Financing your business

What is a goodwill?

A business is a group of tangible and intangible assets that form an economic unit intended for a commercial activity. In the legal sense, a business is an "intangible asset". The owner of a business may not own the premises in which it operates, in which case it is a tenant.

 

What is a business composed of?

              Intangible assets

The goodwill includes goods that cannot be touched, but which nevertheless have a real market value, for example

    ° The clientele: this is possibly the most important aspect of the sale of goodwill. A buyer of a business will be able to benefit from the experience of the seller and also from the clientele that he has developed over the years! Thus, a buyer will start his activity with an acquired clientele that he will also be able to develop.

    ° The lease: in fact, the lease is transferred at the same time as the business, because the latter is closely linked to the clientele and therefore to the location of the business.

    ° The licenses and administrative authorizations: for certain businesses, it is necessary to obtain a liquor license (e.g. License IV), which can be difficult to obtain.

 

              Tangible assets

The tangible assets concern all the tools and furniture necessary for the operation of the business. The transfer will include tools, merchandise, vehicles or even the equipment and machinery necessary for the proper functioning of the business.

 

The advantages and disadvantages of a business acquisition

The advantages are multiple, the existing clientele of the business will allow the buyer to settle more quickly. However, the purchase of a business is a real investment and requires a substantial budget.

 

The different guarantees to be included in the deed of sale

There are several steps before you can finally obtain your business. The most important step is obviously the deed of sale which must include certain obligatory mentions:

    ° The origin of ownership of the business: if the seller has bought the business himself, he must mention this, including the identity of the previous seller.

    ° A list of all the registrations encumbering the business: this means that the seller must inform the purchaser if the business is encumbered by a pledge, a release must be requested by the seller.

    ° The turnover and operating result of the last three financial years:

    ° The selling price:

    ° The lease characteristics: the deed of sale must mention the conditions of the lease such as the name and address of the lessor, the date of conclusion of the lease and its duration.

In the deed of sale, certain guarantees must be included to protect the buyer, in particular a guarantee against hidden defects and a guarantee of eviction which protects the buyer from any attempt by the seller to disturb the peaceful enjoyment of the property acquired. This guarantee is often materialized by a non-re-establishment clause which means that the seller or any other person related to the previous operation cannot settle in the vicinity of the sold business.

 

Financing the project

    Personal funds

In order to finance the purchase, it will obviously be necessary to invest part of one's savings in the project. In general, a contribution of at least 30% of the total amount of the business is required. It will be easier to find investors, such as a banking institution, if you invest your own money.

 

    The business loan

The purpose of the financing

The business loan is obviously the appropriate solution for any business financing. This loan will be obtained from a traditional banking institution and will be for a period of 7 to 15 years maximum. The bank, before granting you this loan, will study your situation and your business plan.

Guarantees requested by the banking organizations

The banks necessarily need certain guarantees in order to secure their investment. The first and most classic one is a borrower's insurance which will cover the risks of death and permanent disability of the loan. Secondly, the bank generally requires a guarantee or a pledge of assets to ensure the repayment of the loan even in case of financial difficulties of the company.

The purchase of a business marks the beginning of a new professional life, it is necessary to be advised throughout this operation, contact us for more information !

Financing your professional equipment

As a business owner, it will be necessary to purchase professional equipment, whether it be machines or even computers. The financing of this operation can differ according to the experience and the stability of your company. Wealth A7 presents you the different possible modes of financing:

 

Equity

Using company funds to finance your equipment is a possibility, there are advantages and disadvantages. The advantage is that your company will be independent, you will not be linked to any other structure by a credit or a debt. The disadvantage is that if your company is young, the financing of this equipment will have a strong impact on your cash flow, in this case it may not be the best solution for your company.

 

Professional leasing

The professional rental allows you to rent the equipment in question, quite simply. In this case, the company will conclude an agreement with a specialized organization and will pay it rent. These rents will of course be deductible from the result. At the end of the rental period, which has been determined in advance, the equipment is returned unless an extension of the rental period has been agreed. The disadvantage of this method is that the goods do not appear on the company's balance sheet.

