Financial Structuring: LBO, MBO, MBI, OBO and Acquisition Structures

Introduction: Financial Structuring — The Architecture of Every Successful Transaction

Selling, transferring, acquiring or refinancing a business are decisions that involve years of work, a patrimony that is often highly concentrated, and human relationships built over time. They deserve a financial architecture commensurate with what is at stake. Financial structuring is precisely that architecture: a set of legal, tax and financial choices that conditions — far more than most people imagine — the success or failure of any acquisition or business transfer.

Financial structuring refers to all decisions relating to the composition of financing for an acquisition or sale: the choice between senior debt, mezzanine debt and equity, the legal form of the acquisition holding company, the design of the management package, tax optimisation, and the negotiation of banking covenants. Each component interacts with the others — a miscalibration of one can undermine the entire structure.

“A deal’s structure is like a building’s frame: invisible when everything is going well, but absolutely decisive the moment the wind picks up.”

The challenge is real for any French or Swiss executive, acquirer or investor: faced with the diversity of available structures — LBO, MBO, MBI, OBO, BIMBO, secondary LBO — how do you identify the one that fits your situation, your wealth objectives and the tax constraints of your environment? What traps should you avoid? What leverage levels are actually sustainable in 2025? And how can a well-executed structure transform an ordinary transaction into a genuine value-creation lever?

This article addresses these questions in a logical sequence: after recalling the origins and fundamentals of financial structuring, we detail the available financing instruments and their repayment waterfall, before providing an in-depth analysis of the six main transaction structures — LBO, MBO, MBI, BIMBO, OBO, secondary LBO — examining for each its mechanics, advantages, limitations and concrete examples in the Franco-Swiss context. We conclude with current market conditions, the most common structuring mistakes and a practical FAQ for business owners and acquirers.

Origins and Evolution of Financial Structuring

Financial structuring in acquisition transactions has its roots in the United States in the 1980s. Pioneer funds completed landmark acquisitions totalling tens of billions of dollars, demonstrating that it was possible to acquire very large companies by financing most of the purchase price with debt repaid from the target’s own cash flows. The mechanism revolutionised corporate finance: the acquirer no longer needed to immobilise the full purchase price — instead, it could mobilise financial leverage to mechanically amplify its return.

In Europe, the practice developed during the 1990s and 2000s, driven by the rise of continental private equity and the emergence of regional funds specialising in SMEs and mid-size businesses. In France, the mid-market LBO segment progressively structured itself around transactions in the CHF 10–150 million enterprise value range. In Switzerland, the Code of Obligations framework and cantonal tax specificities gave rise to adapted structures — particularly the OBO, favoured by owner-managers seeking to partially monetise their wealth while retaining operational control.

The 2023 reform of the Swiss Code of Obligations and France’s loi Pacte modernised the applicable legal frameworks, enhancing the flexibility of acquisition structures and opening new possibilities in terms of share classes, conditional capital and simplified governance. The CO 2023 reform notably allows Swiss corporations to issue shares without nominal value and strengthens minority shareholder rights — two developments directly relevant to LBO and MBO structures.

Today, financial structuring has become a discipline in its own right, mobilising expertise in corporate law, taxation, business valuation, capital markets and governance. It directly conditions investor returns, tax burdens and the long-term resilience of acquired businesses.

Definition and Core Principles

Financial structuring refers to the legal, tax and financial architecture put in place to finance and optimise an acquisition or business transfer. It rests on three fundamental, interdependent mechanisms that must be understood before examining the different transaction forms.

The first is the acquisition holding company (NewCo) — a legal entity created specifically to carry the acquisition debt and hold the target’s shares. The NewCo borrows, acquires the target, and repays the debt using dividends upstreamed by the target: this is the foundational mechanism of any LBO. The NewCo is typically a Swiss SA or a French SAS depending on the applicable law, chosen for its flexibility in terms of governance and share classes. Legally, the interposition of the NewCo creates a separation between the acquisition debt and the target’s operational assets — essential protection for lenders who take security over the target’s shares, not its industrial assets directly.

The second is financial leverage. When the target’s economic return on assets (ROCE) exceeds the after-tax cost of debt, each additional franc of debt mechanically improves the return on invested equity. A ROCE of 12% financed 60% by debt at 4.5% generates an ROE of approximately 23% — nearly double the economic return. Conversely, if ROCE falls below the cost of debt, leverage amplifies losses: this is the fundamental risk of any LBO structure, which rigorous stress testing must anticipate.

The third is the repayment waterfall, or financial waterfall. The target’s operating cash flows first service the senior debt, then the mezzanine debt, then the vendor loan, before remunerating shareholders. The DSCR (Debt Service Coverage Ratio = EBITDA / Annual debt service) is the central barometer of any LBO structure: lenders typically require a minimum DSCR of 1.20x to 1.30x over the repayment horizon, with a stress test at -15% EBITDA to validate the structure’s resilience.

