A lot has been written and said about the tightness in the credit markets that many small businesses across the country are experiencing.  But we've wondered how the credit markets are affecting small business deals.  More specfically read this post as "what do I need to think about if I sell or recapitalize my business in the next 6 - 14 months."

We came across an excellent article describing what is happening in deals that are currently getting done.  Needless to say, we found article the from the TheFreeLibrary.com very interesting.

The first thing to keep in mind is that deal volume is down significantly:

In the twelve months ended July 31, 2009, the aggregate volume of U.S. public M&A fell 61% from the same period in 2007, to approximately $432.5 billion, with private equity activity declining 98%, to $10.7 billion. Pending transactions were tested by financing failures, underperformance and litigation, and negotiating parties were forced to reconsider transaction terms in the context of general economic uncertainty.

The last sentence is telling and sets the tone for the rest of the article.

Based on our read of the article, your attorney could become your best friend (if he or she isn't already) in terms of getting a deal done.  With the deals that are getting done, a lot of emphasis is being placed on certainty and certainty has taken on a whole new meaning.  In the past, certainty meant getting the deal closed or making sure the "the seller was ready to sell".  Nowadays, certainty means will various parts of the deal happen:

Certainty was paramount. In uncertain economic times, deal makers who ventured into the M&A arena sought to ensure certainty. We refer to "certainty" not in the sense of certainty of closing but more broadly in terms of the contracting parties seeking to define their respective rights and obligations as specifically as possible in the face of various contingencies. The effort to achieve certainty can be seen in, among other things, the use of reverse termination fees to address the failure of a financing commitment . . .

 That means both strategic buyers (those who should have capacity to borrow) as well as private equity funds (those who know how to structure a deal based on borrowing - leverage) are having trouble getting financing for a deal and are writing a financing "out" into the letter of intent and purchase agreement.  This is where your new best friend your attorney comes in:

Strategic transactions borrowed pages from the private equity playbook. The private equity experience and the tightening of credit markets have left an unquestionable mark on the M&A marketplace. The financing out, previously the exclusive domain of private equity firms, has made its way into some strategic transactions. While far from universal, this trend highlights a shift in the collective mindset and demonstrates a realization by deal makers that having a counterparty walk away from a binding agreement is no longer exclusively a "legal issue." Instead, contracting parties now go to great lengths to carefully define and limit the remedies that apply to failed transactions.

 As we've been telling business owners we meet face-to-face, deals are getting done but at a rather slow pace.  And the deals getting done are really good deals.  In other words, they allow both parties to write "certainty" into the deal documents.  And of course, the net result of all this skiddishness in the market is reduced valuations.  More on the valuation situation another day.