The heart of your business: understanding goodwill

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When we think of the value of a commercial enterprise, we often imagine its premises, stock and machinery. But the real value often lies elsewhere, in what the law calls "goodwill". This is a key legal concept, sometimes abstract to the uninitiated, but it represents the real dynamic value of your business, the value that attracts and retains customers day after day. Understanding this concept is fundamental, whether you are planning to sell your businessWe can also help you to buy, transfer or finance your business.

The aim of this article is to demystify goodwill. We'll explore what exactly it encompasses, what the essential elements are, including the customer base, and why it's so important to you as an entrepreneur. We'll also look at how this concept is adapting to the digital age.

What is goodwill under French law?

It is interesting to note that the French Commercial Code does not provide a single, formal definition of goodwill. It is a concept that has gradually been developed through legislation, case law and business practice. It can be described as a coherent set of movable assets that a trader or manufacturer groups together and organises in order to carry on his business and attract customers.

Its main characteristic is that it is "universal". This means that goodwill is more than just the sum of its parts. It has a value of its own, distinct from its constituent parts, linked to its ability to generate business and income. This overall nature means that the business can be treated as a unit in certain legal transactions: it can be sold, pledged as security (by way of collateral) or contributed to a company as a single asset. To find out more about these aspects and understand the implications of the partnership contribution or guarantees taken out on the fundTo find out more, read our dedicated article.

In legal terms, a business qualifies as a intangible personal property. Even if it includes very tangible items such as equipment or goods, the whole is considered intangible. This classification has important practical consequences, particularly in terms of taxation, matrimonial property regimes (its value may fall within the community of property between spouses) and inheritance. The rules that apply are not those for immovable property.

Finally, there is a fundamental distinction to be made: goodwill never understands the building (This applies even if the business owner owns the premises. If you own both the premises and the business, selling your business will involve two separate legal transactions (the sale of the business and the sale of the building), each subject to its own rules.

The constituent parts of a business

To fully grasp the reality of a business, it is essential to know the various elements that make up the business. In law and in practice, there is a classic distinction between intangible (immaterial) elements and tangible (material) elements.

The vital element: customers

At the heart of the fund are customers. It's not just a list of names in a file. It's your company's real and present ability to attract customers and, ideally, to keep them. Without a proven customer base, there can be no business. It is the essential element that gives the whole its value and cohesion. Case law constantly reminds us that the customer base is the condition for the existence of a business. sine qua non the existence of the business. Imagine a perfectly equipped but deserted shop: its residual value is low. It is the presence and potential of customers that creates the main economic value.

It is important to emphasise that this clientele must be personalreally attached to your know-how, the quality of your products or services, and your reputation. If your customer base derives almost exclusively from the attractiveness of another establishment (for example, a shop in a busy tourist area or a franchised business highly dependent on the national brand), its value in its own right may be questionable. The question of the autonomy of the customer base is often debated, in particular to determine whether an operator is entitled to the specific protection of a commercial lease.

Other intangible assets

The customer base is surrounded by other intangible elements that contribute to its development:

• The trade name and sign : The name under which you do business (your patronymic or a fancy name) and the sign visible on your establishment are rallying signs for customers. They build your identity and your reputation. These elements have value and are protected against usurpation or confusion by unfair competition proceedings.
• The right to a commercial lease : If you lease your premises, your leasehold rights are often one of the most valuable assets in your business. The status of commercial leases (governed in particular by articles L.145-1 et seq. of the French Commercial Code) offers you considerable protection, in particular the right to renew your lease or, failing that, the right to an eviction indemnity to compensate for the loss of the business. This right to a lease forms an integral part of the business and is transferred with it when the business is sold, as set out in article L.145-16 of the French Commercial Code.
• Intellectual property rights : Your trademarks, patents protecting your innovations, original designs and even certain software developed specifically for your business are valuable intangible assets that can be included in the fund. They protect your competitive edge.
• Licences and administrative authorisations : Some activities require specific authorisations in order to be carried on (think of licence IV for a public house, a specific operating authorisation, etc.). When these licences are attached to the business or the place of operation and not strictly to the person of the operator, they are considered to be part of the business. They may therefore be transferred with the business, subject to compliance with the regulations specific to each licence.