Prior valuation of the target — using DCF and comparable multiples methodologies — is the inseparable starting point of any structuring exercise. Without a robust valuation, it is impossible to correctly calibrate leverage, the WACC and expected investor returns.

Franco-Swiss Application Context

The Franco-Swiss market presents specific tax and legal characteristics that directly condition structuring choices and distinguish transactions carried out in this geography from those executed in Northern Europe or the United States. Any transaction that ignores these specificities is exposed to tax assessments or significant economic inefficiencies.

In France, the tax consolidation regime (CGI art. 223 A) allows the acquiring holding company to deduct acquisition interest charges from the target’s operating profit, provided the holding owns more than 95% of the capital. The parent-subsidiary regime exempts 95% of dividends upstreamed by the operating subsidiary from corporate income tax (only a 5% cost allocation is taxable). These two mechanisms constitute the tax pillars of the French LBO and account for virtually all the fiscal gain of a well-structured transaction. Added to these is the partial deductibility of net financial charges within 30% of fiscal EBITDA (interest limitation rule, CGI art. 212 bis).

In Switzerland, the thin capitalisation rules of the AFC (Federal Tax Administration) cap the amount of deductible debt according to asset type — debt/asset ratio capped at 70% for equity investments, 85% for commercial real estate. The participation relief (Beteiligungsabzug) virtually exempts dividends received from subsidiaries held at over 10%. Capital contribution reserves (RAP) allow distributions free of the 35% withholding tax. A tax ruling is systematically sought before any complex transaction to secure the tax treatment — it is obtained in 3 to 6 weeks from the competent cantonal tax authority and binds the administration for the entire duration of the transaction.

In market terms, Franco-Swiss transactions break down into three segments: SMEs (CHF 5–30 million enterprise value), mid-size businesses (CHF 30–150 million) and large mid-size businesses (above CHF 150 million). Swiss regional banks and Franco-Swiss institutions are the primary providers of senior debt for mid-market transactions. The Swiss market is characterised by more conservative lenders than in France — leverage ratios typically 0.5x to 1.0x EBITDA lower — offset by historically lower interest rates and a regulatory stability valued by institutional investors.

Structuring Methodology

Any financial structuring follows a rigorous analytical sequence of six steps, each conditioning the next. Hectelion’s experience confirms that failed structures — covenant breaches, shareholder conflicts, tax reassessments — are almost always the result of one or more steps inadequately addressed upfront.

Step 1 — Repayment capacity analysis. The target’s normalised EBITDA, after financial due diligence adjustments, determines the maximum sustainable debt load. A conservative lender will accept 4 to 5x EBITDA in total debt, subject to a minimum DSCR of 1.25x in the base case and 1.10x in the stress scenario. Free cash flow generated after taxes and maintenance capex is the real repayment metric — not EBITDA alone, which ignores renewal investments and working capital movements.

Step 2 — Legal form selection. Swiss SA, French SAS or Sàrl — each form offers specific advantages in governance, capital flexibility and administrative costs. The Swiss SA is preferred for LBO structures due to its flexibility around share classes and convertible instruments. The French SAS is favoured for its complete statutory freedom and ease of structuring management incentive instruments.

Step 3 — Debt calibration. Defining the financing architecture: amount and nature of senior debt (amortising Term Loan A, bullet Term Loan B, revolving credit facility), appropriateness of a mezzanine or unitranche tranche, use or otherwise of a vendor loan. Each layer is calibrated on repayment capacity and the target’s risk profile. Poorly calibrated debt — too high, too short or poorly sequenced — is the primary cause of LBO failures in the SME segment.

Step 4 — Management package structuring. Sweet equity, ratchet, BSPCE, free shares — management incentive instruments are negotiated to align interests with long-term value creation while respecting the tax balances documented in our publication on rewarding a key employee.

Step 5 — Tax optimisation. Tax consolidation in France, tax ruling in Switzerland, dividend flow structuring, use of capital contribution reserves — every tax parameter must be anticipated before closing. Tax optimisation not documented by a ruling or formal opinion is optimisation exposed to subsequent reassessment.

Step 6 — Banking covenant negotiation. Financial covenants (net debt/EBITDA leverage ratio, DSCR, ICR interest coverage ratio) are negotiated with lenders to preserve operational flexibility. A headroom of 20 to 30% relative to covenant thresholds is recommended to absorb operational shocks without triggering a costly and time-consuming waiver procedure.

Financing Instruments and the Waterfall

The financing waterfall of a typical LBO combines several instruments with distinct risk, return and priority characteristics. Their articulation determines the structure’s robustness, investor returns and the operational flexibility left to management. Understanding each layer in its own logic is essential for building a balanced transaction.

