Acquisition holding: structuring an SME buyout

Quick answer. An acquisition holding borrows to buy the shares of a target, then repays the loan with the dividends the target upstreams, largely exempt under the parent-subsidiary regime (95 percent exemption, articles 145 and 216 of the French tax code). Tax consolidation (article 223 A) lets interest be set against the target's profit.

Buying an SME without paying the full price in cash requires a structure. The buyer does not sign the share purchase agreement personally: they create a holding company that borrows, buys the shares and organises repayment from the target's cash. This is the leverage of a buyout. But the capital, debt and tax framework must be structured in the right order, or the leverage turns against you.

This article describes the structuring mechanics, step by step. It complements, without repeating, our analyses on the bank financing criteria for a buyout and on what banks look at in an LBO: here, the subject is the legal and tax plumbing, not the loan negotiation.

The principle rests on three flows. The holding borrows to buy the target. The target, now a subsidiary, distributes dividends to the holding. The holding uses those dividends to repay the loan instalment. The buyer has thus acquired a company whose future profits finance their own acquisition.

Three levers combine, each with its own logic:

• Financial leverage: debt allows a larger acquisition than personal equity alone.
• Legal leverage: the holding owns the target, concentrating control and making it easier to bring investors or managers into the holding's capital.
• Tax leverage: the parent-subsidiary regime makes dividend upstreaming almost frictionless, and tax consolidation absorbs the loan interest.

Without these two tax regimes, the mechanism loses most of its value. That is why the structure is designed with the tax angle from the outset, not after signing.

Here is the process we follow in buyout files. Each step conditions the next.

1. Incorporate the holding and set its capital. Create a SAS or SARL whose purpose includes holding and managing shareholdings. Provide a credible capital: it serves as personal equity towards the bank.
2. Structure the acquisition debt. Finalise the financing plan (equity, bank acquisition loan, possible vendor credit). The debt is carried by the holding, not the buyer.
3. Buy the target shares through the holding. The purchase agreement is signed in the name of the holding, which becomes a shareholder of the target.
4. Choose the group's tax regime. Elect the parent-subsidiary regime and, if the holding owns at least 95 percent of the target, tax consolidation.
5. Organise dividend upstreaming and management fees. Plan the target's distributions and, where relevant, a service agreement billed to the target.
6. Manage debt service over time. Track the target's distribution capacity and the interest deduction cap throughout the loan's life.

These six steps follow a timeline: the holding exists before signing, the tax election is formalised within the option deadlines, and management starts from the first financial year.

Steps 1 and 2: capital and acquisition debt#

There is no legal minimum share capital for a SAS or SARL holding: one euro is legally possible. But that is a false economy. The bank expects personal equity proportionate to the target price, demonstrating the buyer's commitment and cushioning the risk. A token capital weakens the financing case.

The table below summarises the typical financing structure of a buyout.

The prudence rule we apply: the repayment instalment must remain sustainable against the target's recurring distributable profit, not its best year.

Steps 3 and 4: buying the shares and choosing the tax regime#

Once the holding owns the shares, two regimes structure the group's taxation. They are not mutually exclusive: they often combine.

The parent-subsidiary regime (articles 145 and 216 of the French tax code) exempts 95 percent of the dividends the target upstreams to the holding; a 5 percent share of costs and charges remains subject to corporate income tax. Conditions: hold at least 5 percent of the capital, keep the shares for 2 years, and elect the regime. Our dedicated article details the parent-subsidiary regime.

Tax consolidation (article 223 A of the French tax code) consolidates the group's results: the holding sets its loss, created by the loan interest, against the target's taxable profit. Core condition: hold at least 95 percent of the subsidiary's capital. When consolidation and the parent-subsidiary regime combine, the share of costs and charges drops from 5 percent to 1 percent. See how tax consolidation works.

Trade-off. If you hold less than 95 percent of the target, tax consolidation is closed: the parent-subsidiary regime is your only lever on dividends, and the holding's loan interest will not be set against the target's profit. Aiming for at least 95 percent therefore changes the economics of the structure, which is negotiated at the time of the buyout. To compare vehicles, see our holding and SCI comparison.

Steps 5 and 6: dividend upstreaming, management fees and debt service#

The holding repays the loan with the dividends upstreamed from the target and, where relevant, with management fees billed to the target. The two sources do not have the same status.

Dividends are the natural route: largely exempt under the parent-subsidiary regime, they fund the debt service without major tax friction. The target must still generate a distributable profit and have the cash to support it.

Management fees pay for services rendered by the holding to the target (management, strategy, support functions). They must correspond to real and justified services, failing which a reassessment may follow for abnormal act of management or an agreement without consideration. Our article explains how to secure management fees. A written agreement, genuine services and a consistent price are essential.

What the tax authorities look at. On management fees, the review focuses on reality and consideration: who does what, at what price, with what evidence. Flat-rate billing with no identifiable service is a classic reassessment. It is better to document from the first invoice.

The structure has four recurring blind spots. Ignoring them turns a lever into a burden.

• The interest deduction cap (article 212 bis of the French tax code). Deduction of the acquisition debt interest is capped, transposing the ATAD directive: net financial charges are deductible only up to 30 percent of tax EBITDA or 3 million euros if that amount is higher. Beyond that, part of the interest is not deductible. On heavy debt, the impact warrants a personalised calculation.
• The Charasse amendment (article 223 B of the French tax code). Under tax consolidation, where the target is bought from persons who control it, that is a buyout from oneself, a share of financial charges is added back. This rule targets schemes where the seller and buyer are linked. It must be checked carefully in family buyouts.
• Management fees without consideration. Already mentioned: it is the most frequent cause of reassessment on these structures.
• Undercapitalisation of the holding. A holding with too little capital weakens the financing and exposes it to recharacterisation. A credible capital is more than a bank requirement, it is a protection.

The underestimated risk. Many buyers assume full deductibility of the interest. Yet the article 212 bis cap can neutralise part of that deduction on significant debt. The expected tax gain must be calculated, not assumed.

Our reading. The value of an acquisition holding lies not in the choice of legal form, but in the coherence between the debt, the target's actual distribution capacity and the chosen tax regime. A structure that looks elegant on paper but rests on dividends the target cannot pay puts the buyer in difficulty from the second instalment.

Recently, a senior manager wanted to buy out the SME employing them through a holding, with a loan sized on the last year's profit, which was exceptionally high. The work consisted of resizing the instalment on the recurring distributable profit, aiming for a holding level enabling tax consolidation rather than the parent-subsidiary regime alone, and documenting the management fees agreement in advance. The initial structure was appealing; above all, it was fragile against an average year.

As a chartered accountant and statutory auditor registered with the Order, I stress that a buyout structure is designed with the target's valuation in hand: see our target valuation service and our holding taxation page. The legal structuring of the holding connects with business creation and, more broadly, with our business transfer support. Where existing shares are contributed rather than bought, see the contribution of shares to a holding and our case study of a holding created after a buyout.