Buying your own shares in a company means selling yourself what you already own. This can be achieved by setting up a takeover holding company, in the form of a financial package known as an OBO (Owner Buy Out), as long as you hold the majority of your company's shares. However, you should be aware that setting up an OBO requires the necessary financial and legal expertise. It is therefore advisable to be accompanied by legal, tax and financial advisors.
Buying back shares through a holding company
What is a holding company?
A "société anonyme" is acompany that holds shares in companies it controls. The creation process is identical to that of any other type of company. You can choose the legal form that suits you best (SA, SAS, SARL, etc.).
There are two categories of holding company: passive holdings, whose role is limited to managing a portfolio of securities, and active holdings, which have their own business and generate income.
What is the OBO mechanism?
The principle behind an OBO is to sell a company to a buyer who is in fact the owner himself. The main aim is to free up cash while retaining control of the business.
However, certain precautions need to be taken when using a financial arrangement such as an OBO, to ensure that this mechanism is not qualified as an abuse of rights by the tax authorities. For example, even if you hold 100% of the shares, it is essential that you bring in new shareholders, either internal or external, to the holding company, so that the shareholding structure is not the same after the OBO.
An OBO arrangement is perfectly suited to small and medium-sized businesses, as it allows entrepreneurs who are shareholders and managers of their company :
- retain control of their company through the holding company
- increase the value of their assets by selling shares in their company, while preserving it
- build cash reserves
- facilitate the transfer of their company by bringing family members into the capital
Setting up an OBO
The first stage
This involves setting up a takeover holding company by contributing a certain number of shares in your company. For example, if you own 100% of the shares in your business, commonly referred to in this type of arrangement as the "target company", you can contribute 50% of your shares.
The second stage
The takeover holding company will seek additional financing from the banks to enable it to buy back the 50% of shares still in your possession. In most cases, this 5 to 7-year loan will take the form of senior debt granted by the bank, since it will be secured by guarantees on the company shares purchased. This loan may be accompanied by mezzanine debt, the repayment of which is subordinated to that of the senior debt and is spread over a period of 8 to 10 years.
Repayment of the loan(s) will be financed by the target company's dividend income.
The advantages of an OBO
This financial arrangement enables family members to acquire a stake in the company, thus facilitating the transfer of the business. In addition, by obtaining liquidity, the company owner converts part of his non-liquid business assets into liquid personal assets.
It also allows you to benefit from :
- financial leverage through a bank loan
- tax leverage, since the interest on the loan is deductible from the corporate income tax (CIT) of the acquisition holding company
- legal leverage, as the owner of the target company remains the main shareholder after the sale of part of the company's share capital
The risks
Even so, there are a number of risks involved in setting up an OBO, since it requires recourse to debt. As the takeover holding company has to repay the money borrowed to buy back a certain number of shares, it is vital that the target company is in a position to generate sufficient cash flow to pay dividends, without jeopardizing its operations and development.
This is why an OBO should only be considered if the target company is financially sound. Otherwise, it runs the risk of becoming a "zombie" company, i.e. a company with no profitability, as it is no longer able to generate enough profits to cover the costs of its debt.
To maximize the security of a share buyback via a holding company, it is important to carry out the transaction at the best possible time, i.e. when a certain number of criteria have been met. For this to happen, the company must be in a performance phase with good short- and medium-term forecasts, and political and economic conditions must be favorable.