Senior debt (Term Loan A/B, revolving credit facility) represents 40 to 55% of the acquisition price and constitutes the priority layer in repayment. Term Loan A amortises quarterly over 5 to 6 years — its amortising structure progressively reduces lender exposure. Term Loan B repays in full at maturity (bullet) over 6 to 7 years, typically sold to institutional investors less constrained by banking ratios. The revolving credit facility is drawn as needed to cover current working capital requirements. Its 2025 cost stands at SARON + 2.0–3.0% for Swiss transactions, Euribor + 2.5–3.5% for French transactions. It is secured by a pledge over the target’s shares and, in France, an assignment of trade receivables.

Mezzanine debt represents 10 to 20% of the price and sits between senior debt and equity in priority. It is remunerated at 8–12%, part of which may be capitalised as PIK (Payment in Kind) — PIK interest accrues to principal and is repaid at exit, preserving cash flow during the growth phase. It is often accompanied by warrants giving the mezzanine lender partial access to exit upside, compensating for its higher risk. The unitranche — a hybrid instrument combining senior and mezzanine in a single tranche from a private debt fund — simplifies documentation and governance. Growing rapidly since 2020 in the Franco-Swiss market, it is particularly suitable for transactions of CHF 15–80 million where the complexity of a two-tier structure is not economically justified.

The vendor loan (seller credit, 0–15% of price) is granted directly by the seller to the acquirer. By deferring part of the price, the seller signals confidence in the future value of the business and facilitates the financing close in a more restrictive banking environment. Its subordination to senior debt is formalised by a contractual subordination agreement — the seller receives neither principal nor interest until the senior debt is fully repaid. The vendor loan rate (typically 4–6%) must be a market rate to be tax-deductible and avoid any recharacterisation.

Equity (25 to 40% of price) is contributed by the PE fund and co-invested by management. Its implicit cost is the investor’s target IRR — typically 20 to 25% over 4–7 years for a mid-market fund. Equity absorbs losses first (residual in the waterfall) but in return captures all value created beyond debt repayment. The management package mechanism allows management to earn an economically disproportionate return relative to their initial investment if targets are exceeded — the alignment engine of any successful LBO.

The 6 Transaction Structures: Detailed Analysis

LBO — Leveraged Buy-Out

The LBO is the archetype of leveraged financial structuring. A private equity fund acquires a target company through a NewCo, combining equity (25–40% of price) and bank debt (60–75%). Value is created through three simultaneous levers: organic EBITDA growth driven by strengthened governance, margin improvement through operational optimisation, and progressive deleveraging that mechanically increases residual equity value. At an identical exit enterprise value, CHF 5 million of debt repaid during the holding period translates directly into CHF 5 million in additional value for shareholders.

The ideal LBO target profile features: stable and recurring cash flows (low cyclicality), a defensible competitive position (barriers to entry), limited maintenance capex (freeing FCF for debt repayment) and a solid incumbent management team aligned on performance. B2B services, specialist distribution and enterprise software sectors are particularly suited to this logic.

Advantages: maximisation of IRR via leverage, tax optimisation through interest deductibility and tax consolidation, management discipline imposed by debt service, governance professionalisation, strategic transformation acceleration driven by a clearly defined exit horizon.

Limitations: structural fragility in the event of an EBITDA shock (major client loss, sector downturn), risk of covenant breach leading to costly lender renegotiation, dependence on credit market conditions for refinancing or exit, short-term management pressure that may hinder long-term strategic investments.

Example:

Acquisition of a Swiss industrial SME at CHF 20.0 million EV (EBITDA CHF 3.0 million, 6.7x multiple).

Structure: CHF 8.0 million equity (40%) + CHF 10.0 million senior debt (50%, SARON + 2.5%, amortising over 5 years) + CHF 2.0 million mezzanine (10%, 9% rate).

Annual debt service: CHF 2.40 million. Year 1 DSCR: 3.0 / 2.40 = 1.25x.

Target IRR: 22% over 5 years, implying an exit at CHF 22.0 million net equity value (after debt repayment).

Exit envisaged via trade sale or secondary LBO.

MBO — Management Buy-Out

The MBO involves the incumbent management team acquiring the company, typically in partnership with a private equity fund that contributes the majority of equity. Management invests a significant portion of their personal savings — the “skin in the game” — in exchange for a management package comprising sweet equity and conditional ratchet mechanisms. The MBO is the most common form of acquisition in the Franco-Swiss SME segment: it preserves operational continuity, reassures clients and employees, and reduces post-acquisition integration risk.

