Still Waiting
Practitioners of the art of leveraged buyouts are still waiting for seller's expectations to fall in line with current realities. You still run across sellers who believe that the multiples of the 2006-2007 period represent an eternal, fixed emblem of value. Perhaps they can't be blamed, as the multiples were around for so long. According to Michael Berk of TA Associates, "sellers are still expecting a multiple of 10 times plus".
My perception is that sellers are starting to read the newspapers and are beginning to get the message that the decline is valuation may be here for awhile. But right now, to the extent deals are getting done at all, it's where middle ground on price is reached through earn outs and other forms of contingent consideration. It's simply not possible for a seller to walk away from a closing with the same amount of cash as in the recent past.
Before middle ground is reached, buyers too need to make peace with the current environment. They need to believe that the fundamentals of the target business are not deteriorating further, and that credit is available at a cost that supports equity returns. It's hard to commit equity capital in an environment where a portfolio of fairly well-rated, publicly-traded bonds can get a 20% current cash return.
Probably sooner than later, perceptions of buyers and sellers will begin to align again. Sellers will stop thinking about the past and realize that those valuations are not coming around again any time soon. Buyers will start to get comfortable that business conditions are stabilizing. When that happens, a new age of Aquarius will be born.
No one likes kissing frogs, but until this middle ground is reached, PE firms will be doing a lot of that.
Yup, we just did a deal a few months ago with a fairly onerous earn-out for our seller client. The earn-out was by far the most heavily negotiated aspect of the deal, since it was linked with continued performance of the company. The problem was that the formula for calculating financial performance left a lot of room for fudging the numbers downward, which would have hurt out client. Ultimately we had to tighten up the accounting formulae/language to clarify what would count towards profits and what would not.