Rather than creating a new business, the business manager may decide to take over an existing business. The takeover may be carried out via the purchase of a business or the acquisition of a stake in a company.
When the business manager purchases a business, he is thus buying the customers, the lease rights, the trade name, the equipment and the merchandise of the business. This allows him to avoid the start-up phase usually experienced by new businesses by taking advantage of the existing infrastructure.
The purchase of shares (public limited company and partnership limited by shares) or partnership shares (other companies: partnership and limited liability company) of a company is the other way to take over a business. Only the legal ownership of shares or partnership shares changes hands and so the company will not be affected by the operation. The company may possibly then change manager, but the operation is discreet, with the company’s customers not necessarily being informed of the transfer.
A Management Buy-Out (MBO) using a holding company is a type of financial transaction intended for employees and managers of the business from which the current owner wants to withdraw. Rather than sell the business to a third party, which involves the risk of the management team leaving, the current owner allows his business to be purchased by one or more managers by means of bank loans repayable with the business’ future profits.
Purchase of a business
The purchase of an existing business is not subject to VAT. The business manager ensures the continuity of activities, so to speak, which also explains why he takes over the rights and obligations of the existing business in terms of VAT, such as the possible adjustment of the relative deductions concerning capital goods. It is only when the purchase of the business does not relate to the business as a whole but rather to certain parts thereof (e.g. the lease rights) that VAT may become payable on the purchase price of those isolated parts.
When the transfer of the business is subject to VAT in respect of isolated parts thereof, no registration fee is payable. On the other hand, the sale of the business as a whole, exempt from VAT, may involve the payment of proportional registration fees for some of its components, such as the transfer of a lease contract for example. The majority of the parts transferred are not, however, subject to registration fees.
The total price of the business is valued on the basis of the sum of its different components (lease, merchandise, etc.). If the total paid exceeds the market value of the different assets acquired as part of the business, the surplus constitutes the purchase cost of goodwill (i.e. the customer base). This cost can be depreciated over a period of 10 years.
Example: the business manager pays 1,000,000 for a business consisting of merchandise (200,000), a lease (50,000) and equipment (250,000).
The purchase price of goodwill therefore amounts to 500,000 (= 1,000,000 – [200,000 + 50,000 + 250,000]). This cost is depreciated over 5 years, and the tax deductible annual depreciation charge is therefore 500,000/5 = 100,000.
If the commercial profit before depreciation is 300,000 the first year, the taxable commercial profit will only be 200,000 (= 300,000 – 100,000).
Purchase of a company
When the purchase relates to an 'opaque company' (SA, SARL, SECA), the fact that there is a new business manager will have no impact on the company’s tax treatment. Given that the company has its own legal personality that is separate from that of its partners, a change in ownership does not, in principle, affect the company’s taxation. The company will continue to carry out its activities as in the past, with the existing contracts remaining in place, etc.
Example: a SARL with owned capital of 1,000,000 is sold for 3,000,000. The commercial and tax balance sheets of the company remain unchanged. On the other hand, the company will have a new partner who has spent 3,000,000 to purchase the shares (ownership rights) of the company. If the new business manager decides to sell the business after 5 years for an amount of 3,500,000, he may either sell his shares in the company, or sell the business and goodwill while keeping control of the company.
If he sells his shares in the company, the company will avoid paying any tax on the sale for the same reasons that it avoided doing so at the time of the initial purchase by the business manager. The business manager will moreover make a capital gain of 500,000 (= 3,500,000 – 3,000,000) on the sale, taxable at a preferential rate equal to one-half of his global tax rate. If the marginal tax rate of the business manager is 39 %, the preferential rate will not exceed 19.50 %.
If he sells the business and goodwill, it is in fact the company that carries out the sale and collects the sale price (even if it means subsequently distributing it to its partner). As the company has owned capital of 1,000,000 (assuming, for the sake of simplicity, that it has not made any profits or losses during the 5 years), it will make a capital gain of 2,500,000 (= 3,500,000 – 1,000,000). This capital gain will be taxed.
The business manager should therefore carefully examine the different exit possibilities in advance. If he would prefer to sell a business rather than company shares, he should also purchase a business rather than company shares. The purchase of partnership shares involves non-tax risks for the business manager that can be avoided by purchasing a business: the transfer of risks that the buyer is not aware of. In fact, by purchasing partnership shares, all of the underlying liabilities, for example lawsuits against the company, are automatically transferred to the buyer, since the company remains intact and it is the company that is being sued. It is therefore necessary to carry out an in-depth audit of the company’s accounts before proceeding with the purchase of shares in the company. The buyer can also consider contractually negotiating a clause guaranteeing the liabilities under the terms of which the seller reimburses the buyer for all of the company liabilities that only come to light after the sale and which relate to the pre-sale period.
When the purchase involves a 'transparent company' (general partnership (société en nom collectif - SENC) and limited partnership (société en commandite simple - SECS)), although the purchase relates to company shares rather than a business, the rules concerning the acquisition of a business must be applied with regard to income tax.
Similarly, if the transparent company is the owner of a building, the acquisition of a stake in the transparent company will result in the payment of registration fees as if the property itself had been purchased.
Example: the business manager purchases all of the partnership shares of a SECS at a price of EUR 1,000,000. The SECS is the owner of a building located in the city of Luxembourg; its market value is EUR 1,500,000. The sale of partnership shares will involve the payment of a 10 % registration fee on EUR 1,500,000, i.e. EUR 150,000, because of the transfer of the economic ownership of the building.
Management buy-out using a holding company
This financial technique was initially widely used in the United States and Great Britain, and then in Europe. It is intended for employees and managers of the business from which the current owner wants to withdraw. Rather than sell the business to a third party, which involves the risk of the management team leaving, the current owner allows his business to be purchased by one or more managers.
As these managers do not generally have the financial resources to finance the purchase of the business, they take out bank loans. The distinctive characteristic of a leveraged management buy-out (MBO) is the aim to repay the loan with the future profits of the business. Along with this loan, banks can acquire a share of the capital which will subsequently be sold to the managers.
For the operation to be viable, the interest paid on the loan must be deductible from the company’s profits. This is made possible thanks to tax consolidation.
Tax consolidation is a legal provision which allows an opaque company holding 95 % of the share capital of another opaque company to combine the results of its subsidiary with its own results and to be taxed only on the whole:
- the buyer of the business sets up a holding company (société de participation or SOPARFI), the aim of which is the purchase of the target company (the company that the buyer wishes to take over);
- the holding company takes out a loan to purchase the target company;
- the funds available to the holding company, i.e. the capital contributed by the buyer and the bank loan, are used to purchase shares in the target company;
- the profits are then made by the target company while the interest is paid by the holding company;
- tax consolidation thus allows the interest on the holding company’s bank loan to be offset against the target company’s profits.
The structure is therefore as follows:
As the 'MBO using a holding company' technique is a transaction involving shares or partnership shares, the operation cannot benefit from State financial aid, particularly because the beneficiary thereof would be a different legal entity than the actual operator of the business.