Price negotiation between the selling and buying management team is the delicate point of any MBO. Management, with their deep knowledge of the business, holds an information asymmetry advantage over the PE fund — which justifies systematically commissioning an independent financial due diligence on behalf of the co-investing fund. The transaction price must be the market price — neither overstated to benefit the seller, nor understated to benefit the buying management at the expense of employees or creditors.

Advantages: total management continuity guaranteeing client retention and key competency preservation, deep target knowledge reducing information asymmetry, optimal interest alignment through management’s personal co-investment, smooth transition for all stakeholders, accelerated due diligence process through management’s active cooperation.

Limitations: limited management financial capacity (investment typically 2–5% of price maximum), conflict of interest risk in the dual seller/buyer role, excessive concentration of personal wealth risk for executives already entirely dependent on the company for their remuneration, potential emotional blind spots on the target’s real risks.

Example:

MBO of a Franco-Swiss services company at CHF 30.0 million EV (EBITDA CHF 4.2 million, 7.1x multiple).

Structure: CHF 12.0 million equity (40%) — management invests CHF 600,000 (5% of equity) in sweet equity representing 12% of economic capital, PE fund contributes CHF 11.4 million — + CHF 16.0 million senior debt (53%, SARON + 2.5%, amortising over 6 years) + CHF 2.0 million vendor loan (7%, 5%).

Annual debt service: (16/6) + 16×0.0385 + 2×0.05 = 2.667 + 0.616 + 0.100 = 3.383M. DSCR: 4.2 / 3.383 = 1.24x.

Ratchet triggered if PE fund IRR > 22%: management share increases from 12% to 18%.

MBI — Management Buy-In

The MBI involves an external manager acquiring control of the business, typically without prior in-depth knowledge of the target. The incoming acquirer — an experienced sector executive, serial entrepreneur or senior executive transitioning to entrepreneurship — brings an unbiased outside perspective, complementary skills absent from the incumbent management, and sometimes a strategic commercial or sector network. The MBI is frequently chosen when no credible internal successor has been identified, when the seller seeks a clear break from the previous management style, or when the business requires a strategic transformation that the existing team is not positioned to lead.

The defining risk factor of the MBI is the incoming acquirer’s learning curve. However experienced, it will take 6 to 18 months to master the target’s operational subtleties, understand client dynamics and earn team trust. This ramp-up period often coincides with the first debt repayment tranches — a time pressure that leaves no room for improvisation. A contractual handover period with the seller — formalised in the SPA with knowledge transfer obligations and presence requirements — is therefore a near-systematic condition of a successful MBI.

Advantages: strategic renewal through an unbiased external perspective, addition of new capabilities (digital, internationalisation, sector consolidation), succession solution when no internal successor exists, potential for more radical transformation than an MBO, ability to attract a more ambitious leadership profile than available internally.

Limitations: long learning curve of 6 to 18 months before full operational mastery, risk of resistance from teams loyal to the former owner, real uncertainty around maintaining key client relationships that are often highly personalised, necessity of a contractualised handover period with the seller whose departure may be perceived as abandonment by the teams.

Example:

An experienced CEO from the logistics sector completes an MBI on a Swiss transport SME at CHF 12.0 million EV (EBITDA CHF 2.0 million, 6.0x multiple).

He invests CHF 800,000 personally for 20% of the capital. A regional development fund contributes CHF 3.2 million for 60%. Senior debt totals CHF 6.0 million (50%, amortising 5 years, SARON + 2.5%) and a vendor loan of CHF 2.0 million from the seller (17%, 5% interest) completes the financing. Total: 0.8 + 3.2 + 6.0 + 2.0 = 12.0M.

Annual service: (6.0/5) + 6.0×0.0385 + 2.0×0.05 = 1.200 + 0.231 + 0.100 = 1.531M. DSCR: 2.0 / 1.531 = 1.31x.

Seller handover period: 12 months at 3 days per week, contractualised in the SPA.

BIMBO — Buy-In Management Buy-Out

The BIMBO is a hybrid structure combining the strengths of an MBO and an MBI by associating part of the incumbent management with an incoming external acquirer. It is the most balanced solution for SMEs in generational transition where internal management is competent in their domain but incomplete to lead the business alone — for example, an excellent technical or commercial director with strong legitimacy among teams and clients, but without general management or financial oversight experience.

Negotiating the allocation of sweet equity between internal and external management is the critical point of any BIMBO. It must objectively reflect the respective contribution of each party to post-acquisition value creation — failing which, governance tensions can rapidly impair operational performance. The shareholders’ agreement must explicitly anticipate decision-making boundaries, veto rights, exit clauses in the event of disagreement and buyout terms should one co-CEO depart.

Advantages: optimal balance between continuity (internal management as guarantor of client relationships and company culture) and renewal (external management bringing strategic vision and missing competencies), reassuring internal legitimacy for teams, shared financial and operational risk between internal and external management, complementary profiles reducing blind spots in decision-making.