 

Leasing

Leasing is very similar to financial leasing with some differences. In this case, the company pays rent to the organization, but at the end it can buy the goods at a price that has been predefined in the leasing agreement. The rents are obviously deductible from the company's income, but the leasing still does not appear on the company's balance sheet.

Why choose leasing rather than financial leasing? It can be interesting to choose leasing if the equipment in question wears out quickly and must be replaced often. On the other hand, if the equipment is used over the long term, the lease buy-back option may be more interesting. 

 

The professional loan

The professional loan is obviously the most classic solution to finance your equipment purchase. This loan will be concluded with a banking institution and the conditions will be negotiated (= rate, insurance etc...). This allows you to avoid a strong impact on your cash flow in one go and of course to deduct the interest from your taxable income. However, it is obvious that a loan binds you to a banking institution and that the latter will most certainly ask for the pledge of the good in question or a personal guarantee in order to ensure its investment.

The purchase of professional equipment is an important step in the development of your business, our credit professionals can assist you in financing this investment, contact us !

Financing your shares

The different types of companies:

There are several forms of company, each of which corresponds to a different need. These forms can be grouped into two main categories, partnerships and corporations:

              Partnerships

These companies are characterized by a strong "intuitu personae", i.e. the company is made up of people who have chosen each other. Thus, when a partner wishes to sell his shares, he must obtain the consent of the others. These are also called unlimited risk companies, because the partners are jointly and severally liable for the company's debts on their personal assets:

    ° The general partnership (= SNC): this type of company has a double commerciality: it is a commercial company whose partners are merchants. The liability of the partners is therefore unlimited.

    ° The civil company : the civil company includes in itself several forms of companies with different objectives. For example, the real estate company is often constituted in order to hold a real estate patrimony and to transmit it, whereas the civil company of means is a form which allows the exercise of a precise activity and the pooling of professional means.

 

              Capital companies

Within this framework, the partners are less important and when a sale takes place, it can be carried out without constraint. The associates are not jointly and severally liable for the debts, they are companies with limited risk.

    ° The limited company (= SA): the limited company is a common and well-known form. This form offers a certain framework, notably a share capital of at least 37,000 euros. However, the SA cannot be a one-person company, at least two people must constitute the company.

    ° The simplified joint stock company (= SAS): This form promotes a great deal of contractual and statutory freedom, the objective being not to hinder the associates when drawing up the articles of association. The SAS can also be a one-person company.

    ° The limited liability company (= SARL): this form can be classified as a capital company, because the partners are not jointly and severally liable for the company's debts, they can only lose the contributions made to the company. However, the SARL is also marked by the attachment to the person of the partners, that is why it can be qualified as "hybrid". Finally, there is no minimum capital and the company can become a one-person company during its life.

 

The different steps of a buy-out

The redemption of shares (= for partnerships) or stocks (= for corporations) must follow a well-established procedure.

              The transfer deed

The deed of transfer must contain certain mandatory information, in particular :

° The identity of the company

° The identity of the purchaser

° The identity of the seller :

° The number of shares transferred

° The terms of payment :

The approval of the other partners if necessary: in some companies, especially partnerships, the partners must give their consent to the transfer and thus to the new purchaser.

             

              The modification of the bylaws

Once the approval is obtained, if necessary, it will be necessary to gather the members of the company in a general meeting in order to modify the statutes and to register the new partner as well as the number of shares he holds.

 

              Registrations and publications

As the constitution of the company has been modified, it will be necessary to notify the company's tax department. Moreover, the deed of transfer as well as the modified articles of association must be filed with the clerk of the commercial court on which the company depends.

 

Guarantees for the buyer to be included in the deed of sale

There are several clauses to be inserted in a transfer of shares:

    ° Non-competition clause: in the context of a transfer of a small or medium-sized business and if the purchase is for the entirety of the shares, it may be wise to insert this clause so that the seller cannot set up his new business in your geographical area of activity. This clause must of course be defined beforehand.

    ° Net asset guarantee clause: this allows the buyer to protect himself against a variation of the net assets between a determined date and the final transfer of the shares or securities, the guarantor guarantees the stability of these assets.

