How to Maximize Value to Potential Medtech Buyers

As M&A advisors focused solely in healthcare, we are often asked about the impact of selling various types of medtech/life sciences businesses in questionable macro market conditions. The United States has just experienced two consecutive quarters of negative growth, which usually indicates the start of a recession. Yet, despite the economy cooling off a bit, experts are not convinced that a recession has begun—or is even close at hand. Why? Well, America’s economy added more than half a million jobs in July, the unemployment rate dropped to 3.5% (the lowest level since 1969), and consumer sentiment has bounced off record lows.

“This is not a recession,” Moody’s Analytics chief economist Mark Zandi told CNN in mid-August. “It’s not even in the same universe as a recession. It’s just patently wrong to say it is.”

Regardless of whether a recession is looming for the United States, the medtech industry continues to have macro growth tailwinds courtesy of the world’s aging population demographics. It’s no secret the post-World War II baby boom spawned steady healthcare growth in most major countries worldwide. Thus, with the exception of a pandemic-induced slowdown in 2020 (created by cancelling elective procedures), the medtech industry has not really been impacted by a recession and is not expected to be affected for at least another 10 to 15 years.

The life sciences market’s positive attributes will be beneficial to sellers of medtech businesses this year and in the foreseeable future. There is a lot of capital available for investment (often referred to as “dry powder” in Private Equity circles). Dry powder refers to the amount of committed but unallocated capital a firm has on hand; simply put, it’s an unspent cash reserve marked for investment.

Dry powder must be invested no matter how good or bad the economy is performing. The only change between a boom and bust cycle is that investors become more critical of where the growth markets are during economic slumps, and that has led many of them to the healthcare industry, for obvious reasons.

Since this is a good time for sellers of medtech businesses, it is necessary they understand the different types of buyers and how they can get the most value for their enterprises.

First, sellers should be aware of the various types of potential buyers (ignoring initial public offerings and special-purpose acquisition companies for now).

Strategic: Acquirers that are larger industry players—i.e., every entity in MPO’s Top Companies report—are considered strategic buyers. These patrons conduct acquisitions regardless of economic health, primarily for two reasons: future growth prospects; and the long lifecycles of healthcare products. Strategic buyers usually will invest in medtech businesses if they can shorten their time to market through inorganic growth activity. Buyers typically look for two types of sellers—large revenue players in their segment or in an adjacent space; or technology firms (any size) that offer a unique competitive market advantage.

Private equity (PE): There are literally hundreds of PE firms that either are focused on the healthcare market or invested in it. MedWorld Advisors receives inquiries every week from PE firms looking to invest their dry powder. These types of acquirers are either seeking companies that are large enough to be a “platform business” for their investment fund (these platform businesses are usually in the $2 million to $5 million EBITDA range), or smaller firms that can add value to their previously purchased platform company. The latter purchases are often called “bolt-on” acquisitions; they can be of any size but usually must be profitable unless there is some type of unique technology consideration that dramatically benefits the platform business.

Individual investor: This kind of acquirer is usually a former Fortune 500 executive (often from the medtech or life sciences arenas) that wants to spend his or her “retirement” running a business his own way. This type of buyer is typically beneficial for those selling smaller medtech businesses (with $1 million to $10 million in annual sales).

Employee takeover: These kinds of acquisitions are not as popular or common now as they were in the late 1980s and early 1990s, but they do still occur. Often, it takes a lead key executive (or two) of the selling company to put together a business plan to purchase the firm. Once aligned with the owner on the purchase price and integration plan (more often than not, these types of transactions take place with family-owned companies), the buying executives work to align with a bank to fund the transaction and raise enough capital for the deal.

Having identified and clarified the various types of buyers, it’s important to note that strategic fit and timing can lead to significant value for sellers of medtech businesses. Regardless of the type of buyer, sellers who can adeptly explain their companies’ near- and long-term market value and strategic fit will be more likely to attract offers. Once a seller makes it clear his business is a suitable acquisition target, timing can help provide for maximum potential value. Some examples follow.

Strategic Buyers: Several factors will usually come into play relative to timing. These may include whether a competitor has launched a similar product, and whether the selling company provides a decent competitive advantage; if the selling entity fits into the buyer’s long-term strategic plans; and/or whether the buyer can boost its image through the acquisition target’s technology.

Private equity: There are two essential elements that may be helpful with timing. The first is whether the PE firm raised significant capital recently, giving it additional dry powder for investment; and the second is whether the PE firm wants/needs to add an incremental business to a new platform enterprise.

Individual buyers: This one is relatively simple. Sellers who can find that key Fortune 500 executive who isn’t quite ready to retire and is anxious to do his or her own thing will be rewarded handsomely.
Employee takeover: This is usually driven by a combination of the seller’s timing, having the right team in place, and ensuring everyone involved is working together for a win-win transaction and transition plan.

In general, it’s rarely a bad time to sell a medtech business. To maximize value, companies should consider working with an advisor that can help ensure they strategically fit with as many potential buyers as possible. Then, it’s just a matter of timing—catching the right acquirer at the right time to maximize the business opportunity. It’s not as simple as it sounds, but it does happen more often than might be expected. The key is patience. Sellers who carefully look before they leap into a deal will be better off in the long run. Happy dealmaking. 

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Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at [email protected] or at www.medworldadvisors.com.

Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at [email protected].