Tangible assets

Goodwill also includes tangible assets:

• Equipment and tools : This covers all tangible movable assets used on a long-term basis for business purposes. This includes furniture (counters, display units, offices), machinery, tools, IT equipment, delivery vehicles, etc.
• Goods : These are stocks of products intended for sale to customers. This is the very purpose of trading.

The distinction between equipment and goods is far from trivial. If the business is sold, separate prices must be quoted for the two categories so that the vendor's lien (his guarantee in the event of payment on credit) can be exercised correctly. In addition, the pledge of the business as collateral may cover equipment, but never goods. Tax rules may also vary.

What is (generally) excluded from goodwill

It is just as important to know what goodwill does not include by default, as this has major consequences, particularly when it comes to transferring ownership.

• Receivables and payables : This is a fundamental point and a frequent source of disputes. Under French law, a business is not an autonomous "asset by appropriation". Unless there is an express clause to the contrary in the deed of sale (and subject to the agreement of creditors in respect of debts), the purchaser does not take over the business. or receivables born before the sale (customers will have to pay the former owner) or debts of the seller (suppliers, loans, etc.). Buyers must therefore be extremely vigilant and make sure that the seller settles its liabilities, otherwise the seller's creditors could block the sale price (via the opposition procedure). To find out more about how to protect yourself as a buyer against this risk, read our article on essential precautions when purchasing.
• Contracts : By the same token, most contracts entered into by the seller are not automatically transferred to the buyer. Think of contracts with suppliers, distribution contracts, maintenance contracts and so on. For these to be taken over, there must either be an express legal provision (as for current employment contracts under article L.1224-1 of the French Employment Code, damage insurance contracts relating to the business, or the commercial lease), or a specific agreement between the seller, the buyer and the co-contractor (the third party). This is a point that needs to be carefully negotiated at the time of acquisition.
• Buildings : Again, the premises are not part of the business. If you buy a business operating from premises belonging to the seller, you are not buying that the business. The acquisition of the building must be the subject of a separate deed of sale, subject to the rules of property law.

Goodwill in the digital age

The law is adapting to economic change. With the massive development of online commerce, the question of the existence of "electronic" or "digital" goodwill naturally arose. The answer is now clear: Yes, a commercial activity conducted mainly or exclusively online can constitute goodwill..

This digital collection has its own characteristics and key elements:

• The : This is the web address of the business (for example, www.nom-entreprise.fr). It is an essential distinctive sign, the digital equivalent of a sign or a trade name. Its ownership and transferability are essential.
• The website: The architecture of the site, its design (the "graphic charter"), its functionalities and its content (text, images, videos) are all important elements contributing to the attractiveness of the site and the customer experience.
• Online customers : Regular customers, visitors, newsletter subscribers, social network subscribers, etc. make up the customer base. Their existence and value depend on the reputation of the site, the quality of the products/services, the security of the transactions and the efficiency of the customer service.
• Databases : Customer and prospect files are valuable assets, provided that they are compiled and managed in compliance with the regulations on the protection of personal data (RGPD).
• Online reputation (e-reputation) : Customer reviews, search engine rankings and presence on social networks all contribute significantly to the value of digital assets.
• Specific contracts : Website hosting contracts, contracts with payment platforms, referencing contracts, online general terms and conditions of sale, etc.

The valuation and transfer of a digital business raises particular challenges. We need to ensure that we can identify and legally transfer all these digital assets (access to accounts, ownership of the domain name, ownership of the site's source code, etc.). Valuation methods must also take into account specific metrics such as site traffic, conversion rate, customer acquisition cost, etc.

The management, valuation and transfer of your business assets, whether physical or digital, raise complex legal issues with major financial and strategic implications. A clear understanding of its nature and composition is the first step in making the right decisions. For an analysis tailored to your situation and secure support for your projects, our team is at your disposal.

Sources

• Commercial code
• Civil Code
• Intellectual Property Code
• French Labour Code

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