Tax Changes Generate Exit Despite Not Changing

In what is not likely the only example of a late 2010 portfolio company sale driven by fears taxes on capital gains would increase this year, Sentinel Capital Partners sold ReachOut Healthcare America Dec. 29 because it began the process before President Barack Obama and Republicans reached a compromise that extended the Bush era tax cuts.

“When we embarked on this journey, we did not know that Congress…would extend the Bush tax cuts,” founder David Lobel told Buyouts. “We thought that everything would end in December.”

The New York-based firm, which announced the deal today, began marketing the Phoenix-based provider of administrative support services to mobile dentists in September 2010 after three years of ownership. During that time, the company’s EBITDA increased to almost $17 million from just less than $5 million at the time Sentinel bought it. With add-on acquisitions and growth initiatives, Sentinel had achieved in three years what it had hoped to achieve in five, which is how long Sentinel typically expects to hold a company, Lobel said. That made Sentinel comfortable with putting it up for sale.

Bolstering that position is the fact that the two founders of ReachOut and the two founders of Mobile Dentists, a company ReachOut bought in 2008, had invested alongside Sentinel and wanted to cash out before the 15 percent tax on capital gains increased, which was set to happen Jan. 1, 2011.

But by the time the Obama Administration and Republicans reached a compromise, in early December, there was too much momentum behind the deal. Sentinel sold the company to Morgan Stanley Private Equity for an undisclosed amount. “We were already on track, we’d selected a buyer,” Lobel said.

Not that Sentinel or the company’s founders wanted to stop the deal. The sale generated a return of about 3x Sentinel’s equity investment of approximately $21 million, according to a source familiar with the deal.

The deal was part of a frenetic last week for Sentinel. The day after it closed the sale of ReachOut, the firm closed its acquisition of Chase Industries Inc., a nearly 80-year-old manufacturer of specialty door systems used by supermarkets and restaurants. I’ll have more details on these deals and on Sentinel’s outlook for the coming year in the next issue of Buyouts, to be published Jan. 17.