Limitations: governance complexity between co-leaders with different legitimacy and horizons, sensitive sweet equity allocation negotiation that can create lasting resentment if poorly handled, risk of cultural incompatibility between outgoing internal management (anchored in company habits) and incoming external management (bearing a disruption vision), necessity of an explicit governance charter from day one.

Example:

Acquisition of a Franco-Swiss engineering consultancy at CHF 18.0 million EV (EBITDA CHF 3.1 million, 5.8x multiple).

The incumbent technical director (20 years’ tenure, guarantor of client relationships) and an experienced external CEO in commercial development partner in a BIMBO.

Each invests CHF 500,000 for 5% of capital (10% total management). The regional development fund contributes CHF 5.0 million (28% of capital).

Senior debt totals CHF 10.0 million (56%, SARON + 2.2%, amortising over 6 years) and the seller’s vendor loan represents CHF 2.0 million (11%, 5%). Total: 0.5 + 0.5 + 5.0 + 10.0 + 2.0 = 18.0M.

Annual service: (10.0/6) + 10.0×0.037 + 2.0×0.05 = 1.667 + 0.370 + 0.100 = 2.137M. DSCR: 3.1 / 2.137 = 1.45x.

Leverage: (10.0 + 2.0) / 3.1 = 3.9x EBITDA.

Total management sweet equity 10%, ratchet to 15% if IRR > 20%.

Locked-box pricing mechanism. 18-month seller handover.

OBO — Owner Buy-Out

The OBO is a specific structure in which the owner-manager sells part of their capital to a holding company they themselves control, financed by bank debt and often by a minority investor (family office, development fund). They thereby immediately monetise part of their wealth — diversifying a patrimony often 80–90% concentrated in a single illiquid asset — while retaining operational control and a significant future participation in value creation.

The OBO addresses three distinct needs that often coexist in the same owner-manager: first, to diversify wealth so as not to depend on a single illiquid asset; second, to progressively prepare the business transfer without a brutal break; third, to finance a development project (external acquisition, industrial investment) without diluting their operational stake. It is a wealth management tool as much as a financial structuring instrument.

The tax complexity of the OBO is significant and must never be underestimated. In France, the tax administration may invoke abuse of law (CGI art. L64) if the self-sale is deemed artificial and motivated exclusively by the search for a tax advantage. In Switzerland, the AFC’s thin capitalisation rules impose a strict leverage cap based on the holding’s asset composition. In both cases, a prior tax ruling is not merely recommended — it is indispensable.

Advantages: immediate partial liquidity without loss of operational control or break with the business, tax optimisation of the partial sale (capital gain potentially exempt under conditions), retention of all future value creation potential, progressive preparation for transfer over 5 to 10 years, possibility of bringing in a minority financial partner providing expertise, network and governance.

Limitations: risk of abuse-of-law recharacterisation in France if the economic substance of the transaction is contestable, AFC thin capitalisation constraints in Switzerland capping admissible leverage at 70% for equity holdings, absolute necessity of a prior tax ruling in both countries, high structuring costs (legal, tax, financial advisory), risk of excessive dilution if the minority investor’s governance rights are poorly negotiated.

Example:

A Zurich-based owner-manager aged 55, holding 100% of a services company valued at CHF 25.0 million (EBITDA CHF 3.5 million, 7.1x multiple).

He creates a Swiss holding company, which acquires 60% for CHF 15.0 million financed by: CHF 9.0 million senior debt (60% of the sale, debt/participation ratio = 9.0/25.0 = 36% — within the AFC thin capitalisation cap of 70%) + CHF 6.0 million contributed by a family office investor (25% of total capital with veto rights on strategic decisions > CHF 1.0 million). Total: 9.0 + 6.0 = 15.0M.

Holding DSCR (senior debt CHF 9M over 7 years, SARON + 2.5%): upstreamed dividends = 3.5×0.60×0.86 = 1.806M. Annual service: (9/7) + 9×0.035 = 1.286 + 0.315 = 1.601M. DSCR: 1.806 / 1.601 = 1.13x — structurally acceptable for an OBO holding given the non-controllable refinancing timeline.

AFC ruling obtained: capital gain of CHF 13.5 million exempt from income tax. The owner retains 40% direct operational stake + holding control (75% of total capital).

Exit envisaged in 5–7 years via trade sale.

Secondary LBO

A secondary LBO (SBO) occurs when a private equity fund sells its stake in a portfolio company to another PE fund, rather than to a trade buyer or via an IPO. It accounts for 40 to 50% of European PE exits today, demonstrating the depth and liquidity of the private equity market. For the selling fund, it is a clean exit enabling immediate distribution to its LPs; for the acquiring fund, it is the acquisition of a business already professionalised, with a documented financial track record and a management team experienced in PE disciplines.

