LBO: Financing a Holding-Led SME Buyout (2026)

Quick answer. A leveraged buyout funds an SME acquisition through a holding company that borrows: personal equity usually covers 30 to 40 percent of the price, bank debt 60 to 70 percent, repaid from the target's dividends. The leverage works only if debt service stays sustainable, not because the loan rate is low.

Buying an SME without paying the full price in cash is a financial structuring exercise. The buyer does not purchase in their own name: they set up a holding company that borrows, acquires the shares, then repays the loan with cash upstreamed from the target. This is the architecture of an LBO (leveraged buyout). The real question is not "can we borrow?" but "how far does the target's cash flow let us hold the repayment schedule without strangling operations?".

This angle, sizing the financing, complements our analysis of the legal and tax structuring of an acquisition holding and our benchmarks on what banks look at in an LBO. Here we focus on the financial skeleton: how much equity, how much debt, which financing layers, and how the schedule aligns with distribution capacity.

An LBO rests on three flows locked together. The holding borrows to buy the target's shares. The target, now a subsidiary, distributes its profits to the holding. The holding allocates those dividends to repaying the loan instalment. The buyer thereby acquires a business whose future profits finance their own acquisition.

Leverage comes from the ratio between equity and the price paid. With 35 percent equity, the buyer controls 100 percent of a target while tying up only a third of its value: debt covers the rest. As long as the target's profitability exceeds the cost of debt, the deal creates value for the buyer. If profitability slips or rates rise, leverage works in reverse and can wipe out the equity committed.

Taxation amplifies the leverage but does not create it. 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, with only a 5 percent share of costs and charges remaining taxable. Tax consolidation (article 223 A), available once the holding owns 95 percent of the capital, voting rights and dividend rights, allows the holding's loan interest to be offset against the target's profit. We detail this mechanism in our article on how tax consolidation works.

Market practice sets personal equity between 30 and 40 percent of the acquisition price, and acquisition debt between 60 and 70 percent. This is not a legal rule: it is the balance point where the bank agrees to share the risk. Below 25 percent equity, financing becomes scarce and expensive; above 50 percent, financial leverage erodes.

Equity is not limited to the buyer's cash. It can combine personal savings, a contribution of pre-existing shares to the holding, an honour loan, a minority investor entering the holding's capital, or vendor credit granted by the seller. Each block changes the cost of capital and the governance.

Here is how to structure the financing plan, step by step:#

1. Value the target and set the price. A documented valuation (EBITDA multiples, discounted cash flows) frames the financing need. Without a defensible value, the bank caps its support. Our business valuation engagement exists precisely to objectivise that price.
2. Incorporate the holding and size its capital. No legal minimum capital applies to an SAS or SASU, but a credible capital, proportionate to the price, conditions the bank's agreement.
3. Raise the equity (30 to 40 percent). Gather cash, an honour loan, co-investors and contributed shares until you reach the expected proportion.
4. Secure the acquisition debt (60 to 70 percent). Negotiate the amount, the term (often 7 years), the rate and the guarantees. The holding carries the debt, not the buyer directly.
5. Align the schedule with distribution capacity. Check that the net dividends that can be upstreamed cover the instalment, with a safety margin.

A buyout is rarely single-source: it stacks. Each layer has a different rank, cost and risk level. Understanding this stack prevents over-leveraging the holding on a single line.

Vendor credit, which commonly covers 30 to 50 percent of the price on smaller deals, lightens the need for bank debt and signals the seller's confidence. The earn-out indexes a fraction of the price on results after the sale: it is not financing in the strict sense, but it reduces the upfront cash outlay and aligns the interests of seller and buyer.

The choice of holding form shapes the stack. Our holding versus SCI comparison shows why an SAS or SASU almost always prevails for an operating buyout, whereas the SCI stays confined to real estate holding.