    ° Profitability guarantee clause: for this clause, the seller undertakes to guarantee the result of the current financial year. If this result is not in conformity with what was determined in the deed, the seller will have to pay back to the buyer the difference between the real result and the transfer price.

 

The credit pro to finance your buyback

              Personal funds

Indeed, before financing a buyout, the buyer is asked to invest his personal funds in order to solidify the project. A contribution of 20 to 30% of the total amount of the transfer can be requested.

             

              The professional loan

                            The purpose of the loan

Bank loans generally finance 70 to 80% of the total price. The bank will obviously examine your experience, but also the financial health of the company being purchased. The financing can be granted, in principle, for a period of 5 to 7 years.

                            Guarantees requested by the banking institutions

In general, the banking institution will ask for a pledge of the shares. To this guarantee can be added a surety and sometimes other real guarantees on the personal assets of the buyer.

 

The support of a professional credit broker is crucial in order to obtain financing for your project. On the other hand, if you wish to sell your shares, the taxation of the operation can be optimized in particular thanks to the article 150-0 B Ter, contact us for more information!

Leveraged Buy Out

The LBO (= Leveraged Buy Out) allows the purchase of a company thanks to a strong leverage effect. Wealth A7 explains everything there is to know about LBOs:

 

What is it?

An LBO is a financial arrangement which, through a leverage effect, allows a holding company to buy back its shares. The principle is simple, the manager who owns his company will sell all or part of his shares to a company that has been previously created. The holding company will go into debt in order to buy back the shares of the manager, the latter will be able to repay the loan contracted thanks to the dividends paid by the target company.

 

The different types of LBO :

LMBO (= Leveraged management buy out): it is a form of LBO, in this case, it is the executives of the target company who will be the buyers.

LMBI (= Leveraged management buy in) : the buyers are exclusively private investors who will bring their own management team.

LBU (= Leveraged build up) : the operation aims to build a group by merging several activities.

OBO (= Owner buy out) : allows a manager to buy back part of his professional assets and to anticipate a transfer of his company. 

BIMBO (= Buy in management buy out): the investors of the holding company are both external investors and executives of the target company.

In the different cases, the buyers become the majority shareholders of the holding company, at the end of the loan repayment, they can choose to merge the holding company and the target company.

 

The financing of an LBO

              Equity capital:

An LBO must obviously be financed with equity, it is an operation that requires a personal investment. The seller can keep part of his shares in order to bring them to the new holding company and thus obtain a more or less important part of the capital in exchange. The contribution can also be cash.

 

          The professional credit

It is indeed possible to finance an LBO with a professional credit. However, the target company will have to show a certain financial stability, because it is finally it which will refund each term thanks to the rise of the profits. The banking institution will therefore examine the company and its health. On average, the borrowed funds correspond to 70% of the total amount of the operation.

 

The taxation of the LBO

                            The dividends

The taxation of this operation is the same as for the OBO. In order to finance the purchase of the shares, the holding company had to borrow from a banking institution. The question that arises is how are these dividends taxed? The objective here is to avoid double taxation, i.e. dividends taxed in the hands of the holding company and in the hands of the partners in case of redistribution by the holding company. In order to avoid this very heavy taxation, the partners can opt for the parent-daughter regime.

According to article L233-1 of the French Commercial Code, a parent company is a company that owns at least 50% of its subsidiary. The tax law is less demanding, however, as it only requires a 5% shareholding. Under this regime, the dividends received by the parent company, in our case the holding company, will be fully exempted, subject to the reintegration of a share for costs and expenses which remains very low.

 The conditions of the exemption: in order to benefit from this regime, article 145 of the General Tax Code stipulates that :

    ° 1st condition: The parent company and the daughter company must both be subject to corporate income tax.

    ° 2nd condition: The parent company must hold at least 5% of the shares of the daughter company.

    ° 3rd condition : The securities in question must be registered and the parent company must undertake to keep them for a minimum period of two years.

 

              The interests of the loan

The interests of the loan can be deducted from the taxation of the holding.

