After the Sale: A Business Transition Guide for Buyers and Sellers

Loyal readers of MPO and its semi-weekly newsletter have almost certainly noticed high levels of medtech M&A in the past few months. It seems every newsletter contains at least one report of an acquisition for various-sized companies.

As mergers and acquisitions (M&A) advisors who focus on medical device deals, we are often asked about the various steps involved in selling a business: effective value proposition creation, finding buyers, and appropriate valuation, among others. Those are all necessary pre-sale components. But as seasoned business development professionals with Fortune 500, middle market, and emerging technology transaction experience, we’ve also learned that post-sale matters are very important. Often overlooked during the transaction is the ownership transition phase after the sale. The activities in this period may have a huge role in the deal’s overall success.

As a starting point, for many emerging technology and middle market companies, part of the total sale value is likely to involve earn-out payments based on mutually agreed milestones. From a financial perspective, this means it’s critical to ensure the business stays on track to meet the stated objectives.

For most sellers, it’s also about leaving a meaningful legacy for customers and employees. We are often asked about managing a company after it’s sold (once the transaction is completed). There are many ways to foster a successful transition, but some behaviors can help ensure the enterprise moves forward without disruption.

Balance is one of the most important components of smooth post-sale operations. Company leaders must balance the reality that everything has changed but act like nothing has changed. Although a sale changes everything about an organization’s future, it is important to the business and its stakeholders that executives behave as if nothing has changed. Stakeholders including employees, 1099 consultants, customers, and suppliers—basically anyone involved with company activity—should notice no immediate behavioral changes.

This “business as usual” attitude is perhaps most critical during the immediate “post-close” transition period (the first 90 days after the sale). During this time, the business must behave like it did before the deal closed; drastic changes should not be made, even if they had been planned in the past.

In the transition’s initial phases, executives should tend to both employees and consultants. Depending on the organization’s size, management may not be able to spend time with every employee and consultant. Thus in large companies, it is important for the executive team to communicate priorities to staff at all levels.

Every business (especially small enterprises) has “mission-critical team members” it cannot afford to lose (conceivably, a combination of employees, managers, supervisors, and manufacturing team members with “tribal knowledge” on certain projects, business practices, etc.). It is crucial to check in with these vitally important staff within the first 90 days after a sale. In doing so, executives can identify any misconceptions these people may have before it prompts them to look elsewhere for employment.

Clearly, it is in the company’s best interests to maintain both short- and long-term relationships with critical customers (usually the top 10 percent to 20 percent that comprise 70 percent to 80 percent of the revenue/profits for each business unit).

Although management does not need to behave differently during the post-sale transition, executives should be extraordinarily purposeful about friendly “check-ins” to ensure loyal customers are not developing any misinformed opinions about the new organization. Both disgruntled employees and competitors are known for using this time period to create fear, uncertainty, and doubt (FUD factor) about recently sold companies in order to take advantage of the situation. Transparency and frequent communication can keep customer relationships on the right track.

Key suppliers are just as important to the new organization’s future as customers (and similarly, some suppliers can be considered “mission critical”). Suppliers should receive the same prioritization after closing that they received before the sale. If a supplier mistakenly assumes the new “post-close” organization may not value them as much as the previous owner, they might believe their business is at risk. Consequently, they may behave in ways that are counterproductive to management’s relationship with them and to the new business.

To effectively manage the various relationships, executives must develop a working rhythm with the new owners. Depending on objectives and the way the deal is structured, the title holder(s) may simply be investors, majority owners, or pure shareholders.

Regardless of proprietorship percentages, gaining a positive momentum with the leading ownership group partners is critical, for there is nothing worse than a new holding group that is out of sync with the former owners (and current business managers for the immediate transition period). If it’s not working well, it becomes evident to other key stakeholders rather quickly. Therefore, it is very important to make these relationships work well.

Two of the crucial early issues to address are reporting and communication expectations, and future transition planning. While both sides (current management, former owners, and new owners) should be able to interact informally at any time, it is very important that formal business activities be scheduled and addressed in a professional manner. Otherwise, those business activities could potentially be disrupted. It can reflect badly upon a current manager when he (or she) must leave a meeting with a new customer to respond to the new owner’s “urgent” communication (an email, phone call, or personal visit).

Granted, some urgent communication issues may be occasionally unavoidable. But most urgent communication issues can be eliminated through an established reporting mechanism (emails, phone calls, and live meetings) for mutually agreed upon business topics.

One of the most important issues that must be addressed is future transition planning. This topic falls under the category of “last but not least” but it does need to be last. If the three issues mentioned previously are not addressed urgently during the first 90 days, then the future transition can become a “mission impossible.”

Certainly, it is possible to work on longer-term transition planning in parallel if all key stakeholders are being adequately addressed and managed.

Before implementing any transition plan, management should begin with “the end in mind” and work backwards to the current day. In other words, it is important to identify the ideal time frame in which to complete the transition and then begin to develop the plan that ensures it will be done on time—just like any other project plan.

It is crucial to involve the new owners in the transition plan. Key decisions are no longer the seller’s to make.

In developing the future plan, management should consider: (1) what needs to be achieved; (2) who needs to be hired; (3) what revenue targets need to be achieved; (4) what profit targets need to be achieved; (5) what key customers need to be obtained; and (6) what supplier competencies need to be in place.

As those selling a business consider all of these items, they must decide on the organizational structure that will best serve the future and help the new leadership team implement it.

When the seller and the new owners are ready, the transition plan should be executed. Milestone payments should be one of the objectives.

Having successfully completed the sale and transition period, the seller can retire in peace and enjoy a leisurely existence with friends from the key business stakeholder groups and in the new majority ownership. 

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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]

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].