Case Study: Maximizing Returns through Strategic Exit and Tax Benefits – Majority Exit

Written By: Gerald O’Dwyer the PE Guru

for owners and executives wanting to play in the Private Equity world. 

  

Background: 

 

In a challenging economic environment, with banks closing branches and laying off thousands, as reported by ZeroHedge, business owners are contemplating strategies to unlock value from their businesses. This case study delves into the journey of Mr. Thompson, a business owner, and how he maximized his returns with the guidance of an experienced executive, Ms. Davis. 

 

 

Company Profile: 

 

Company Name: Thompson Tech Solutions 

Industry: Technology Solutions 

Annual Revenue: $100M 

Objective: Mr. Thompson aimed to unlock significant value from his business by selling between 70% to 100% of his company, ensuring a secure financial future. 

 

 

Strategy & Execution: 

 

 

 

Engaging Expertise: Mr. Thompson collaborated with Ms. Davis, an executive with over 20 years in the industry, managing companies ranging from $30M to $500M. 

Valuation & Sale: Ms. Davis, using her funds and a consortium of investors, proposed to buy 80% of Thompson Tech Solutions. The company was valued at $150M, translating to a sale price of $120M for Mr. Thompson. 

Investor Returns: The investors, including Ms. Davis, expected a 3x cash-on-cash return within a 5-year ownership period. This means they aimed to achieve a company valuation of $450M in 5 years. 

Tax Benefits: By holding onto his shares for over a year, Mr. Thompson would benefit from long-term capital gains tax, which is typically lower than short-term capital gains tax. This would mean more net proceeds from the sale. 

 

 

Mathematical Breakdown: 

 

Sale Price for 80% Stake: $120M 

Expected Company Valuation in 5 years: $450M 

Return for Mr. Thompson if he reinvests: $120M x 3 = $360M 

Long-term capital gains tax (assumed at 20%): $360M x 20% = $72M 

Net Proceeds after tax: $360M – $72M = $288M 

If Mr. Thompson had opted for a short-term sale (held for less than a year) and was taxed at 30%, his net proceeds would be: 

 

Short-term capital gains tax: $360M x 30% = $108M 

Net Proceeds after tax: $360M – $108M = $252M 

Difference due to tax benefit: $288M – $252M = $36M 

 

 

Outcome: 

 With the strategic sale and the advantage of long-term capital gains tax, Mr. Thompson not only unlocked significant value from his business but also saved $36M in taxes. The company, under the guidance of Ms. Davis and her consortium, is on a growth trajectory to achieve the targeted valuation, ensuring all stakeholders benefit. 

 

 

Conclusion: 

Strategic exits, coupled with tax planning, can significantly enhance the returns for business owners. In uncertain economic times, collaborating with experienced executives and understanding the financial implications can lead to decisions that are both profitable and tax-efficient.