Dealmakers finding there's still action within some industries. (L.A.'s Fastest Growing Private Companies).

IT'S tough to sell a business these days. The IPO market is closed, banks aren't lending and large companies are licking their wounds. Yet some deals are still getting done.

Los Angeles-based Barrington Associates has put together some big-ticket deals this year, including the $682 million sale of Herbalife International Inc., and the more than $75 million sale of Wickes Furniture.

Barrington managing directors James B. Freedman and W Michael Rosenberg, veterans with a combined four decades in the banking business, talked about deal-making these days.

Question: How difficult is it to get a deal done compared with, say, 1999?

Freedman: By comparison, 1999 was probably a two or a three on a scale of 1 to 10, 10 being the most difficult. Today we're looking at probably an eight to a nine. We need to be heavily involved in all of these transactions for them to get over the goal line.

Q: And yet there are some deals getting done.

Freedman: Private equity groups are very focused on trying to do deals in this environment. The supply of money and equity has not gone down. What's challenging is finding ways to get a return on their investment, given the difficult debt markets.

Q: Are there some good companies for sale, or just distressed ones?

Freedman: There are a lot of good companies out there, although a lot of companies are struggling. But we're often able to come up with situations where one plus one equals three, and everyone's better off.

Q: Which sellers are finding it toughest?

Rosenberg: A couple of years ago, companies that were mediocre performers were getting sold at fairly attractive valuations. Now, if a company isn't a market leader, or it doesn't have a unique distribution channel, a unique product or better margins than some of its peers, those companies are not attracting a lot of interested buyers.

Q: Which industry sectors are the most active?

Rosenberg: Building products, particularly with housing starts at record levels, home furnishings, because of the nesting that's going on in the country. We see packaged consumer goods are still trading at attractive multiples, and branded products still attract quite excellent multiples.

Q: Why are private equity groups so motivated to do deals?

Freedman: There is a fair amount of pressure on these groups that have raised billions of dollars to find a successful way to employ that capital. As a result, they're becoming more aggressive in trying to come up with structures that will work.

Q: If the banks aren't lending, where can buyers obtain financing?

Rosenberg: The types of lenders involved in middle market transactions has changed. It's no longer the traditional banks, but non-bank lenders that have been formed by brokerage firms, insurance companies and hedge funds.

Q: Are strategic buyers still active?

Rosenberg: Yes, but a lot of them are somewhat constrained if their stock performance hasn't been as robust as it has in the past. They may have existing credit facilities that allow them to still be active in the marketplace. Particularly in distressed situations we continue to see strategic buyers be quite active.

Q: Are entrepreneurs running their companies differently?

Rosenberg: They're trying to professionalize their companies, getting audited financial statements, recruiting better middle management personnel, and upgrading their infrastructure, their IT systems. Because now they're competing with the portfolio companies of private equity firms that are also being sold.

Q: What has to happen before dealmaking picks up again?

Rosenberg: Banks have some bad credits out there that they need to work through first. Lenders also have to see several quarters, if not a year or two, of stable and growing corporate earnings in order to raise their lending ratios.

Q: Will some of today's changes stick when M&A activity loosens up?

Freedman: There will be a time in the future, whether it's in 2003 or beyond, when the M&A business will come back very strongly. Banks will be more aggressive at lending, the private equity groups will be more aggressive, the strategic buyers that have largely been beat up over the past couple years will have made enough progress in their own companies that they will need to grow through acquisition. Ultimately the multiples and the sort of the euphoria of the deal business will come back again.