Financing of MBOs

1st case 1 - Principles for MBOs

Success factors

Question

What are the success factors for MBOs (without the participation of financial investors)?

Key figures of MBO (bank) financing

Question

What are the typical parameters of MBO financing?

Acquisition Holding

Questions

• What role do acquisition holdings play in MBOs?
• What tax issues arise in a Swiss acquisition holding company?
• What criteria must a foreign acquisition holding company meet?

2. complete takeover by the management

Facts

Three employees intend to purchase all shares in the service company ABC AG. The previous owner of the company and sole shareholder would like to hand over his life's work to his three long-serving managers. In order to be able to successfully implement the ideal succession solution in his view, he is prepared to sell his company at a price below the current wealth tax value. When considering the selling price, it is important to bear in mind that the company is primarily associated with him as the owner of the company due to his extremely prominent public image.
In connection with the acquisition of the shares, the three shareholders intend to conclude a shareholders' agreement among themselves.

Minimum purchase price and required risk capital from management

Questions

• At what (minimum) price can the entrepreneur sell the shares in his company
  to the previous management without assuming a
  payment in kind from a tax point of view?
• How much risk capital must the management contribute?

Variant with vendor loan

Variant

Subordinated to the bank financing, the seller grants the buyers (or AkquiCo held by them) a seller's loan. The bank loan bears interest at 1.5% p.a. and is to be repaid within 7 years. The vendor loan, on the other hand, is non-interest-bearing and does not necessarily have to be amortized for the time being.

Question

What tax questions arise?

Option: Gift of 60% share from the owner of the company to his son

The son of the company owner is also among the three management employees. The transfer of 60% of the shares to the son will be carried out in the form of an inheritance preemption. The two other employees are to each take over a 20% share in the service company as part of the MBO.

Question

What are the challenges in terms of the acquisition credit required?

Variant: existing employee stock option plan

Question

What do you need to consider for an existing employee stock option plan?

3rd Leveraged MBO

Financial investor as possible partner of the management

The present case concerns the purchase of a company by a financial investor with financial participation of the current management. Such acquisitions are generally financed by a combination of equity, shareholder loans from the financial investor and a bank loan (acquisition loan).

Possible financing:

Questions

• Which tax aspects have to be considered for debt financing?
• What should be considered if the bank loan is secured (i) by a pledge of the shares
  of the Company or (ii) by a guarantee of the Shareholder?
• What do you need to consider if the bank loan is secured by real estate?
• What do you have to consider so that interest under the bank loan is not subject to withholding
  tax?
• How are the preferential conditions (relatively higher share of equity) of the
  management to be assessed?

4th COVD-19 Credit

Current MBO financing

Three years ago, the management of XYZ AG acquired all shares from the previous owner of the company. The acquisition was financed, among other things, with a bank loan, which provides for a linear repayment of the loan amount over 5 years. Upon the enactment of the emergency regulations for bridging loans for companies facing Corona-related liquidity shortages, two amortization payments and accrued interest were still outstanding. XYZ AG had to apply for a so-called COVID-19 loan, i.e. a loan up to a maximum of CHF 500,000, from its principal bank due to the sharp drop in sales figures.

Question

How and to what extent can or may the outstanding obligations from the acquisition credit be serviced?

Basics:

• Ordinance of 25 March 2020 on the granting of credit and joint and several guarantees in consequence of the corona virus (COVID-19-Solidarity Guarantee Ordinance, (SR 951.261) (as of 20 April 2020)
• Explanatory notes on the Ordinance on the Granting of Credits and Solidarity Guarantees following the Coronavirus (COVID-19 Solidarity Guarantee Ordinance) (as at 14 April 2020)
• Preliminary draft Federal Act on loans with a solidarity guarantee as a result of the coronavirus (Covid-19-Solidarity Guarantee Act, Covid-19-SBüG)
• Explanatory report on the preliminary draft law on loans with a joint and several guarantee following the coronavirus (Covid-19-Solidarbürgschftsgesetz) of 1 July 2020