A secondary LBO presents a different value creation dynamic from a primary LBO. Most of the straightforward operational improvements (governance, management systems, purchasing optimisation) have typically already been implemented during the first cycle. The acquiring fund must therefore identify a specific value thesis — external growth via add-on acquisitions (build-up), internationalisation, digitalisation, offer repositioning — that justifies applying new leverage to an already optimised business. The double leverage layer (LBO on LBO) amplifies potential returns but also structural fragility in the event of a downturn.

Advantages: clean and rapid exit for the selling fund enabling immediate LP distribution, market valuation established through a competitive process reducing information asymmetry, business already professionalised (governance, monthly reporting, management information systems, institutional-quality management), limited integration risk.

Limitations: double leverage layer increasing structural fragility and reducing headroom in the event of operational shocks, often higher price reflecting target quality and visibility — compressing IRRs, less operational value to create than in a primary requiring a clearly identified build-up thesis, risk of management fatigue after a demanding first LBO cycle.

Market Conditions 2025–2026

The LBO financing environment has undergone significant transformation since 2022. The rise in policy rates — SARON moving from negative to +1.5% in Switzerland, the 3-month Euribor rising to +3.5% in the eurozone before a partial easing in 2024–2025 — increased the cost of debt and mechanically compressed the entry multiples sustainable at an unchanged target IRR. An LBO executed in 2021 at 7.5x EBITDA with debt at SARON + 1.5% was structurally more robust than the same transaction executed in 2024 at 7.0x EBITDA with debt at SARON + 2.8% — even though multiples formally declined.

In practice, acquisition multiples have retreated from 7.5–9x EBITDA in 2021 to 6.5–8x EBITDA in 2024 in the Franco-Swiss mid-market segment. Banks simultaneously tightened leverage conditions (caps reduced from 5x to 4–4.5x EBITDA) and reinforced covenant headroom requirements. To maintain 20–25% target IRRs, PE funds have had to adapt by targeting high organic growth potential businesses or intensifying build-up strategies (add-on acquisitions during the holding period) that create value independently of pure leverage effect.

These conditions have favoured two lasting structural trends. First, the growing prominence of the vendor loan: faced with a more restrictive banking environment, sellers are increasingly willing to finance 10–20% of the price themselves, signalling confidence in the business’s future trajectory and facilitating the financing close without excessive equity dilution. Second, the rise of private debt and unitranche: private debt funds, less constrained by banking regulatory requirements, offer increased financing capacity in the CHF 15–100 million segment with simplified documentation, faster response times and greater structural flexibility than traditional commercial banks.

Advantages and Limitations of Financial Structuring

Financial structuring is a powerful but demanding tool. Its benefits are real and documented — but they are conditional on rigorous implementation, a perfect fit between the target’s profile and the chosen structure, and expert advisory throughout the process.

Key advantages: equity return optimisation via leverage that amplifies value creation at a constant economic return, tax efficiency through interest deductibility and tax consolidation reducing the effective cost of debt, management-investor interest alignment through incentive instruments, operational discipline imposed by debt service that enforces beneficial rigour, accelerated governance professionalisation driven by PE fund requirements.

Limitations and risks: structural fragility in the event of an operational or market shock — a 20% EBITDA decline can trigger a covenant breach in a tight structure with no room for manœuvre, significant legal and tax complexity generating substantial structuring costs (4–7% of enterprise value, non-recoverable in case of failure), risk of shareholder-lender conflicts in performance deterioration scenarios amplifying an operational crisis into a governance crisis, concentration of personal wealth risk for the co-investing management team whose patrimony is now tied to the company’s performance.

Common Structuring Mistakes

Hectelion’s experience in Franco-Swiss financial structuring advisory reveals five recurring mistakes that are often costly and, in the vast majority of cases, avoidable with adequate upfront advisory.

1. Overestimating repayment capacity. A DSCR calculated on an overly optimistic normalised EBITDA — without a -10% or -20% stress test — exposes the structure to a covenant breach from the very first year of underperformance. Yet the first post-acquisition years are precisely when operational incidents are most frequent: departure of a key client, integration of incoming management, team restructuring. Lenders now systematically require a documented stress scenario with a DSCR > 1.10x even in the worst case.

2. Neglecting the tax treatment of the management package. In France, the recharacterisation of a management package gain as salary — for example if the sweet equity subscription price is manifestly undervalued relative to market value — can generate an additional tax and social charge of 30 to 50% on the realised gain. Structuring BSPCE and free shares requires precise upfront tax analysis, documented by a formal opinion.

