyer to ignore the agreement, with predetermined financial compensation for vendor.
The unilateral promise to sell indicates that the vendor wants to sell. The outcome of this unilateral promise depends on the wishes of the buyer. In the case where the sale does not happen, the buyer pays capital allowance to the vendor. The promise must be registered within 10 days of signing or it will be declared void.
In this pre-contract, the two parties will set a deadline for signing the contract.
This contract will be subjected to registration and legal advertising.
If a payment over time is agreed, the vendor has a legal privilege to goodwill: they have the right to ask for other guarantees (pledge). The vendor will receive nothing for three months. The sum will be blocked in order to balance liabilities.
There are two legal guarantees, which protect a buyer of goodwill: the warranty against latent defects and the obligation of non-reinstatement.
The warranty of latent effects does not need to be noted in the act so that it can protect the buyer from hidden faults, which:
– Would prevent the use of goodwill
– Would change the value in such a significant manner that the buyer wouldn’t have bought the business or would have bought it for a much lower price.
The non- reinstatement obligation is generally completed by the clause of non competition, which protects the buyer from any acts of the seller resulting in a loss of clientele. This clause must have a time or space limit.
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