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.
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 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.
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
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.
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.