 

              The advantages

First of all, the contributions of the different investors will allow to inject new money into the company. If these contributions are cash, the intellectual contribution of each investor is not to be neglected and it is possible to observe very good results after an LBO operation.

 

              The risks

As the holding company has no source of income, it is the target company that must entirely support the loan. The latter must therefore be able to repay the loan and be financially sound. The objective is not to find that the target company only "lives" to repay the loan, but also to develop.

 

An LBO is an operation that requires the support of a credit professional, our asset management consultants can assist you in the search for financing as well as in the creation of your holding company, contact us

Owner Buy Out

The owner buy out or OBO is a mechanism for transferring shares via a holding company. This operation can have different objectives and is mainly aimed at managers of SMEs and VSEs. Wealth A7 explains why an OBO can be interesting for you:

 

What is an OBO?

The OBO is a financial arrangement which, through a leverage effect, allows a holding company to buy back its shares. The principle is simple, the manager who owns his company will sell all or part of his shares to a company that has been previously created. The holding company will take on debt in order to buy back the shares of the manager. The holding company will be able to repay the loan taken out thanks to the dividends paid by the target company. The manager will remain a majority shareholder by making a contribution to the holding company, the contribution can be the remaining shares that are not part of the sale transaction.

However, it is important to understand that the target company will have to be quite developed and financially solid, and will have to provide the holding company with dividends in order to repay the loan.

 

The OBO with the objective of transmission

It is obvious that one of the concerns of a manager of a SME or VSE is the transmission of his professional heritage. It can be difficult for this manager to find a buyer, whether this buyer is a grandchild or a private buyer. The OBO in this context will allow a manager to gradually pass on the management of his company while remaining at the heart of each decision.

The first step is therefore to sell part or all of the shares to a holding company. The sale will free up cash for the manager. It is frequent that an owner of a very small company or a small business has a real professional patrimony that he develops as the life of his company goes on, but encounters difficulties to constitute a personal patrimony. The sale operation will allow to secure a part of his investment and to transfer it into his personal assets even before the final transmission of his company.

At the same time, he will remain the majority shareholder of the holding company. As previously mentioned, the contribution can be in kind or in cash. This step will allow the manager to integrate new shareholders into the company, such as the successor of his company or private investors.

Thus, this operation will allow to secure the professional assets and to initiate a smooth transition. Once the arrangement is completed, the holding company will gradually repay the loan thanks to the dividends paid. Moreover, the interest is during the transitional period to develop the target company and thus allow the manager to benefit from a revaluation of his shares at the exit.

 

The OBO with a development objective

The OBO can be part of a development strategy, without being especially part of a transmission logic. In the case where the manager wishes to expand his activity or to integrate new investors, the OBO can be a real solution.

The manager will always have to transfer his shares to a holding company and thus carry out a "cash-out", i.e. recover part of his liquidities. However, when the holding company is set up, he will be able to integrate new investors into the company. The cash contributions of the new shareholders will thus give a new dynamism to the company. Moreover, the intellectual involvement of the investors will mark a turning point in the development of the company.

It can be noted that this operation can be carried out without including new investors, if the manager only wishes to create a new branch to his activity the holding will allow the investor to release liquidities which he will engage in the new structure, this last being also controlled by the holding.

 

Taxation of the OBO

              The dividends

In order to finance the purchase of the shares, the holding company had to borrow from a bank. The question that arises is how these dividends are taxed? The objective here is not to have a double taxation, i.e. dividends taxed in the hands of the holding company and in the hands of the partners in case of redistribution by the holding company. In order to avoid this very heavy taxation, the partners can opt for the parent-daughter regime.

According to article L233-1 of the French Commercial Code, a parent company is a company that owns at least 50% of its subsidiary. The tax law is less demanding, however, as it only requires a 5% shareholding. Under this regime, the dividends received by the parent company, in our case the holding company, will be fully exempted, subject to the reintegration of a share for costs and expenses which remains very low.

The conditions of the exemption: in order to benefit from this regime, article 145 of the General Tax Code stipulates that :

              1st condition: The parent company and the daughter company must both be subject to corporate income tax.

