Running and developing your business: leasing, guarantees and anticipation

Owning a craft business means owning much more than just a set of physical assets. It is a dynamic work tool, a source of income, but also a valuable asset that can be used to obtain credit or whose transfer can be judiciously prepared. To fully understand the implications of this, it is essential to know in advance its composition and acquisition methods. Once you have acquired the business, how do you optimise its operation? To do this, it is essential to understand the the legal status of the craftsman himself. How can it be used to finance growth? And how can you plan for its future management or transfer?

This article explores the various aspects of managing and enhancing the value of a craft business. It looks at direct and indirect operating methods (usufruct, lease management, management with power of attorney), techniques for using the business as collateral (security interests) and, finally, estate planning tools such as the posthumous power of attorney.

Operating the business: different procedures

While direct operation by the owner is the most common situation, there are various situations in which ownership may be dissociated from the actual operation of the business. The law provides a number of mechanisms for dealing with these situations. In addition to the legal operating structures, the day-to-day running of a craft business also depends on the quality of its staff. qualifications and the management of its human resources, whether this involves taking on apprentices or formalising the status of spouses.

Own-account operation: usufruct of the business

Usufruct is the right to use property belonging to someone else (the bare owner) and to receive the fruits thereof, provided that the substance of the property is preserved (article 578 of the Civil Code). This right is temporary (life annuity for an individual, 30 years maximum for a legal entity). It may arise by operation of law (for example, the rights of the surviving spouse in the estate) or by contract (gift of bare ownership with reservation of usufruct, sale of usufruct, etc.).

Applied to a craft business :

• Rights and obligations of the usufructuary : He has the power to manage and operate the business in order to receive the profits (which are considered to be fruits). He may carry out acts of administration and even certain acts of disposal of the business. elements of the business (e.g. replacing equipment), as long as he maintains the substance of the business as a whole. He may even lease out the business. In return, he must operate the business "reasonably", maintain it (day-to-day repairs), pay the annual operating expenses and draw up an inventory at the start of the usufruct period.
• Rights and obligations of the bare owner : He retains the right to dispose of the business (sell it, for example, but without prejudicing the rights of the usufructuary, who retains his usufruct over the property sold). He must ensure the peaceful enjoyment of the usufructuary (not competing with him, for example). The usufructuary is responsible for "major repairs" (those affecting the structure, a concept that is difficult to transpose to the business, but which undoubtedly involves major investments for its long-term survival), although the usufructuary cannot legally force him to do so as the law currently stands.
• Switching off : Usufruct is extinguished by the death of the usufructuary (or at the stipulated term), by total loss of the land, by non-use for 30 years, or by forfeiture in the event of misuse. At the end of the term, the usufructuary returns the land to the bare owner, without being able to claim compensation for any improvements he or she has made to it (article 599 paragraph 2 of the Civil Code), a rule that is often criticised.

Own-account operation: lease management

A management lease (or free management) is a contract under which the owner (or operator) of a craft business leases it to a manager (the tenant-manager), who then runs the business. at its own riskThis is a temporary arrangement, in return for payment of a fee (articles L. 144-1 et seq. of the French Commercial Code). This is a useful option for temporary management (illness, waiting for an heir, etc.) or to allow a future buyer to test the business before buying it.

Key points of the scheme (specific to commercial and craft businesses) :

• Qualification: This is a lease of intangible personal property (the business), distinct from a property lease of the premises. It is intuitu personae concerning the tenant (he may not sublet or assign the contract without agreement).
• Terms and conditions: To be able to rent out their business, the lessor must, in principle, have run it personally for at least two years (article L. 144-3). There are many exceptions (heirs, protected adults, credit institutions, etc.) and a court waiver may be obtained. Failure to comply with this condition will render the contract null and void.
• Advertising : The contract must be published in a legal gazette within 15 days. The tenant-manager must register with the RM.
• Obligations of the lessor : To deliver the business in a fit state to be exploited, to guarantee against hidden defects, to ensure peaceful enjoyment, and above all, it is jointly and severally liable with the lessee for any debts contracted by the latter in connection with the operation of the business, until publication of the contract and for the following 6 months (article L. 144-7). This joint and several liability is a major obstacle to the formula.
• Obligations of the tenant : Operate the business reasonably, without changing its principal activity, pay the licence fee, maintain the business (day-to-day repairs), and return it at the end of the contract.
• Switching off : It is terminated on expiry of the agreed term (there is no automatic right to renewal), by termination (by fault or agreement), by loss of the business, or by the death of the lessee. At the end of the contract, the tenant's operating debts become immediately due and payable (article L. 144-9).

Operating on behalf of third parties: managing agents

In this case, the owner (the principal) entrusts the management of the business to a manager (the agent), who acts on behalf of the principal. in the name and on behalf of the principalThe principal retains ownership of the business and bears the risks of operation. The principal remains the owner and bears the operating risks. The manager-agent has a degree of autonomy in organising his or her work (hiring staff, etc.).

This hybrid status, created to provide security in situations that fall somewhere between salaried employment and entrepreneurship, is governed by a set of rules:

• Training : The principal must provide detailed pre-contractual information to the future manager (article L. 146-2). The manager-agent must be registered with the RM (or RCS).
• Plan : It is a mandate, subject to the rules of the Civil Code (articles 1984 et seq.), but with specific features inspired by employment law:
  • Remuneration : A minimum commission must be guaranteed, set by framework agreement or, failing that, by the minister (or judge).
  • Obligations : The principal must make the fund available, pay the commission, reimburse expenses and advances, and compensate the agent for losses incurred through no fault of his own (article 2000 C. civ.). The agent must manage the business diligently, be accountable and comply with instructions.
  • Switching off : Often regarded as a mandate of common interest (revocable only for just cause or by mutual agreement), it provides for a specific termination indemnity in the event of termination by the principal (except in the event of gross negligence on the part of the manager), equal to the commissions for the last 6 months (article L. 146-4).

