Financing a company buyout: structuring the acquisition

Quick answer. Financing a buyout most often goes through an acquisition holding combining several sources: the buyer's contribution, a senior bank debt, sometimes a vendor loan and, on larger deals, a mezzanine debt. The holding repays the debt thanks to the target's dividends, the tax leverage coming from tax consolidation when the holding owns at least 95% of the bought company.

Buying a company is rarely financed in cash: you build a structure that stacks financing sources around an acquisition holding. Understanding the structure of this deal, its tiers and its levers, is the key to a successful buyout. Here is the mechanics, explained simply.

The structure of a buyout is organised around a holding created to buy the target.

The buyer sets up a holding company, which will acquire the shares of the target. It is this holding that carries the acquisition debt and owns the target. The benefit of this scheme is twofold: it isolates the buyout operation and it opens, under conditions, the tax leverage of tax consolidation, by which the debt interest is offset against the target's profits. This mechanism is detailed in our article on the creation of a holding after a buyout.

The holding is therefore the pivot of the financing: it stacks the sources and repays, thanks to the target's flows.

The deal combines several sources, from the safest to the riskiest.

The buyer's contribution forms the base, a token of their commitment. The senior debt, granted by banks, forms the bulk: it is the main financing, repaid first. The vendor loan, by which the seller accepts a staggered payment, often completes the round and marks their confidence, a subject covered in our comparison vendor loan or bank loan. On larger deals, a mezzanine debt, intermediate between debt and capital, can be added, more expensive but more flexible.

The repayment of the deal rests on the target's ability to pay up dividends.

The holding has no activity of its own: it repays the acquisition debt thanks to the dividends the target pays it. The sustainability of the deal therefore depends on the target's ability to distribute, after financing its operations. The tax leverage comes from tax consolidation: if the holding owns at least 95% of the target, the acquisition debt interest is offset against the target's profit within the consolidated result, which lightens the tax. This mechanism, and its limit through the Charasse rule, is developed in our article on tax consolidation and the LBO.

A sustainable deal is one where the target's dividends comfortably cover the debt service, without choking operations.

Financing a buyout succeeds when the deal is calibrated on the target's real ability to repay, not on the acquisition price alone. The classic mistake is to stretch the deal to the maximum, at the risk of suffocating the target under the weight of the debt.

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 deal finances the buyout without weakening the bought company. An over-stretched deal turns a fine buyout into difficulty from the first deadlines.

A buyer wanted to buy an SME with a minimal contribution and a maximal debt, to limit their stake. The analysis showed that the target's sustainable dividends did not cover the service of such a heavy debt, at the risk of suffocating operations. By strengthening the contribution, adding a vendor loan and securing the senior debt with a Bpifrance guarantee, the deal became sustainable. Tax consolidation, the holding owning 100% of the target, lightened the tax and eased repayment.