Based on our daily conversations with lenders, private equity groups and mezzanine lenders, there are a number of signs that the tightening credit market is having a negative impact on what acquirers may be willing to pay for middle market companies.

For example, senior debt as a multiple of cash flow declined from 3.1x adjusted EBITDA in the first six months of 2007 to 2.5x in 3Q ‘08.  Total debt (including senior and subordinated debt) declined from 3.9x to 3.3x. 

With less debt available, buyers needed to increase their equity contributions. Equity, on average, now needs to represent 49.2% of the capital structure, a rise of nearly 10 percent from 39.5% in the first half of last year. 

As is the past, when bank lenders retreat and business sellers have not yet revised their value expectations, mezzanine lenders or subordinated debt providers have begun to play a more important role in getting deals done. Our research shows that the percentage of deals utilizing sub debt increased over the past year from 45.2% in the first half of '07 to 50.0% in 3Q '08.

In addition, the lenders who are still active have changed their credit criteria.  Most bank lenders are no longer interested in doing cash-flow based lending . These lenders are looking for tangible assets as collateral in order to get deals done.