Is it necessary to create a holding to buy a company?

A holding company is an important solution for buying a company. This legal system allows you to benefit from financial and tax benefits. In this article discover what a holding company is, interest in forming one to acquire a company.

Holding Company to Buy a Company: A Few Reminders

what is a holding company

There are different legal statuses for each activity, whether commercial or civil. A holding company is a full-fledged company that may take the form of capital companies or individuals.

As a parent company, the holding company is characterized by the holding of equity securities within its various subsidiaries.

However, it may also have other activities or participate actively in the management of its daughter companies as a group leader company. The holding company will act as an intermediary between the company and the manager’s personal assets. Thanks to the holding company, governance of various group companies is facilitated, capital management, finance and taxation are assured.

Holding company in case of company buyout: LBO and OBO

You can buy your own company through an OBO (Owner Buy Out) arrangement or benefit from the leverage effect by buying another company through a holding company known as an LBO (Leveraged Buy Out).

About Classic LBO: Entrepreneur who wants to buy another company by creating a holding company will be able to take over a company without all the financial contribution required. For this you will borrow from banks or investors to acquire units or shares of the target company. This debt would then be required to be repaid for dividends received by the holding company.

This type of financing will allow you to avoid investing your own money outright. The process of obtaining an assistant is debt redemption.

Thus, you solve the problem of equity financing by creating a holding company. In fact, a natural person who decides to finance the buy-out of a company himself will face significant monthly repayment installments. In addition, social charges will apply to his salary, which is itself subject to income tax. Hence the holding company proves to be a wise choice in this context.

OBOs, which are a form of LBO used to purchase their company through a holding company, are a liquidity advantage for business leaders. Its purpose is to collect funds to build a personal legacy that is distinct from the professional. Three actors come into play: the entrepreneur as the shareholder of his company, the investor or lender, and the company itself. The first operation involves the investor’s financial participation followed by the purchase of his company, with the aim of maximizing the leverage effect, and finally the company acquiring a new shareholder.

A company with high turnover will have no trouble attracting potential investors. However, other factors can affect the success of this type of operation, namely: the organizational aspect of the company, its management, its resources, products, expertise, etc.

Benefits: Benefit from additional income on retirement; facilitating the transfer of property to relatives by way of donation or inheritance (Dutrel Treaty); Take advantage of leverage effects, among other things, by increasing its borrowing power, thanks to its greater negotiating power.

What does it mean to form a holding company to buy a company?

tax deduction of loan interest

The creation of a holding company presents a financial interest first to purchase a company.

  • On registration fee for acquisition of a company: These charges are in line with the tax levied by the state during the registration of acquisition of a company. In this case, this action is mandatory. They may relate to the acquisition of shares, set at 3% of their purchase price, with a rate increase of up to 5% in cases of immovable property; acquisition of shares representing 0.1% of the purchase price; a capital increase, the rate of which will depend on the type of contribution: in cash or in kind; on the sale of a business. To find out whether you have to pay a registration fee: Determine the amount of the allowance per unit, the amount of the overall allowance, then the amount of the tax base. Fees are payable when the result of the taxable basis obtained is positive.
  • On VAT: Unlike a pure holding company, the holding company is subject to VAT, the same as for invoicing the services of its subsidiaries. Benefits: the possibility of deducting tax associated with the expenses of their activities or paid when taking over a company (Article 216 of the General Tax Code).

Mother-Daughter Governance or Tax Consolidation

This regime has an advantage in terms of reducing overall taxation. The goal is to globalize your taxation. Actually, the method of calculation of this tax is based on the results of the parent and daughter company. The loss-making holding company will be able to fully benefit from the positive results of the annual accounts of its subsidiaries by way of compensation for group profits.

To benefit from the tax consolidation regime, certain conditions have to be met:

  • The target company must be 95% owned by the holding company and subject to both corporation tax (paragraph 223 of the CGI);
  • The parent company must hold equity securities in wholly or bare ownership of at least two years;
  • These securities, if the subsidiary’s head office is in France, must represent 5% of its share capital.

Exemption from capital gains on disposal

Equity securities are subject to capital gains tax. Exemption may be total or partial in the event of the sale of a sole proprietorship of shares in a partnership subject to income tax, in the event of a complete branch of activity (CGI 238 Quindsee, CGI 219-I and 151 Septs. CGI). The value of receivables and dispatched elements is taken into account.

You also benefit from the gainful sale price of securities in terms of capital gains: By reinvesting more than half of the proceeds from the sale, you will not be subject to tax on capital gains on the securities sold.

In other cases, you will have to pay corporation tax (IS) only in respect of part of the cost, charges that represent 12% of the gross amount of equity securities, because capital gains arise long-term when disposing of equity securities. Exempted from corporation tax for more than one year.

Which legal form to choose for forming a takeover holding company?

The interests of the various statutes are varied, whether it concerns a patriarchal or family holding company, tax or social benefits. Remember that the main options for forming a holding company are as follows:

  • mother-in-law : A form primarily used in corporate law, simplified joint stock company provides great flexibility for your human-sized or large-scale projects. Its legal system, drafting of articles of association, absence of share capital, practice of commercial activity as a holding company, freedom to sell securities, possibility to avoid payment of social contribution while freely distributing dividends There are all reasons. To choose this legal form.
  • Easy : Adheres to the strict rules of the Commercial Code. This legal form is equally popular in France. the potential to benefit from the mother-daughter regime or from tax consolidation; Unlike SAS, distribution of dividends may be subject to payment of social contributions under the Self-Employed Workers’ Scheme.
  • civil society : Performs purely civilian activity. Comes under the rule of partnership. However, the company can choose to tax the companies. Thus it will be able to benefit from the tax consolidation regime like capital companies having commercial activities. The transfer of securities in this type of company is very strict as it requires the approval of all the partners.

What are the steps to be taken to form a holding company to buy the company?

1. Establish a Financing Plan

Beginning by establishing a financing plan for the acquisition of the target company is obviously the first step before setting up a holding company to purchase a company. Consider the long-term needs of your project and determine sustainable resources.

You should consider: establishment cost, cost of purchase of securities, repayment of loan, if applicable in the current account of the partners. According to the social nature, capital as well as contribution should be analyzed.

Consider the method of financing. Debt or Equity? Project leaders or investors, banks, crowd lending can also be considered.

2. Choose the Target Company

Determine the type of business, its size, the market you want to take. The company should be valued. For this, you will need to conduct an acquisition audit to make it possible to conduct a global and strategic diagnosis of the company. Do not neglect the stage of negotiation with the transferor, you must prepare for it!

3. Develop the Legal Package

Determine the appropriate legal form for the acquiring company, the terms of the acquisition of the business, the debt as well as the assets to be considered. Take into account the commercial aspect: the products as well as the services provided by the company, the business to be received and the means to achieve it, etc. Company employees are also important. You should assess, for example, the current workforce, departure, hiring.

Filing of Articles of Association with Business and Companies Register. Don’t forget to complete the formalities with the Center de Formalites des Enterprises.

For all these processes, you can have professionals (lawyers, accountants, notaries, etc.) with you, but different networks such as Chambers of Commerce and Industry, Chambers of Trade and Crafts etc.

general question

How does the holding company reimburse the loan?

The holding company will use the dividends paid by its subsidiary to repay the debt and interest incurred.

Why Avoid Taking Business in Your Name?

To avoid double taxation: Pay the operating company’s corporation tax on the one hand, up to 30% called “flat tax” on the other that takes into account income tax and Social Security contributions.

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