Exploitation on behalf of others: the posthumous mandate

Created by the Inheritance Act 2006 (articles 812 et seq. of the Civil Code), this tool enables a person (the principal) to appoint during his or her lifetime an agent (a natural or legal person) to administer or manage all or part of his or her estate after his or her death, on behalf of and in the interest of one or more identified heirs.

• Special features: It takes effect on death, the mandatary represents the heirs (who have not chosen him) and not the deceased, and it divests the heirs of the management of the assets concerned.
• Terms and conditions: It must be justified by a serious and legitimate interest (incapacity of an heir, need to manage professional assets, etc.), given and accepted by notarial deed before the death. The proxy must be capable and must not be disqualified from managing professional assets.
• Powers of attorney : The powers of the mandatary are limited to conservatory acts and provisional administration prior to acceptance of the succession by the heir concerned. After acceptance, the powers are those defined in the mandate (generally administration, except where an express mandate is given for acts of disposal). The mandate is exercised subject to the powers of any executor.
• Duration: In principle 2 years (extendable by court order), but extended to 5 years (extendable) if justified by the incapacity of the heir or the need to manage professional assets.

It is a powerful tool for ensuring the continued operation of a craft business after the death of the operator, until the heirs can take over or decide what to do with the business.

Leveraging the craft fund as a guarantee

As an economic asset, the business can be used as collateral to obtain financing. There are two main approaches: security based on ownership of the business and security based on its value.

Security interests based on ownership

Here, the creditor obtains a form of property right in the land as security for his claim.

1. The Reservation of Ownership Clause (CRP) : (Articles 2367 et seq. of the French Civil Code) Stipulated in a contract for the sale of the business (often on credit), it suspends the transfer of ownership to the purchaser until the price has been paid in full. The seller remains the owner and can reclaim the business in the event of non-payment. To be effective, particularly in the event of the buyer's insolvency, the clause must be in writing and agreed no later than delivery. It is highly protective of the seller.
2. Leasing of business assets : (Articles L. 313-7 et seq. of the French Monetary and Financial Code) A finance company buys the business and leases it to the craftsman with a unilateral undertaking to sell at the end of a specified period. The craftsman pays rent (royalties) and can buy the business at the end by exercising the option. This is a financing technique, but it is rarely used for craft businesses because it is risky for the lessor (the value of the business depends on how well it is run by the craftsman) and is subject to the restrictive management lease system (in particular, the lessor is jointly and severally liable). The transaction must be publicised.
3. The Security Trust : (Articles 2011 et seq., 2372-1 et seq. of the Civil Code) The craftsman (settlor) transfers ownership of his business to a creditor (or third party) trustee, who is responsible for returning it once the debt has been paid. In the event of non-payment, the trustee acquires free disposal of the business (or sells it) to pay itself. The artisan generally retains the use of the business via an ad hoc agreement (not subject to the management lease regime if the business is commercial - note that article 2018-1 C.civ. does not explicitly refer to the fund artisanalwhich could cause problems). It is a very strong but complex security, requiring a notarial deed and tax registration.

Security interests based on value: Pledging

This is the security most specifically associated with the fonds artisanal since its legal recognition (article 22, Law 96-603 referring to articles L. 142-1 et seq. of the Commercial Code).

• Definition: Pledging is the assignment of the business (intangible personal property) as security for a debt, without the artisan being dispossessed. He continues to operate his business.
• Interest : Although often seen as a second-rate guarantee (its value depending on the company's performance), it is frequently requested by banks as a complement to other securities.
• Types : It can be conventional (agreement between the craftsman and the creditor) or judicial (obtained by a creditor with the authorisation of a judge to guarantee a debt that appears to be justified and whose recovery is threatened).
• Formalities : A conventional pledge must be recorded in writing and registered. Above all, it must be registered in a special register held at the clerk's office of the relevant commercial court within 30 days of the deed, on pain of nullity. The registration is valid for 10 years and must be renewed. Judicial pledges are registered provisionally and then definitively.
• Plate : The pledge covers the intangible items listed by law (brand name, name, leasehold rights, customer base, intellectual property, etc.) and professional equipment and furniture. It does not cover goods.
• Effects : The secured creditor benefits from a preferential right (to be paid before the unsecured creditors on the sale price of the business) and a resale right (the right to sell the business even if it has been transferred to a third party). However, he may not apply for the business to be assigned to him for payment. In the event of non-payment, he may initiate the forced sale of the fund at public auction.

Operating, financing or transferring your business requires strategic choices with significant legal and financial consequences. Management leases involve your liability in a different way to management contracts. The choice of security (pledge, trust, etc.) will depend on the requirements of your financial partners and the acceptable level of risk. Our the firm advises you on the operating structures and financing options best suited to your project, to optimise the management of your fund and secure your operations.

Sources

• Civil Code (Art. 578 et seq., 812 et seq., 1709 et seq., 1984 et seq., 2000, 2011 et seq., 2355 et seq., 2367 et seq., 2372-1 et seq.)
• French Commercial Code (Art. L.142-1 et seq., L.143-1 et seq., L.144-1 et seq., L.146-1 et seq., R.143-1 et seq., R.144-1)
• Law no. 96-603 of 5 July 1996 (Art. 22)
• Monetary and Financial Code (Art. L.313-7 et seq., R.313-3 et seq.)
• Code des procédures civiles d'exécution (Articles relating to precautionary measures and the distribution of funds)