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
ACCESS. EXPERTISE. SERVICE.
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
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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
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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
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
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
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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”
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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
The Northern Trust Experience
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

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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
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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

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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
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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