Some firms would also be wise to wait. Without robust information systems, a well-constructed management team, and properly documented business relationships, for example, a firm has no ability to grow, says Marks. "The difference in valuation if you're just talking about growth versus actually doing it is dramatically different," he says. "It's worth waiting a year."

Waiting can also help to firm up valuations. Right now, says Grant Thornton's McGee, "buyers can still use the bad economy and high levels of uncertainty as excuses to keep valuations down."

Vincent Ryan is senior editor for capital markets at CFO.

The Strategic Option

Not every company is selling to
private-equity firms. Strategic buyers, with bushels of cash, are becoming more acquisitive. Total second-quarter M&A activity was $546.5 billion, although it grew slower than the private-equity portion at 5.4%.

And a corporate suitor can simply be a better fit. As an example, private-equity firm Castle Harlan agreed to sell portfolio firm Ames True Temper, a $443 million maker of lawn and garden tools, to holding company Griffon Corp. in July. Although Ames struggled through 2008 and saw sales fall 10% in fiscal 2009, the deal still had a purchase-price multiple of 8.8 times earnings before interest, taxes, depreciation, and amortization, a price about average compared with other deals done early in the third quarter (see chart, above). In addition, "Ames is now part of a larger entity with a broader relationship to the customer base," says Justin Wender, former president of Castle Harlan. "They have low leverage and access to public capital to do transactions."

While Griffon financed the deal with a $500 million term loan from Goldman Sachs (and $75 million in cash), the buyer is expected to redeem $300 million in bonds that represent almost all of Ames's outstanding debt. "We don't sell to someone who highly leverages the company," says Wender. "A too highly leveraged deal also means you risk the inability to close." — V.R.

• « previous
• 1
• 2

LinkedIn Company Connections:

• Preqin |
• Marcum LLP |
• Grant Thornton |
• Castle Harlan |
• Pamlico Capital |
• American Renal |
• Centerbridge Partners |
• Robert W. Baird |
• High Rock Partners