Repayment relies on upstreaming the target's dividends to the holding. The central question is distribution capacity: does the target generate, after tax and necessary investment, enough cash to distribute the amount that covers the holding's loan instalment?

The calculation runs backwards. You start from the instalment (principal plus interest), work back to the gross dividend required given the low tax friction (parent-subsidiary or consolidation), then check that the target can pay it without draining its working capital or sacrificing its investment. A safety margin (a debt service coverage ratio above 1) is essential: a target that distributes everything it earns will not survive its first difficult year.

Corporate income tax weighs on this calculation. The target's profit is taxed at 15 percent up to 42,500 euros, then 25 percent beyond (subject to turnover and ownership conditions). It is this after-tax result that feeds the distribution, and therefore the debt service.

The buy-out by the owner (OBO), where a director sells their own company to a holding they control to cash out part of their wealth, triggers specific rules. The Charasse amendment (article 223 B of the French tax code) reintegrates financial charges for tax purposes when a group company buys shares from persons who control it, over the acquisition year and the following eight, that is nine years. The tax leverage of consolidation is largely neutralised.

The reinvestment after a contribution-then-sale follows a distinct regime. When a director contributes their shares to a holding that then sells them, the tax deferral of article 150-0 B ter requires, for sales made since 21 February 2026, reinvesting at least 70 percent of the proceeds within three years (against 60 percent over two years previously). This tightening from the 2026 Finance Act changes the timetable of any wealth structure attached to a buyout.

The internal buyout by employees uses the same leverage but with its own governance and support schemes. We address it in our dedicated article on internal buyouts by employees.

The underestimated risk. In our buyout files, the most frequent sticking point is not the loan rate: it is overestimating the target's distribution capacity. A director often reasons on accounting net income, whereas the cash actually distributable is cut by working capital needs, renewal investment and corporate tax. A holding sized on a theoretical dividend ends up in default at the first downturn.

What the tax authority looks at. Tax consolidation is not automatic: the 95 percent threshold of capital, voting rights and dividend rights must be held continuously. The interest deduction cap (article 212 bis) limits the deduction of net financial charges to the higher of 3 million euros or 30 percent of tax EBITDA. On mid-sized deals the 3 million threshold usually absorbs the interest, but it must be verified, not assumed.

Here are the checks to run before signing:

• Does the equity reach at least 30 percent of the price without weakening the buyer's personal cash position?
• Does the debt service coverage ratio stay above 1 in a cautious scenario?
• Is the 95 percent threshold met continuously if consolidation is sought?
• Is the deal an OBO that could fall under the Charasse amendment?
• Does the financing plan include acquisition costs (registration duties, advisers, guarantees)?
• Are the registration duties on share transfers costed: 0.1 percent on shares, 3 percent on units after the allowance (article 726)?

A successful LBO is won in the modelling, not in negotiating the rate. Recently, a director of a services SME asked us to help them buy out a competitor: their banker approved 65 percent financing, the price looked reasonable, but the distribution plan relied on a dividend equal to 90 percent of net income. By rebuilding the cash actually available, after working capital and investment, the debt service coverage fell below 1 from the second year. We recalibrated the equity, lengthened the senior debt and added vendor credit over three years: the structure went from unsustainable to robust, without touching the price.

Our reading is consistent. Financial structure takes priority over tax optimisation. The parent-subsidiary regime and tax consolidation are accelerators, not foundations: they never rescue an over-leveraged structure. As chartered accountants registered with the Order and statutory auditors, we first model debt service under a stressed scenario, then layer the tax structure on top. This is the opposite of the approach we see too often, where the tax structure precedes the solvency analysis. It is also the logic of our support for business transfer operations: securing the structure before optimising it.

Hayot Expertise tip. Before any commitment, have a seven-year forecast prepared that separates accounting profit from distributable cash. Stress it on a 15 percent drop in activity and a rate increase. If debt service coverage stays above 1 in that scenario, the structure holds. Otherwise, raise the equity or lengthen the debt before signing.