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Transcript Northern Trust
The Northern Trust Experience
Southeast Region
FOCUSING ON WHAT REALLY MATTERS
Positioning Closely Held Businesses For Sale ―
Trends In Private Equity
May 22, 2008
Juan Alonso
Senior Vice President
© 2008 Northern Trust Corporation
Lori Runquist
Senior Vice President
Mary Boehler
Senior Vice President
northerntrust.com
Question #1
ACCESS. EXPERTISE. SERVICE.
What trends are you seeing that
will impact our clients regarding
how they position their closely
held business for sale?
2
The Northern Trust Experience
Mary Boehler
ACCESS. EXPERTISE. SERVICE.
What trends are you seeing that will impact our clients regarding
how they position their closely held business for sale?
3
Unprecedented pool of Private Equity capital
Strong earnings
Baby boomers reaching retirement age
Cap gains rate at 15%
Consolidation trends
Recent turmoil in credit market
The Northern Trust Experience
Juan Alonso
ACCESS. EXPERTISE. SERVICE.
What trends are you seeing that will impact our clients regarding
how they position their closely held business for sale?
4
Turmoil in the credit markets is affecting pricing,
structure and availability of bank credit.
The amount of leverage that banks will allow has
decreased during this phase of the credit cycle.
As a result:
Sellers must reduce their price expectations
Find buyers who can provide more equity
Be patient until cycle turns
The Northern Trust Experience
Lori Runquist
ACCESS. EXPERTISE. SERVICE.
What trends are you seeing that will impact our clients regarding
how they position their closely held business for sale?
5
M&A markets are driven by the convergence
of buyer and seller expectations
2006 and the first half of 2007 was characterized
by record breaking numbers for deal flow and
capital raised.
The liquidity provided by the debt markets led to
very frothy valuations.
Contraction in the debt markets has implications
for buyers and sellers
Reduced purchase prices
Higher equity contributions
Slower deal pace
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Total US Leveraged Buyout Volume 1996 – 2007
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433.7
450
$Billions
300
233.0
130.3
150
93.9
56.7
28.9
33.0
1996
1997
52.5
40.5
47.0
19.5
21.9
2001
2002
0
1998
1999
2000
Total Common Preferred Equity
Source: S&P LCD - M&A Stats, Dec 2007
6
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2003
2004
2005
Other Sources
2006
2007
Trends in the Buyout Market
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Purchase Price/EBITDA by Deal Size
(Includes Fees)
12.0x
Chart Title
10.3x
(Sub-title)
10.0x
7.7x
8.0x
6.8x
7.8x
8.3x 8.5x
8.3x
8.8x
8.6x
8.9x
7.6x
7.2x
6.0x
4.0x
2.0x
0.0x
2004
2005
<$250mm
Source: S&P LCD- M&A Stats, December 2007
7
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2006
$250-$499mm
>$500mm
2007
Question #2
ACCESS. EXPERTISE. SERVICE.
How would you recommend
preparing a business and its
owners for a liquidity event?
8
The Northern Trust Experience
Juan Alonso
ACCESS. EXPERTISE. SERVICE.
How would you recommend preparing a business
and its owners for a liquidity event?
9
Start getting audited statements now.
Remove / identify personal “adjustments”
from statements.
Club membership
Cars, planes
Travel Expenses
If real estate is owned by the family not corporation,
increase the lease to market rate.
“Institutionalize” clients
Commit to the decision.
The Northern Trust Experience
Mary Boehler
ACCESS. EXPERTISE. SERVICE.
How would you recommend preparing a business
and its owners for a liquidity event?
Owners
Restructure ownership to minimize taxes, move
appreciation
to future generation
Sales to defective grantor trusts
GRAT’s
Charitable trusts/entities
LLC strategies
Delaware non-grantor trusts
Dynasty trusts
10
Design infrastructure for a post sale family enterprise /
family office
Create a personal plan for life after business is sold
The Northern Trust Experience
Mary Boehler
ACCESS. EXPERTISE. SERVICE.
How would you recommend preparing a business
and its owners for a liquidity event?
Business
Obtain
professional valuation
Clean
up negatives, build out positives
Move
real estate out of the business
Get
environmental report
Prepare
audited financials
Consider
11
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“stay bonuses” for key managers
Lori Runquist
ACCESS. EXPERTISE. SERVICE.
How would you recommend preparing a business
and its owners for a liquidity event?
Private equity firms will conduct a significant amount of
due diligence in their review process.
What they will look for:
Strengths
Audited
financial statements / one-time or family expenses
Retaining
relationships with key clients
Recurring
/ Stable cash flow streams
Ability
Exit
to service debt
scenarios with growth potential
Deal killers
Inability
to conduct thorough due diligence
“Waffling”
12
and weaknesses of management team
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Question #3
ACCESS. EXPERTISE. SERVICE.
What process do you recommend for
obtaining the best transaction price /
best overall value for the business?
13
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Lori Runquist
ACCESS. EXPERTISE. SERVICE.
What process do you recommend for obtaining the best
transaction price / best overall value for the business?
All depends on the sellers definition of “value”
Corporate
Market has become significantly more intermediated in the
last ten years
Range
versus family sellers
from large investment banks to one-off business brokers
Considerations:
Price
Discretion/Confidentiality
Speed
Treatment
Roll-over
14
of existing employees
of ownership
Hire good service providers; law firm, accountants,
investment bank
The Northern Trust Experience
Mary Boehler
ACCESS. EXPERTISE. SERVICE.
What process do you recommend for obtaining the best
transaction price / best overall value for the business?
Clarify goals and risk appetite / financial preferences
Optimize
All
after tax proceeds
cash at closing
Business
owner role post closing
Retention
of management
Retention
of employees
Identify value preferences
Buyer
culture similar to seller
Commitment
Only
strategic buyer
Certain
15
to community
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buyers not acceptable
Mary Boehler
ACCESS. EXPERTISE. SERVICE.
What process do you recommend for obtaining the best
transaction price / best overall value for the business?
Select transaction preference
IPO
Sale
of stock
Sale
of assets
ESOP
Recapitalization
Combination
Choose the best team for transaction and identified goals
Trusted
Board
advisors, attorneys, accountant, key business execs,
members, trustees, family members
Additional
expertise
Investment banker
Transaction attorney
Estate planner
16
Match expertise to most probable buyer expertise
The Northern Trust Experience
Juan Alonso
ACCESS. EXPERTISE. SERVICE.
What process do you recommend for obtaining the best
transaction price / best overall value for the business?
IPO: Price vs.
Ongoing
expense
Administrative
“Constant
on employees
Potential
of privacy
Impact
on employees
Selling
to a rival
ESOP: Great tax treatment and high regard for employees vs.
Lower
price
Ongoing
17
requirement to stay for some time
Synergistic Buyer: Price vs.
Loss
report card”
Private Equity: Price vs.
Impact
aggravation
“responsibility” in the event of performance downturn
The Northern Trust Experience
The Northern Trust Experience
Southeast Region
FOCUSING ON WHAT REALLY MATTERS
Thank You
May 22, 2008
Juan Alonso
Senior Vice President
© 2008 Northern Trust Corporation
Lori Runquist
Senior Vice President
Mary Boehler
Senior Vice President
northerntrust.com