Five pitfalls to avoid when divesting an underperforming French subsidiary
Five pitfalls to avoid when divesting an underperforming French subsidiary For international groups, exiting a loss-making French subsidiary can be more complex than acquiring one. From hidden exit costs to post-completion liabilities, five common pitfalls can turn a strategic divestment into a prolonged financial burden. By François Couhadon, Anne-Sophie Leclerc, Frédéric Paquet, Anker Sorensen and Claire Tergeman, lawyers at De Gaulle Fleurance For multinational groups, underperforming subsidiaries present a recurring strategic dilemma. Should the parent company continue funding a business that is no longer meeting expectations, initiate its closure or find a buyer willing to take over its operations? In France, selling a subsidiary before it becomes unable to meet its debts as they fall due can provide an alternative to closure or formal insolvency proceedings. However, these transactions are rarely straightforward. Unlike conventional M&A deals, where negotiations primarily focus on valuation and future growth, divestments of distressed or underperforming businesses often revolve around a different question: how can the seller achieve a sustainable exit without creating additional financial or legal exposure? Five pitfalls deserve particular attention. 1. Underestimating the true cost of exiting the business A nominal purchase price does not necessarily mean an inexpensive transaction. When a subsidiary is generating losses, potential buyers may require the seller to contribute financially to its recovery. This can involve recapitalisation, cancellation of intragroup debt, temporary funding of operating losses or contributions towards restructuring costs. These commitments often substantially exceed the consideration received for the shares. The transaction may then be described commercially as involving a 'negative purchase price', even though the share consideration itself is not necessarily negative. For the parent company, the relevant calculation is the total cost of disengagement. This should be compared with the alternatives, including closure, which may trigger redundancy payments, contractual termination costs, equipment dismantling and environmental remediation obligations. The practical lesson: assess the full financial impact of each exit scenario before entering into negotiations. A transaction with a nominal sale price may still represent the most economically attractive option, provided that the seller's commitments are clearly identified and controlled. 2. Choosing a buyer without adequately testing its financial resilience Finding a buyer is only the beginning of a successful divestment. An acquirer may present a convincing turnaround strategy but lack the financial resources required to implement it. If the business continues to generate losses after completion, the former shareholder may face demands for additional funding. In more difficult situations, the prospect of insolvency proceedings may become a source of pressure to renegotiate the original transaction. For international groups, this risk is particularly important where the subsidiary's difficulties have already required substantial financial support. The buyer's financial capacity should therefore be examined alongside its industrial and commercial credentials. This includes assessing the credibility of its business plan, projected cash requirements and ability to finance the turnaround over a realistic period. The practical lesson: evaluate the buyer's ability to sustain the business after completion, including with the seller’s subsidies and contributions on closing, not merely its willingness to acquire it. 3. Failing to control how seller-funded support will be used Financial assistance provided by the seller may be essential to securing a transaction. Yet transferring funds without adequate safeguards can undermine the very objective of the divestment. The seller should consider how the money will be held, when it can be released and what purposes it may serve. Under French law, mechanisms such as escrow arrangements or a fiducie — a legal structure allowing assets to be held and managed for defined purposes — may help secure the use of funds. Contractual restrictions on dividend distributions or upstream cash transfers can also reduce the risk that financial resources intended to support the subsidiary's recovery are diverted elsewhere. The same attention should be paid to the allocation of liabilities. Representations, warranties and indemnities are often much more limited than in traditional M&A transactions, reflecting the financial condition of the target and the risks already known to the buyer. Where an earn-out is negotiated, the parties should define performance indicators precisely and establish appropriate access to financial information after completion. The practical lesson: financial support should be accompanied by enforceable safeguards and clear contractual obligations. The objective is not simply to complete the sale, but to limit the seller's continuing exposure. 4. Treating French employment and tax requirements as secondary issues International groups sometimes approach divestments primarily as financial transactions. In France, employment and tax considerations can significantly influence their feasibility, timing and ultimate cost. Employee information and consultation procedures must be anticipated. Depending on the circumstances, consultation with the comité social et économique (CSE), the French employee representative body, may take between one and three months. Beyond legal compliance, employee relations can affect business continuity and the wider group's social climate. Tax issues also require early attention. The value of tax losses carried forward may be affected by changes in the subsidiary's business activities following the sale. Similarly, where the company belongs to a French tax consolidation group, its departure may raise questions concerning the allocation of tax losses and compensation arrangements under intragroup agreements. These considerations can influence both the negotiations and the overall economics of the transaction. The practical lesson: involve employment and tax advisers from the outset. Addressing these issues late in the process can lead to delays, additional costs or the renegotiation of key terms. 5. Waiting too long to explore available legal options Timing is often one of the most underestimated factors in distressed divestments. As financial difficulties intensify, the seller may have fewer potential buyers, reduced negotiating leverage and less flexibility in structuring the transaction. Early action can preserve options that may become more difficult to implement as the subsidiary's financial position deteriorates. French law provides preventive restructuring mechanisms, including mandat ad hoc and conciliation, which can facilitate confidential negotiations with creditors with the assistance of a court-appointed professional. These procedures may help create the conditions for a negotiated solution before financial difficulties escalate. For listed parent companies or other listed entities, timing also has a market disclosure dimension. Applicable ongoing and periodic disclosure obligations must be considered, together with any specific requirements relating to proposed disposals of significant assets. The preparation of the transaction must therefore take account of both commercial negotiations and the relevant regulatory framework. The practical lesson: explore strategic and legal options while the parent company still has sufficient flexibility to choose the most appropriate course of action. The real measure of a successful divestment This analysis concerns share disposals of underperforming French subsidiaries outside formal insolvency proceedings. It does not address court-approved sales of tangible and intangible assets under French insolvency law, which follow a separate legal framework. For international groups, the central challenge is not simply to find a buyer for a loss-making business. It is to achieve an orderly transfer of ownership while managing the financial, contractual and regulatory risks associated with the exit. That requires a broader approach than conventional deal execution. The seller must understand the full cost of disengagement, assess the buyer's financial resilience, secure any funding commitments and anticipate the implications of French employment, tax and market disclosure rules. Above all, the process should begin before the subsidiary's difficulties leave the parent company with limited alternatives. A successful divestment is not necessarily the transaction that delivers the highest price. It is the one that allows the seller to exit on terms that remain sustainable long after completion.