© 2008 northern trust corporation northerntrust.com the northern trust experience a c c e s s. e x...
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© 2008 Northern Trust Corporation northerntrust.com
The Northern Trust ExperienceThe Northern Trust ExperienceA C C E S S . E X P E R T I S E . S E R V I C E .
Robert JankSenior Vice President
Robert MorganSenior Vice President
Positioning Closely Held Businesses For Sale ― Trends In Private Equity
Gerard MazurczakSenior Vice President
The Northern Trust Experience
Question #1
What trends are you seeing that will impact our clients regarding how they position their closely held business for sale or succession?
The Northern Trust Experience
Jerry Mazurczak
Unprecedented pool of Private Equity capital
Strong earnings
Baby boomers reaching retirement age
Cap gains rate at 15%
Consolidation trends
Credit market turmoil
Weak U.S. Dollar
What trends are you seeing that will impact our clients regarding how they position their closely held business for sale or succession?
The Northern Trust Experience
Bob Jank
Turmoil in the credit markets is affecting pricing,structure and availability of bank credit
The amount of leverage that banks will allow hasdecreased 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
What trends are you seeing that will impact our clients regarding how they position their closely held business for sale or succession?
The Northern Trust Experience
Bob Morgan
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 and increasing fund sizes led to very frothy valuations
Contraction in the debt markets have implications for buyers and sellers
Reduced purchase prices – Slowly
Higher equity contributions
Slower deal pace
Returns???
What trends are you seeing that will impact our clients regarding how they position their closely held business for sale or succession?
The Northern Trust Experience
Trends in the Buyout Market
Source: Thompson Buyouts, July 7, 2008
US - Based Deal Volume by Quarter
16
4051
103
4638 42
68
115
10
37
57 61
105
4661
140132
0
20
40
60
80
100
120
140
Dea
l Vo
lum
e in
$B
illio
ns
Q1 16 40 51 103 46
Q2 38 42 68 115 10
Q3 37 57 61 105
Q4 46 61 140 132
2004 2005 2006 2007 2008
The Northern Trust Experience
Trends in the Buyout Market
Purchase Price/EBITDA by Deal Size(Includes Fees)
Source: S&P LCD- M&A Stats, June 2008
7.2x
8.3x 8.3x8.9x 9.1x
8.5x 8.8x
10.3x10.9x
7.6x
8.4x8.6x7.8x
6.8x
7.7x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
2004 2005 2006 2007 LTM 6/08
<$250mm $250-$499mm >$500mm
The Northern Trust Experience
Trends in the Buyout Market
Average Debt Multiples of Middle Market Loans(Defined as Issuers with EBITDA of less than $50M)
Source: S&P LCD- M&A Stats, June 2008
3.8x
4.2x
4.7x 4.7x
5.6x
4.5x
4.1x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
2003 2004 2005 2006 2007 1H08 2Q08
The Northern Trust Experience
Question #2
How would you recommend preparing a business and its owners for a liquidity event?
The Northern Trust Experience
Bob Jank
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
How would you recommend preparing a business and its owners for a liquidity event?
The Northern Trust Experience
Jerry Mazurczak
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
Design infrastructure for a post sale family enterprise / family office
Create a personal plan for life after business is sold
How would you recommend preparing a business and its owners for a liquidity event?
The Northern Trust Experience
Jerry Mazurczak
Business Obtain professional valuation
Clean up negatives, build out positives
Move real estate out of the business
Get environmental report
Prepare audited financials
Consider “stay bonuses” for key managers
How would you recommend preparing a business and its owners for a liquidity event?
The Northern Trust Experience
Bob Morgan
What they will look for: Strengths and weaknesses of management team
Audited financial statements / one-time or family expenses
Retaining relationships with key clients
Recurring / stable cash flow streams- addbacks
Ability to service debt
Growth in some form
Exit scenarios
Deal killers Inability to conduct thorough due diligence
“Waffling”
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.
The Northern Trust Experience
Question #3
What process do you recommend for obtaining the best transaction price / best overall value for the business?
The Northern Trust Experience
Bob Morgan
All depends on the sellers definition of “value” Corporate versus family sellers
Market has become significantly moreintermediated in the last ten years
Range from large investment banks to one-off business brokers
Considerations: Price
Discretion / confidentiality
Speed
Treatment of existing employees
Roll-over of ownership
Hire good service providers: law firm,accountants, investment bank
What process do you recommend for obtaining the best transaction price / best overall value for the business?
The Northern Trust Experience
Jerry Mazurczak
Clarify goals and risk appetite / financial preferencesOptimize after tax proceeds
All cash at closing
Business owner role post closing
Retention of management
Retention of employees
Identify value preferencesBuyer culture similar to seller
Commitment to community
Only strategic buyer
Certain buyers not acceptable
What process do you recommend for obtaining the best transaction price / best overall value for the business?
The Northern Trust Experience
Jerry Mazurczak
Select transaction preference IPO Sale of stock Sale of assets ESOP Recapitalization Combination
Choose the best team for transaction and identified goals Trusted advisors, attorneys, accountant, key business execs, Board members, trustees, family members Additional expertise
Investment banker
Transaction attorney
Estate planner
Match expertise to most probable buy expertise
What process do you recommend for obtaining the best transaction price / best overall value for the business?
The Northern Trust Experience
Bob Jank
IPO: Price vs. Ongoing expense Administrative aggravation “Constant report card”
Private Equity: Price vs. Impact on employees Potential requirement to stay for some time
Synergistic Buyer: Price vs. Loss of privacy Impact on employees Selling to a rival
ESOP: Great tax treatment and high regard for employees vs. Lower price Ongoing “responsibility” in the event of performance downturn
What process do you recommend for obtaining the best transaction price / best overall value for the business?
The Northern Trust Experience
Bob Jank
Best scenario I have seen: Sell to synergistic buyer who offers earn out provided that:
Buyer pays a fair price
Buyer has a proven track record of treating acquired employees well
Buyer has a proven track record of treating “earn out” fairly
Seller recognizes that buyer will bring some real synergies
What process do you recommend for obtaining the best transaction price / best overall value for the business?
© 2008 Northern Trust Corporation northerntrust.com
Thank You
Positioning Closely Held Businesses For Sale ― Trends In Private Equity