              2nd condition: The parent company must hold at least 5% of the shares of the daughter company

              3rd condition: The securities in question must be registered and the parent company must undertake to keep them for a minimum period of two years.

 

              The interests of the loan

The interests of the loan can be deducted from the taxation of the holding.

 

              The animating holding company

It is possible to transform your simple holding company holding shares into an animating holding company. In addition to the management of a portfolio of participations, the activity of a facilitating holding company is to actively participate in the management of its group's policy and in the control of its subsidiaries carrying out an operational activity and, on a purely internal basis, to provide its subsidiaries with specific services (administrative, accounting).

Thus, a management agreement may precisely define the various services that will be invoiced to the subsidiary. If the holding company can deduct the interest from its tax liability, the target company will be heavily taxed, the invoicing of these services will allow it to reduce its tax burden.

This reclassification of the holding company as an animating holding company must be real, because it will allow the manager to benefit from the exemption of the Pacte Dutreil in the case of a future final buyout of his shares. This regime allows an exemption of 75% on the transfer duties resulting from the transfer of the shares, whether it is a transfer free of charge or within the framework of a succession. If you wish to know more about this promising system, Wealth A7 invites you to read the file dedicated to the Pacte Dutreil: Dossier Pacte Dutreil.

In conclusion, the OBO can have several very attractive objectives for the company director, it is however necessary to surround yourself for this operation. Wealth A7 can accompany you, from the financing of your project to the constitution of the holding company. If you wish to sell your shares, your situation can be optimized, contact us for more information!

Family Buy Out

The family buy out allows you to transfer your company free of charge to one or more members of your family.

What is the FBO?

The FBO is a complex operation which is composed of several mechanisms: donation-sharing, Dutreil pact and creation of a holding company.

A company director is concerned about transferring his company, when he wishes to sell it to a member of his family, the OBO allows to optimize this transfer. The main problem is that in general not all the children or grandchildren will take over the company, but only one. The donation will probably affect the hereditary reserve if there are several children and it will be necessary to compensate the other heirs with a balance. In this context, the OBO allows to optimize the situation of the buyer and the manager.

For example: Let's imagine a company manager with an estate composed of 80% of his company. If this entrepreneur has three children, but wishes to transmit his company to only one, the hereditary reserve (= 33% for three children) will be exceeded and the child will have to compensate the two other heirs when receiving the shares.

 

The steps of a family buy out

- Pacte Dutreil : this mechanism allows a partial exemption of 75% of the transfer duties, in order to meet the different conditions the pact must be set up before the donation.

- Donation-sharing: in a first step, the company director will make a donation-sharing in order to transfer the shares of his company.

- Creation of a holding company: once the shares have been received by the donee, it will be necessary to create a holding company and to contribute the shares to it. The holding company will then be able to borrow in order to pay the balance.

 

The shared donation

              Definition

A shared donation allows, during one's lifetime, to anticipate an inheritance and to divide one's assets among one's heirs. The main difference with a classic donation is that the value of the given goods is not fixed.

Example: a mother decides to give one of her sons an asset worth €300,000 by means of a simple donation. At the time of the inheritance, the notary estimates the property at €400,000. It is possible that the original value of the property did not affect the inheritance reserve, but that the increase of €100,000 has reduced the share of each of the children. In this case, the donee will have to compensate his brothers and sisters. With a shared donation, the value of his property would have been fixed at 300 000 €.

 

Who is it for?

A shared donation can be made for the benefit of children, and even grandchildren.

 

The limits

Obviously, this shared donation must not affect the hereditary reserve. In this case, it is possible to provide in the deed of gift for the payment of a balance in order to compensate the other heirs who could be harmed by the gift.

 

The creation of a holding company

              What is a holding company ?

A holding company is a company (= civil or commercial company) which holds shares in other companies. The objective is to have several companies that are linked to each other by a single entity. In general, the holding company will have a majority in all the companies it owns and will ensure a certain unity of management.

 

              The holding company in an FBO

Once the donation has been made, it will be necessary to create a holding company. The objective is simply to contribute the received securities to the holding company. The holding company will then go into debt in order to pay the balance to the heirs. In order to repay the loan, the operating company will pay dividends to the holding company.

