Transferring the business to yourself

It is legitimate to ask how it is possible to transfer the business to yourself.

You are the owner and manager of your company, you are between 40 and 55 years old, your assets consist of a main residence, a nice car and a second home?

Do you want to enjoy the fruits of your labor and keep your business?

An owner buy out (OBO) is intended for owners of healthy, profitable SMEs with good visibility.

But how do you actually transfer the business to yourself?

Conditions:

• The company must regularly pay dividends to the holding company in order to repay the loan taken out on this occasion without compromising its development objectives.
• The loan repayment must not exceed 50% of the company’s profits.

HOW?

An OBO is an arrangement for the sale of a company which is carried out with the owner himself in the context of an operation to acquire a company or companies through bank debt.

The OBO (owner buyout) is what is known as a “double trigger sale” because it allows the company to be sold to itself in two stages:
First trigger:

• The company’s shareholder manager creates a holding company that will take over 100% of the company’s capital.
• Thus, the company’s shareholder-manager brings the company’s social rights to the holding company, he holds a part of the capital in a minority or majority way according to his choice, most often alongside capital-investors.
• The capital investors may be minority or majority shareholders, but, generally speaking, they are minority shareholders because they want a return on their investment and not to participate in the management of the company.
• The payment of the company by the takeover holding company will be made by the equity contribution of the investor-capital and by the debt contracted by the holding company.
• The shareholder-manager continues to run his company and is a substantial shareholder-manager of the takeover holding. In other words, he remains a shareholder manager and benefits from the liquidity of the sale of part of the shares to the persons who have entered the capital of the holding company.

Second trigger:

• the shareholder-manager will be able to benefit from the added value of his company when he resells his shares.

The common objective of both parties is the development of the company in order to resell it in the medium/long term. Generally, the capital investors commit themselves for a minimum of 3 years (minimum to recover their investment) and for a maximum of 7 years.

Exit of the financial partner

There are several ways out for the financial partner(s):

• Takeover by the owner himself with other financial partners (secondary LBO)
• Sale to an industrial group
• Listing on the stock exchange

It should be noted that the choices and conditions of the exits are discussed and fixed at the time the OBO is set up.

WHY SELL THE COMPANY VIA AN OBO?

It is an operation that allows the shareholder manager :

• To transform part of his professional assets (the company) into personal assets (cash) while continuing his activity and remaining a significant shareholder in his company.
• To bring in members of your family in the capital to prepare the transfer of your company.
• To bring other people into the capital: employees, capital-investors.

Key success factors :
– Commitment and motivation of the manager
– Real business project with attractive financial prospects

ADVANTAGES

The OBO is the least risky form of LBO because there is no real change in ownership and management. This is the reason why this operation is attracting more and more interest from owner-managers as well as from capital-investors.

• This technique allows for managerial continuity of the company, which reassures the banks for the raising of debt.
• There is a patrimonial interest for the manager who secures part of his professional assets as personal assets.
• In the absence of a possible transmission through the family or internally, the OBO gives the manager the possibility of choosing a manager, putting him in place and training him to transmit the business.

EXAMPLE: BRINGING A FAMILY MEMBER INTO THE CAPITAL

Let us take the example of a company valued at EUR 2 million that is entirely owned by its director. The latter wants to carry out an OBO to “liquidate” 50% of his shares and, at the same time, bring his daughter into the capital.
He then creates a holding company to hold 100% of the shares of the SME. He then contributes 45% of his shares to this holding company, thus giving the special purpose vehicle a capital of EUR 900 000.
His daughter contributes EUR 100 000 to the capital of the holding company, which then totals EUR 1 million. With this million euros of equity, taking into account the ratios accepted by the credit institutions, the holding company can then borrow 1 million euros from the banks over seven years.
The holding company uses the money from this loan to pay the manager the remaining 50% of the shares in cash. At the end of the arrangement, the manager still owns 90% of his SME via the holding company, and his daughter 10%.

BEWARE OF ABUSE!

• This particular arrangement is often used to recover cash and/or to bring in new shareholders such as members of your family, employees or capital investors into the company. Therefore, if the distribution of capital has not changed, it is possible that the tax authorities will consider it as an abuse of tax law.
• If you overestimate your company, the financial set-up may be strained and you risk weakening your company.