M&A Deal Structure is Changing - but deals are getting done!

In 2008 Private Equity Firms raised $223 BILLION

In 2008 we estimate 18,000 M&A transactions will close!

Although there has been a lot of news about financing "drying up" there are still M&A deals getting done. The biggest impact of this credit environment is the cost of financing. For about the last 5 years larger deals ($10,000,000 and up) were getting done with equity, senior debt and an asset based revolver. Debt to equity leverage of 5 to 1 was not uncommon.

In today's environment the debt leverage is more likely to be 2-3 to1 with the increased equity being generated by a sub-debt piece (most lenders look at subordinated debt as equity since this debt is below the senior debt preference on the balance sheet). This senior debt piece is expensive. Because it is behind the senior lender the sub-debt is basically "unsecured" which brings with it a higher interest rate (as high as 12% -14% is not uncommon) and often a kicker for equity if the business does well.

Macro Economic Trends

• Interest rates are likely to rise over the next several years due to the U.S. Federal Government policy decision to put Trillions of dollars into the financial system.
• Current tax rates are scheduled to expire in 2010 and virtually every expert says the marginal and capital gains rates will increase significantly.
• What does this mean to a business owner who is trying to decide if now is the time to sell their business?
• Any future increases in interest rates is likely to have downward pressure on prices paid to buy businesses.
• Any future increases in tax rates will mean a decrease in NET sales price of a business.

Summary:

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