Financing a company buyout: structuring the acquisition

Quick answer. A standard buyout structure combines, around an acquisition holding, the buyer's contribution, a senior bank debt, often a vendor loan and, on larger deals, a mezzanine debt. The holding repays thanks to the dividends paid up by the target. The tax leverage comes from tax consolidation (article 223 A of the French tax code) as soon as the holding owns at least 95% of the bought company.

Buying a company is almost never financed in cash. You build a structure that stacks several financing sources around a holding, each with its rank, its cost and its risk. The success of a buyout depends less on the negotiated price than on the quality of this structure: an over-stretched stack turns a fine target into a restructuring file from the very first deadlines. This article walks through the mechanics tier by tier, with a worked example, the levers, thresholds and pitfalls we keep seeing in acquisition files.

The standard leveraged buyout (LBO) scheme is built around a holding company set up to acquire the target's shares. The buyer contributes their equity to this holding, which takes on the acquisition debt and then owns the bought company.

The benefit of this structure is twofold. It isolates the buyout from the manager's personal assets and from operations themselves. And it opens, under conditions, the tax leverage of tax consolidation, by which the acquisition debt interest is offset against the target's profits. This structuring logic, and the choice between an active or passive holding, is detailed in our study on the creation of a holding after a buyout.

The holding is therefore the pivot of the financing: it carries the debt, stacks the sources and repays, thanks to the target's flows. Its soundness conditions everything else.

A buyout structure combines several sources, from the safest (and cheapest) to the riskiest (and most expensive). It is a layered structure, each tier having its repayment rank. The costs below are market orders of magnitude, to be confirmed for each file.

The buyer's contribution forms the base of the structure. Banks generally expect a meaningful contribution: it is the proof of commitment and the cushion that absorbs the first setbacks. Senior debt forms the bulk of the financing: granted by banks, it is repaid first and, depending on the buyout financing offers, spread over a duration often between five and eight years. The vendor loan, by which the seller accepts a staggered payment of part of the price, often completes the round and signals their confidence in the company's durability; we compare this lever with the bank loan in our article vendor loan or bank loan. On heavier deals, a mezzanine debt, subordinated to the senior debt, can slot in: more expensive but more flexible, it bridges the gap between equity and bank debt.

The most useful way to grasp sizing is to run through a simple structure. Take a target valued at 1,000,000 euros, generating a steady operating profit and a distribution capacity the analysis estimates at about 130,000 euros a year once working capital, renewal investments and tax are financed. It is this sustainable flow figure, not the price, that drives the sizing.

A balanced round might be built as follows:

How to read this sizing. The 250,000-euro contribution gives the bank a comfortable cushion. The 550,000-euro senior debt over seven years means an annuity of about 90,000 euros of principal, plus interest: the total stays under the 130,000 euros of sustainable flow, leaving a safety margin. The 150,000-euro vendor loan, staggered, shifts part of the charge and reduces the need for bank debt. The mezzanine, modest here, only steps in to close the round.

Conversely, a tight structure would push the contribution down to 100,000 euros and the senior debt up to 750,000 euros. The principal annuity would then climb towards 110,000 euros, interest on top: the debt service would exceed the sustainable distribution capacity, and the target would be ordered to pay up dividends it cannot afford without cutting into its operations. That is exactly the tipping point to avoid.

Sizing rule. Each tier is set from the bottom up: you start from the sustainable flow, deduce the senior debt it can service with margin, top up with the vendor loan the seller accepts, and the mezzanine only bridges a last gap, otherwise its high cost weighs on the return. The contribution, by contrast, is not a downward adjustment variable: it is the base that makes the rest financeable.

The Bpifrance guarantee is often what unlocks the senior debt of a buyout. It does not finance the buyer: it reduces the risk carried by the bank, which then lends more readily.

The exact mechanics matter. It is the bank that requests the guarantee from Bpifrance; the buyer pays a commission and remains fully liable to repay the loan. The guarantee discharges them of nothing: in the event of default, Bpifrance compensates the bank, then may turn against the borrower. The guaranteed share is never total: it only covers a fraction of the bank facility, which varies according to the scheme (creation, transmission), any regional intervention and the year; the exact rate applicable to your file must be checked with the bank and Bpifrance. It is a common confusion to believe the guarantee shifts the risk away from the buyer. It shares it with the bank, it does not erase it.

Our view: size on the target, not on the price#

Financing a buyout succeeds when the structure is calibrated on the target's real ability to repay, not on the acquisition price alone. The most frequent mistake we correct is stretching the structure to the maximum, minimal contribution and maximal debt, to limit the buyer's stake. On paper, the return on equity looks flattering. In reality, the target finds itself ordered to pay up dividends it cannot distribute without cutting into its operations.

Our approach is to size each tier (contribution, senior debt, vendor loan) according to the target's sustainable flows, then to secure the debt with a Bpifrance guarantee and activate the tax-consolidation leverage. The right structure finances the buyout without weakening the bought company. It is as much a financial analysis as a structuring exercise, which we carry out within our corporate tax advisory engagement.

The repayment of the structure rests entirely on the target's ability to pay up dividends to the holding. The holding indeed has no activity of its own: it lives only on the distributions of the bought company. The sustainability of the deal therefore depends on the target's ability to distribute after financing its working capital needs, its investments and its tax.