3. Ignoring covenants until the first breach. Financial covenants are negotiable at signing — they are no longer negotiable after a breach. Insufficient headroom of just 10% on the leverage ratio transforms the slightest operational shock into a governance crisis with lenders, requiring a formal waiver accompanied by additional restrictive conditions and often a margin increase.

4. Under-capitalising the NewCo in Switzerland. AFC thin capitalisation rules impose strict debt/asset ratios based on asset type — 70% for equity investments, 85% for real estate. A Swiss NewCo exceeding these caps sees its interest partially non-deductible for tax purposes. An additional equity contribution of a few hundred thousand francs often suffices to correct the problem — provided it has been identified before signing.

5. Omitting the tax ruling before an OBO. An OBO executed without a prior tax ruling exposes the owner-manager to a subsequent tax reassessment on the entire gain — in France, the administration may invoke abuse of law (CGI art. L64); in Switzerland, the AFC may classify the gain as professional income rather than an exempt capital gain. The ruling is a 3 to 6-week investment that secures the transaction for 10 to 15 years. Its cost is negligible compared to the tax exposure it prevents.

Case Studies

Case 1 — MBO of a Swiss industrial SME

Target:

Precision components manufacturer, canton of Vaud, CHF 18.0 million turnover, CHF 2.8 million normalised EBITDA after financial due diligence (15.6% margin). Agreed valuation: CHF 12.0 million (4.3x EBITDA — conservative multiple reflecting size and industrial profile).

Financing structure: CHF 4.8 million equity (40%) — management invests CHF 960,000 (20% of equity) in sweet equity, regional fund contributes CHF 3.84 million (80% of equity) — + CHF 6.0 million senior debt (50%, SARON + 2.5%, amortising over 5 years) + CHF 1.2 million vendor loan from seller (10%, 5% interest, 4 years).

Total: 4.8 + 6.0 + 1.2 = 12.0M.

Annual debt service: (6.0/5) + 6.0×0.0385 + 1.2×0.05 = 1.200 + 0.231 + 0.060 = 1.491M. DSCR: 2.8 / 1.491 = 1.88x (comfortable, sufficient headroom). Leverage: (6.0 + 1.2) / 2.8 = 2.6x EBITDA.

Cantonal tax ruling obtained in 3 weeks.

Management package: sweet equity representing 15% of economic capital, ratchet to 20% if fund IRR > 25%. Target fund IRR: 22% over 5 years.

Case 2 — OBO of a Franco-Swiss owner-manager

Geneva-based owner-manager, aged 57, holding 100% of a services company valued at CHF 25.0 million (EBITDA CHF 3.5 million, 7.1x multiple).

Objective: immediately monetise CHF 15.0 million (60% of capital), retain operational control and future participation.

Structure: Swiss holding created, acquires 60% of the operating company for CHF 15.0 million financed by CHF 9.0 million senior debt (60% of sale, debt/participation ratio = 9.0/25.0 = 36% — within AFC thin capitalisation cap of 70%) + CHF 6.0 million contributed by a family office investor (25% of total capital with veto rights on strategic decisions > CHF 1.0 million). Total financing: 9.0 + 6.0 = 15.0M.

AFC ruling obtained: capital gain of CHF 13.5 million exempt from income tax (private wealth confirmed).

Holding DSCR: upstreamed dividends = 3.5×0.60×0.86 = 1.806M. Annual service on senior debt (7 years, SARON + 2.5%): 9.0/7 + 9.0×0.035 = 1.286 + 0.315 = 1.601M. DSCR: 1.806 / 1.601 = 1.13x — structurally acceptable for an OBO holding.

Owner retains 40% direct operational stake + holding control (75% of total capital). Exit envisaged in 5–7 years.

Case 3 — BIMBO in the business services sector

Target:

Franco-Swiss engineering consultancy, CHF 18.0 million EV (EBITDA CHF 3.1 million, 5.8x multiple). The incumbent technical director (20 years’ tenure) and an experienced external CEO partner in a BIMBO.

Structure: CHF 6.0 million equity (33%) — internal management CHF 0.5M (5%) + external management CHF 0.5M (5%) + regional fund CHF 5.0M (28%) — + CHF 10.0 million senior debt (56%, SARON + 2.2%, amortising over 6 years) + CHF 2.0 million seller vendor loan (11%, 5%, 4 years). Total: 6.0 + 10.0 + 2.0 = 18.0M.

Annual service: (10.0/6) + 10.0×0.037 + 2.0×0.05 = 1.667 + 0.370 + 0.100 = 2.137M. DSCR: 3.1 / 2.137 = 1.45x.

Leverage: (10.0 + 2.0) / 3.1 = 3.9x EBITDA.

Total management sweet equity 10%, ratchet to 15% if IRR > 20%.

