Escrow of the price in the sale of a business (fonds de commerce)

The sale of a business (fonds de commerce) has a particular feature that ordinary sales do not: the price paid by the buyer is not immediately handed over to the seller. It is held by an escrow agent for several months, while the rights of creditors and of the tax authorities are cleared. Understanding this mechanism avoids a great deal of misunderstanding between the parties.

Why is the price unavailable?

The legislator protects the seller's creditors. When a trader sells their business, their creditors could be left with nothing if the price slipped out of reach. Two sets of rules therefore organise a period during which the price is unavailable.

On the one hand, the sale is subject to statutory publication: publication in a legal notices journal and then in the Official Bulletin of Civil and Commercial Notices (BODACC). From that publication, the seller's creditors have a period of ten days to file an opposition on the price (article L.141-14 of the Commercial Code). Until these oppositions are cleared, the price cannot be paid to the seller.

On the other hand, the buyer is jointly liable for the payment of certain taxes owed by the seller. This joint tax liability makes the price unavailable for a period that runs from the filing of the income declaration. A buyer who handed over the price too early would risk having to pay it a second time to the tax authorities.

The risk of paying twice

The stakes are real. If the buyer paid the seller directly and the seller then disappeared without settling their creditors or the tax authorities, the buyer could be compelled to pay a second time, into the hands of the opposing creditors or the Treasury. Escrow of the price removes this risk: the funds are frozen and will only be released once everyone's rights have been settled.

The role of the escrow agent

The price is entrusted to a trusted third party — a lawyer, for example — who keeps it in a dedicated account. This third party only releases the funds after checking that the opposition period has expired, that any oppositions have been dealt with and that the joint tax liability periods have elapsed. The balance, once the opposing creditors have been settled, then goes back to the seller.

Entrusting this escrow to a lawyer offers specific safeguards. The funds pass through the CARPA account (the French bar's fund-handling body, the Caisse des Règlements Pécuniaires des Avocats), which checks every movement and isolates the sums in a sub-account specific to the matter. The lawyer is also bound by professional secrecy and by strict rules of conduct.

How long does escrow of the price last?

In practice, the period during which the price is unavailable generally runs for three to five months. This duration results from the combination of several periods: the creditors' opposition period opened by publication in the BODACC, the clearing of the registered privileges and pledges encumbering the business, and the buyer's joint tax liability period. As long as these periods are running, the escrow agent keeps the funds.

The stages of escrow in a business (fonds de commerce) sale

Escrow of the price follows a precise sequence, from the payment of the funds by the buyer to their final delivery to the seller:

• Signing of the sale agreement and payment of the price into the hands of the escrow agent, who deposits it in the CARPA account dedicated to the matter;
• Completion of the publication formalities: registration of the deed, then publication in a legal notices journal and in the BODACC;
• Running of the creditors' opposition period (ten days from publication in the BODACC) and handling of any oppositions;
• Clearing of the registered privileges and pledges encumbering the business;
• Expiry of the joint tax liability period, once the seller's income declaration has been filed;
• Release of the balance of the price to the seller, once the opposing creditors have been settled.

The importance of the escrow agreement

Escrow of the price rests on an escrow agreement, separate from the sale agreement, which defines the escrow agent's remit and sets out precisely the conditions for releasing the funds. It is this document that determines when and on what conditions the price may be handed over to the seller. Careful drafting, tailored to the nature of the transaction, prevents deadlocks and disputes between the parties.

Preparing a business (fonds de commerce) sale? Fidens puts the escrow of the price in place on a CARPA account and secures the transaction, from receipt of the funds through to their release.