The tax leverage comes from tax consolidation (article 223 A of the French tax code). If the holding owns at least 95% of the target's capital, the two companies can form a tax-consolidated group: the acquisition debt interest, borne by the holding which has no profit of its own, is then offset against the target's taxable profit within the consolidated result. The resulting corporate income tax saving lightens the net cost of the debt. This mechanism, its conditions and the workings of the option are developed in our article on tax consolidation and the LBO.

Two limits frame this lever. First the Charasse rule (article 223 B of the French tax code): when the buyer buys, through their holding, a company they already controlled (a buyout "from oneself"), a fraction of the financial charges is added back to the consolidated result over the acquisition year and the following fourteen, that is fifteen years in total. Second the general cap on interest deduction (article 212 bis of the French tax code, transposing the ATAD directive): net deduction of financial charges is in principle limited to 30% of tax EBITDA or 3 million euros, whichever is higher.

This cap, however, carries an exemption for SMEs that should not be overlooked. Companies whose net interest charge stays below 3 million euros and which show a moderate debt-to-EBITDA ratio may, under the conditions of the ATAD transposition, not be capped by the 30% limit. In other words, an SME buyout with a reasonable structure is not systematically capped: it is mainly the aggressive, heavily indebted LBO that hits this limit. As the precise conditions remain technical and may change, they should be checked case by case with your adviser against the rules in force.

A buyer wanted to buy a services SME by contributing the minimum and borrowing the maximum, to keep most of their savings. The round showed a very thin contribution against a heavy senior debt, repayable over seven years.

By rebuilding the target's distribution capacity, the analysis showed that sustainable dividends, once operations and renewal investments were financed, did not cover the debt service. The risk was twofold: choking the bought company and triggering bank covenants from the second year.

Three levers rebalanced the file. A strengthened contribution, first, to bring the senior debt down to a level genuinely covered by the flows. A vendor loan next, on part of the price: the seller accepted a staggered payment, which lightened the starting bank debt and signalled their confidence to the banks. A Bpifrance guarantee finally, which secured the remaining senior facility. With the holding owning 100% of the target, tax consolidation allowed the interest to be offset against the bought company's profit, reducing the net cost of the financing. The structure, untenable at first, became sustainable without giving up the buyer's ambition.

A textbook case: bank covenants and their trigger thresholds#

Covenants are financial undertakings the bank writes into the loan agreement and which the holding must respect throughout the repayment period. They are not incidental: a breached covenant can, on its own, make the debt immediately due, even if cash still holds.

Two ratios come up almost every time. Leverage, that is net debt over EBITDA, which caps borrowing at an agreed multiple (for example not exceeding 3 times EBITDA). And the debt service coverage (DSCR), that is available cash flow over the year's instalments, which must stay above a threshold (often at least 1.1 to 1.2). The exact values are negotiated file by file.

The classic trap, in the files we take over, is to calibrate the structure right at the threshold. A revenue drop of a few points, an unforeseen investment or a working capital rise is then enough to breach the covenant, trigger a technical default procedure and block any distribution, hence repayment itself. The remedy is to build the structure with a deliberate margin below the thresholds, and to stress-test its resilience under a downside scenario before signing. A covenant is not a legal detail: it is a trigger that often fires before the real cash problem.

In practice: securing the financing of a buyout#

Before locking a structure, we methodically check the following points:

• Rebuild the target's sustainable distribution capacity over three years, after working capital, investments and tax, not just the reported net profit.
• Size the senior debt on these sustainable flows, keeping a safety margin against bank covenants.
• Negotiate a vendor loan on part of the price when the seller is open: it lightens the starting debt and, under the conditions of article 1681 F of the French tax code, can open a deferral of the seller's tax payment.
• Request the Bpifrance guarantee through the bank, factoring the commission into the financing plan and knowing the buyer remains liable to repay.
• Check eligibility for tax consolidation (the 95% threshold) and anticipate the Charasse rule in case of a buyout from oneself.
• Stress-test the structure against a downside scenario (revenue drop, rate rise) before signing, never after.

A few mistakes keep coming up in buyout structures, especially when they are closed in the rush of a negotiation.

• Confusing a sustainable price with a negotiated price. A price can be justified by the target's value and still be unfinanceable given its dividend flows.
• Overestimating the Bpifrance guarantee. It shares the risk with the bank, it does not discharge the buyer, who remains fully liable for the loan.
• Forgetting the cap on interest deduction. Article 212 bis of the French tax code limits the deduction to 30% of tax EBITDA or 3 million euros: a heavily indebted structure will not offset all its interest, unless it falls within the SME exemption.
• Neglecting the Charasse rule. A buyout from oneself through a holding triggers an add-back of financial charges over fifteen years, that is the acquisition year and the following fourteen (article 223 B of the French tax code).
• Stretching the contribution to the minimum. Without an equity cushion, the slightest operating setback turns into a repayment default.
• Ignoring bank covenants. The coverage ratios imposed by the bank can trigger before any real cash problem, and block distribution.

• A buyout is financed by stacking sources around a holding: contribution, senior debt, vendor loan and, on large deals, mezzanine.
• Sizing starts from the target's sustainable distribution capacity, not the negotiated price: it dictates the tenable amount of debt.
• A solid contribution (often 20 to 30% of the price) and a vendor loan lighten the bank debt and reassure the banks.
• The Bpifrance guarantee shares the risk with the bank but never discharges the buyer, who remains the sole debtor.
• Tax consolidation (95% ownership, article 223 A) is the main tax lever; the Charasse rule and the cap of article 212 bis (with its SME exemption) are its limits.
• Bank covenants often trigger before the real cash problem: plan a margin and stress-test a downside scenario before signing.