L’effet de levier dans le cadre d’une holding
Frequently, one or more investors wish to take control of a target company but do not have sufficient financial capacity to acquire it.
In this case, the arrangement of acquiring the target company through a holding company may be particularly interesting since it provides a leverage effect. The blog du dirigeant offers you a detailed look at this concept.
What is the assembly process?
The arrangement consists of the acquisition of a target company by one or more holding companies.
Illustration: Person A has 100,000 Euros and wishes to acquire a target company valued at 530,000 Euros. Other investors are interested in the project and wish to invest 75,000 Euros.
- Has created a holding company 1 and contributes 100,000 euros. Other investors contribute 75,000 euros (a total of 175,000 euros).
- Holding company 1 takes out a loan of EUR 50,000 and contributes EUR 225,000 to a new holding company 2.
- This holding company 2 will be able to conclude, in its turn, a loan of 305,000 euros to acquire the target company.
- The loan will be repaid from the dividends paid by the company.
In this diagram, we can see that with an investment of 100,000 euros, A has a majority stake in a company valued at 530,000 euros.
For a direct acquisition of the target company, he would have had to invest at least 265,000 euros to obtain at least half of the capital.
What is leverage?
To understand the concept of leverage, it is necessary to consider its various components.
The purchase of a company by one or more takeover holding companies generates a leverage effect:
- On the legal front
- On the financial side
- On the tax side
- On the organizational level
These different leverage effects form the general concept.
What is legal leverage?
Legal leverage allows an acquirer to take control of the target company through one or more interlocking holding companies.
The arrangement takes advantage of the mechanisms of corporate law to optimize this takeover by :
- A drafting of a partnership agreement
- A possible issue of preference shares
- …
This legal leverage also preserves the liability of the person at the head of the group in the event of difficulties in repaying the loan (except in certain cases, such as mismanagement).
Note: the choice of the legal status of the takeover holding company plays an essential role for the manager. The SAS is often recommended because of the protection granted to its manager and the great statutory freedom it offers.
It should also be noted that the more holding companies there are in the structure, the more cumbersome and costly the management of the group will be.
What is financial leverage?
The financial leverage effect consists, for the takeover holding company, in repaying the amount of its loans thanks to the dividends received by the target company.
When the acquired company has unnecessary assets, it will be possible to dispose of them in order to generate additional dividends to repay the loan at the holding company level.
France Lbdd: the success of such a financial leverage effect is only possible if the target company generates a sufficient result to allow a regular distribution of dividends. Thus, the role of the audit is essential to evaluate the future profitability of the target company prior to the acquisition.
What is fiscal leverage
The tax leverage effect finds its consistency in three devices that can be applied to such an arrangement:
- Parent-daughter regime: allows a virtual tax exemption when dividends are transferred from the target company to the acquisition holding company
- Tax deduction of loan interest at the holding company level
- The tax consolidation system: if the target company is more than 95% owned by the holding company, the head company of the group is the only company liable for tax. This system also allows to totally exempt the dividend payment and to proceed to the imputation of the group’s deficits.
Note: in order to benefit from such a tax leverage effect, the takeover holding company and the target company must be subject to corporate income tax.
What is organizational leverage
The arrangement allows for a majority ownership of the target company. This leverage effect consists therefore:
- To dictate the target company’s policy to maximize profit to enable repayment of the loan
- To retain or change the current officer of the company
The group’s organizational policy must be in line with the interests of the acquisition holding company in order to optimize the arrangement.
Conclusion
The leverage effect conferred by such an arrangement can only be successful if numerous analyses and simulations have been carried out before the operation. In this respect, the choice of a competent professional (chartered accountant or lawyer) appears necessary to offer all the guarantees of the arrangement.
By:
Luc BRZUSTOWSKI
Phone : +33(0)4 37 65 07 67
E-mail : luc.brzustowski@actoria.fr
