For whom?

Is it legitimate to ask how to transfer a company to oneself? If you are an owner and manager of your company, between the ages of 40 and 55, with assets consisting of a primary residence, a nice car, and a second home, and you want to enjoy the fruits of your labor while keeping your business, an owner buyout (OBO) is a possible solution. An OBO is intended for owners of healthy, profitable SMEs with good visibility. But how can you transfer the company to yourself?

Here are the conditions:

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

An OBO is an arrangement intended for the sale of a company that is carried out with the owner himself within the framework of an operation of acquisition of a company or companies by bank debt. The OBO (owner buyout) is called a “double trigger sale” because it allows you to sell the company to yourself in two steps:

First trigger:

• The shareholder-manager of the company creates a holding company that will take over 100% of the company’s capital.
• The shareholder-manager of the company brings the social rights of his company to the takeover holding, and he holds a part of the capital in a minority or majority way according to his choice, often alongside capital investors.
• 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 manage his company and is a substantial shareholder manager of the takeover holding company. In other words, he remains an executive shareholder and benefits from the liquidity of the sale of a part of the shares to the persons who entered the capital of the holding company.

Second trigger:

• The shareholder-manager will be able to benefit from the capital gain/surface value of his company at the time of the resale of his shares.

The common objective of both parties is the development of the company 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. Several exits are available to the financial partner(s): takeover by the owner himself with other financial partners (secondary LBO), sale to an industrial group, or stock market listing. Note that the choices and conditions of exit are discussed and fixed at the time of the OBO assembly.

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 family members to prepare the transfer of your company.
• To bring in other people as shareholders: employees, capital-investors.

Key success factors:

• Commitment and motivation of the manager.
• Real business project with attractive financial prospects.

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 increasingly attracting the interest of owner-managers as well as capital-investors. This technique allows the managerial continuity of the company, which reassures the banks for the raising of the debt. There is a patrimonial interest for the manager who secures a part of his professional assets in personal assets. In the absence of a possible transmission through the family or internally, the OBO gives the manager the possibility to choose a manager, to set him up, and to train him to pass on.

Example: to make a family member a shareholder

Let’s take the example of a company valued at 2 million euros 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 which will hold 100% of the shares of the SME. He then contributes to this holding company, in kind, 45% of his shares, thus endowing the special purpose vehicle with a capital of 900,000 euros.

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