When considering acquiring or transferring a business activity, it is essential to clearly understand the distinctions between the leasehold right (droit au bail) and the business goodwill (fonds de commerce). These two concepts, though often confused, have very different legal and economic implications.
What is the leasehold right?
The leasehold right is a sum of money paid by an incoming tenant (the buyer) to an outgoing tenant, in order to benefit from the favorable conditions of the current commercial lease. It refers to the right to occupy a commercial space under the terms of the existing lease, including the rent amount, the remaining lease duration, and the location. This right has economic value, especially when the rent is below market value or the premises are in a prime location (shopping street, city center, high-traffic area, etc.).
However, the leasehold right does not include the business activity itself, nor the equipment or the clientele. It solely represents the right to occupy the premises under the current lease conditions.
What is business goodwill?
Business goodwill is a fundamental legal and economic concept for anyone looking to acquire or take over a commercial activity. It represents a collection of tangible and intangible elements that, combined, enable the operation of a commercial, artisanal, or industrial economic activity.
The components of business goodwill
Business goodwill comprises several essential components, which are generally transferred in their entirety during a sale:
- Clientele and foot traffic
Clientele is the most valuable component of business goodwill. It refers to the body of regular and potential clients attached to the business. Foot traffic refers to people naturally drawn to the location of the business. These two elements form the economic foundation on which the sustainability of the business relies.
- Trade name and signage
The trade name is the name under which the business operates and is known to its clients. The signage is the visible sign on the premises identifying the business. These elements contribute to the reputation and brand recognition of the business goodwill and are important intangible assets.
- Equipment and furnishings
This includes all physical goods necessary for business operations: machines, tools, furniture, installations, professional vehicles, inventory, etc. Their nature and importance vary depending on the type of business.
- Employment contracts
In some cases, the sale may include employment contracts of staff involved in the activity, especially if the business is being taken over as a going concern. This transfer may entail specific obligations toward employees.
- Intellectual property rights
Business goodwill may include intangible rights such as registered trademarks, patents, designs and models, licenses, or other exclusive rights associated with the business. These rights enhance the value and uniqueness of the business.
- Leasehold right
Finally, business goodwill almost always includes the leasehold right, that is, the right to occupy the business premises under the terms of the existing lease. This right is fundamental as it guarantees location stability, which is often crucial for business success.
Buying business goodwill means acquiring a full business operation
Unlike the purchase of a leasehold right alone, acquiring business goodwill entails taking over the entire business operation, with all its tangible and intangible components. This includes not only the location but also the clientele, brand recognition, equipment, and in some cases, the staff.
This acquisition allows the buyer to start operating immediately with an already established economic and commercial foundation, thus reducing the risks associated with starting a business from scratch
Key differences between leasehold right and business goodwill
The leasehold right and business goodwill are two often-confused concepts, but they have notable differences. The leasehold right refers solely to the right to occupy commercial premises, whereas business goodwill encompasses all the elements necessary to operate a business, such as clientele, signage, equipment, and trade name. As such, business goodwill includes clientele, which is not the case with a simple leasehold right. Additionally, business equipment is generally included in the sale of business goodwill, but not in that of a leasehold right. Consequently, the value of business goodwill is often higher than that of a leasehold right. Finally, in terms of transfer, the leasehold right can be sold independently, while business goodwill automatically includes the associated leasehold right.
Buying a leasehold right or business goodwill?
The choice between purchasing a leasehold right and buying business goodwill mainly depends on the nature of your business project and your objectives.
Buying a leasehold right
The leasehold right only concerns the right to occupy commercial premises under the terms of the existing lease. This option is particularly suitable if you want to launch your own business in a chosen location without taking over the existing activity or clientele.
It allows you to benefit from a strategic location, often with below-market rent, while giving you the freedom to implement your own concept. This is an appealing solution for entrepreneurs starting out who wish to minimize costs associated with taking over an existing business.
Buying business goodwill
Business goodwill, on the other hand, includes all the elements required to operate a commercial activity: clientele, signage, equipment, trade name, and of course the leasehold right.
This option is ideal if you wish to take over an already-established business, with an existing customer base and often an already-recognized reputation. It provides you with an immediate start, benefiting from a flow of existing clients and sometimes even the current staff, making business continuity easier.
Legal and tax considerations
The transfer of a leasehold right or business goodwill is governed by strict regulations designed to protect the parties involved and ensure transaction transparency:
- Public registration: The transfer document must be registered with the Corporate Tax Department (Service des Impôts des Entreprises – SIE).
- Legal notice: A transfer notice must be published in a legal announcements journal to inform third parties of the transaction.
- Right of first refusal: The landlord may have a right of first refusal on the leasehold right or business goodwill, and in some cases, employees must be informed and may also exercise a right of first refusal.
To secure your transaction and avoid any disputes, it is highly recommended to consult a notary or an attorney specialized in commercial and real estate law. Their expertise will help you verify the validity of documents, fulfill legal formalities, and protect your interests.
If you have questions on the matter, contact your Capifrance advisor, who will guide you through the process.
Summary
- Leasehold Right: This right allows you to occupy and operate a commercial premises under the conditions set out in an existing lease.
- Business Goodwill: This encompasses all the elements necessary for operating a commercial activity, including clientele, equipment, trade name, and of course, the leasehold right.
- Key Distinction: Understanding the difference between these two concepts is crucial for accurately assessing the value of a business transfer, securing your investment, and choosing the most appropriate solution for your project.
Key takeaway: Buying a leasehold right primarily means acquiring a strategic location. Buying business goodwill means taking over an entire business activity, with its assets and client base.
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FAQ
Can I sell only my leasehold right without selling my business goodwill?
Yes, this is possible. However, the transfer of the leasehold right may be subject to the landlord’s approval, depending on the terms of the lease agreement.
What are the formalities required when selling business goodwill?
Selling business goodwill involves specific formalities, such as registering the deed of sale, publishing a notice in a legal announcements journal, and informing the landlord or employees.
Is the selling price the same for a leasehold right and business goodwill?
No, the selling price of business goodwill is generally higher, as it includes additional elements such as clientele, equipment, and the leasehold right.
Author :
Bernard Schustermann – Head of Commercial & Business Real Estate Division
With 20 years of experience in the real estate sector and dedicated expertise in the Commercial & Business field, my goal is to share concrete insights and practical analysis to help every professional make the best decisions in their real estate projects. A well-planned project is a successful project.