Target IRR: 20% over 5 years → exit equity = 6.0×(1.20)⁵ = 14.9M → management gain (10%) = 1.5M for 1.0M invested → 1.5x multiple (amplified to 2.2x with 15% ratchet if targets exceeded).

Locked-box pricing mechanism. 18-month seller handover.

FAQ — Frequently Asked Questions on Financial Structuring

What is the difference between an LBO and an MBO?
In a LBO, the initiative and the majority of equity come from an external PE fund that identifies and acquires the target. In an MBO, the incumbent management initiates the transaction and co-invests significantly (2–5% of the price) — the PE fund is a co-investor. The leveraged financing mechanism is identical in both cases. The fundamental difference is the identity of the initiator, the acquirer’s legitimacy vis-à-vis the teams, and the level of information risk.

What leverage level is acceptable for a Swiss SME?
Swiss lenders generally accept 3.5 to 4.5x normalised EBITDA in total debt, subject to a minimum DSCR of 1.25x in the base case and 1.10x in the stress scenario. Beyond 4.5x, mezzanine debt or a private debt fund takes over from commercial banks. AFC thin capitalisation rules impose an additional cap of 70% debt/assets for holding NewCos holding equity investments.

Is a tax ruling required before structuring an OBO in Switzerland?
Yes, without exception. The cantonal tax ruling confirms that the sale to the personal holding constitutes an exempt capital gain and not taxable professional income. Its absence exposes the owner to tax reassessment on the entire gain — a potential exposure of 20 to 30% of the transaction price. The ruling is obtained in 3 to 6 weeks and binds the AFC for the entire duration of the transaction.

What is the total structuring cost of a Franco-Swiss LBO of CHF 15–30 million?
Structuring costs include: legal fees CHF 80,000–200,000, financial advisory 1–2.5% of transaction price, financial due diligence CHF 50,000–150,000, bank fees 1–2% of debt raised, notary and registration CHF 20,000–50,000. Total: 4 to 7% of enterprise value — a non-negligible amount to integrate into the financing plan from the outset.

Is the vendor loan tax-deductible for the acquirer?
Yes, subject to two conditions: the interest rate must be an arm’s length market rate and the total debt must comply with thin capitalisation rules (CGI art. 212 in France, AFC rules in Switzerland). The vendor loan documentation — formal contract with market rate, subordination agreement — is essential to secure the tax deductibility of interest charges.

A Word from the Managing Partner

“Financial structuring is often perceived, wrongly, as a technical matter — a modelling exercise reserved for debt and corporate law specialists. In reality, it is first and foremost a human matter.

Every transaction we advise on is unique. Behind every LBO, there is an entrepreneur who has spent twenty years of their life building a business and who wonders what this transaction will mean for their teams, their clients, and for themselves. Behind every OBO, there is a fifty-five-year-old executive seeking to preserve their wealth without betraying what they have built. Behind every MBO, there is a management team taking the professional risk of their lives to take over the reins of a company they have carried for years.

Our role at Hectelion is not to impose a standard template on a complex reality. It is to listen, to understand the real objectives — wealth, operational, human — before opening a financial model. It is to build a bespoke structure that accounts for Franco-Swiss tax constraints, governance balances between parties, and 2025 market realities. It is finally to accompany our clients through to closing with the same rigour and availability as on day one, because in a complex transaction, the details can make the difference between a structure that holds and a structure that undermines.

We structure every acquisition or transfer transaction with a constant objective: to maximise value created for all parties, in strict compliance with applicable tax and financial constraints. Financial structuring is not an end in itself — it is the tool in service of your entrepreneurial and wealth ambitions.”

— Aristide Ruot, Ph.D, Founder of Hectelion

Conclusion: Financial Structuring, the Strategic Lever of Every Business Transfer

LBO, MBO, MBI, BIMBO, OBO — each transaction form responds to a specific context, a particular acquirer profile and distinct wealth objectives. There is no universally optimal structure: the ideal structure is the one that maximises value creation within the fiscal, financial and operational constraints of each situation, while preserving the human balances that condition post-acquisition success.

For Franco-Swiss executives contemplating a transfer, an acquisition or a partial liquidity event, specialist advisory in financial structuring is decisive. Structural mistakes — tax, legal or financial — can cost several million francs and jeopardise transactions that are otherwise excellent on the merits. Rigorous upfront analysis, including target valuation using recognised methodologies and calculation of the WACC, is the foundation of any structure defensible before banks, tax authorities and co-investors.

Hectelion advises executives, investors and acquirers in the design, structuring and execution of their acquisition and transfer transactions in France and Switzerland. Discover our financial structuring service or contact our experts for an initial confidential review of your situation.

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Author

Aristide Ruot, Ph.D

Founder | Managing Director