 

The insertion of the Dutreil Pact in an FBO

The Dutreil Pact will allow you to benefit from the partial exemption of transfer duties. In order to benefit from this favorable regime, it will nevertheless be necessary to meet certain conditions. Within the framework of a Pacte Dutreil, the shares of the company concerned by the pact must be subject to a collective retention commitment of at least two years. This commitment must be made by the deceased or the donor for himself and his donees. Thereafter, the beneficiaries must again commit themselves for a period of four years. One of the beneficiaries who has made the commitment to retain must carry on his or her professional activity in the company or hold a management position throughout the duration of the collective commitment and for a period of three years from the date of the free transfer. If you wish to know more about this promising system, Wealth A7 invites you to read the file dedicated to the Dutreil Pact: Dutreil Pact File.

 

The taxation of the FBO

              At the time of the shared donation

The shared donation must be carried out by a notarial act. Regarding taxation, deductions apply every 15 years. For example, between parents and children, the allowance is 100 000 euros per child and per parent.

              Taxation of the FBO with Pacte Dutreil

The Dutreil Pact is a real asset for the transfer of a company, it allows to benefit from a 75% exemption on the transfer duties. In addition, a 50% deduction of gift tax in the case of a donation of full ownership of shares by a donor under 70 years of age can be combined with the scheme.

 

Example: A 65 year old company director has two children and wishes to transfer his company to his daughter. The donation will be made of shares worth 500,000 euros to each of the children, which means that a balance will have to be paid to the other heir for an amount of 500,000 euros. It is a matter of calculating the tax on each share of 500,000 euros.

1st step: first of all the donee will benefit from the 75% exemption of the Pacte Dutreil, 500,000 x 0.75 = 375,000 €. The taxable base is therefore 125,000 euros.

2nd step : then the donation is in direct line, an allowance of 100 000 euros applies, 125 000 - 100 000 = 25 000 €.

3rd step : Now the tax is calculated according to the table below, 25,000 x 0.2 - 1,806 = €3,194

4th step : the donation being made before 70 years old, there is a reduction of the rights of 50%, 3 194 / 2 = 1 597 €.

Conclusion, on a share of 500,000 euros, the amount of tax to be paid is 1,597 euros, without a Pacte Dutreil, the donee would have to pay 78,194 euros per share and therefore 156,388 euros in total.

 

Taxable brackets

Rate

Quick calculation

Up to 8 072 €

5 %

0 €

Between 8 072 € and 12 109 €

10 %

404€

Between 12 109 € and 15 932 €

15 %

1 009€

Between 15 932 € and 552 324 €

20 %

1 806€

Between 552 324 € and 902 838 €

30 %

57 038€

Between 902 838 and 1 805 677 €

40 %

147 322€

More than 1 805 677 €

45 %

237 606 €

 

Taxation of the holding company

              The dividends

In order to finance the balance, the holding company had to borrow from a bank. The question is how are these dividends taxed? The objective here is to avoid double taxation, i.e. dividends taxed in the hands of the holding company and in the hands of the partners in case of redistribution by the holding company. In order to avoid this very heavy taxation, the partners can opt for the parent-daughter regime.

According to article L233-1 of the French Commercial Code, a parent company is a company that owns at least 50% of its subsidiary. The tax law is less demanding, however, as it only requires a 5% shareholding. Under this regime, the dividends received by the parent company, in our case the holding company, will be fully exempted, subject to the reintegration of a share for costs and expenses which remains very low, 5%.

The conditions of the exemption: in order to benefit from this regime, article 145 of the General Tax Code provides that :

              1st condition: The parent company and the daughter company must both be subject to corporate income tax.

              2nd condition: The parent company must hold at least 5% of the shares of the daughter company

              3rd condition: The securities in question must be registered and the parent company must undertake to keep them for a minimum period of two years.

 

              The interests of the loan

The interest on the loan can be deducted from the taxation of the holding company.

 

It is useful to be accompanied by a professional for your family buy out. Our wealth management advisors can assist you in the search for financing as well as in the creation of your holding company, contact us!

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