Florence Joffroy-Black and Dave Sheppard, MedWorld Advisors01.29.20
We are often asked about appropriate timing for exit strategy planning. It is only natural for business owners—whether they be founders of startups or well-established manufacturers—to ponder this topic. Our advice is simple: It is never too early to start thinking about an exit, regardless of the size, stage, or ownership of a business.
Established medtech firm owners may be considering exits for various reasons: They could be ready for retirement and ready to sell in the right situation; they might be thinking about an exit but unsure about selling the business; or they may be enjoying running a company and have no intention of selling anytime soon.
Regardless of motive, it is important for business owners to always manage their organizations with an exit in mind. Doing so will result in a better business for all stakeholders. Business owners seeking the best value for their medtech companies should take the following steps to ensure a successful outcome.
Consider the desired result for all stakeholders—Those stakeholders may include the owner, other investors, management team, family, local community, employees, customers, suppliers, and anyone else with an interest in the future outcome of the business. A successful exit strategy begins with a clear understanding of the outcome and the necessary course of action to achieve the desired result.
Complete a strategic review of business operations—Regular performance reviews are a necessary (and basic) part of corporate management, but it is important for owners to routinely assess their organization as if they were going to buy them today or at some point in the future. Following are 20 areas to consider.
1. Revenue Performance (to increase the base of potential buyers)—The greater the revenue, the greater the number of potential suitors for the business.
2. EBITDA Results (to increase value)—Many transactions are valued either as a multiple of the revenue or a multiple of the EBITDA. Interesting correlation to note: the greater the revenue, the greater the EBITDA multiple.
3. Management Team Competence (makes a business easier to sell, especially if the owner wants to step away from it)—Can management make daily decisions without the owner/founder? Is the management team functionally competent? Is one of them (or more) a possible candidate to fill the owner’s shoes?
4. Employee Engagement (helps buyer confidence)—Is employee retention a positive attribute of the business? Do employees care about their work? (This often shows up in quality metrics.) Does some innovation come from within the organization? (It could be process innovation as well as product ideas.)
5. Financial Records (must be in good order to give confidence)—This includes up-to-date balance sheets, regularly updated P&Ls, and current taxes. Note that financials don’t necessarily need to be audited; it depends on the seller’s and buyer’s respective businesses. If the buyer is a public company, then having audited financials will likely be a requirement. Otherwise, “audited” records will be a negotiation depending upon the buyer’s confidence in the seller’s records.
6. Intellectual Property—This includes patents (filed, issued, etc.) and trade secrets (i.e., proprietary processes). Freedom to operate is more important than actual patents, especially if a strategic buyer is involved. Large strategic buyers are more likely to be sued than smaller medtech mid-market businesses.
7. Regulatory Status of Current and Future Pipeline Products—Must be relevant and current for the company’s markets, such as the U.S. Food and Drug Administration (United States), CE mark (Europe), and National Medical Products Administration (China).
8. Manufacturing Operations (usually the first item reviewed is product operating margins)—Good margins often translate to positive EBITDA. Conduct a line item (by SKU) review of product margins. Start with the highest volume products regardless of current margin. It often makes more sense to turn good margins into great margins on high-volume products rather than trying to improve a low-volume product. Then, make a list of tactical actions to improve company margins for the year, and prioritize those action. It’s important to tackle the most rewarding improvements first.
9. Quality (can be a deal maker or breaker)—Quality metrics do not have to be perfect, but the lack of a tactical plan to improve mediocre metrics will certainly discourage potential buyers. Quality can provide an important first impression to all stakeholders and potential buyers. Strive to make a good first impression on everyone.
10. R&D Roadmap (surprisingly, many companies don’t have a formal R&D pipeline plan)—Review the roadmap regularly. R&D pipeline failures are okay; no roadmap, however, is unacceptable.
The roadmap for OEM suppliers that manufacture products for others may actually be capabilities (enhanced or new) rather than new technology or new devices. It is important for companies developing new technologies or new products to ensure their efforts specifically address a proven unmet clinical need. There have been many great technologies and products that were unsuccessful because they did not fulfill a market requisite. The only way to win in R&D is to find and address unmet clinical needs in the market.
11. Clinical Evidence (helps create confidence for future successes)—Have key opinion leaders involved in clinical decisions. Clinical evidence can be (in order of most helpful):
12. Markets Served—This includes vertical market segments (e.g., cardiovascular, respiratory, orthopedics, etc.) and geographical markets, such as North America (United States, Mexico, Canada) and Europe. There are 28 countries in the European Union (EU). Companies should understand their ability to serve each country within Europe, since targeted, individualized market plans will likely be more successful than a universal (broad) EU strategy.
13. Marketing Capabilities—Business owners should know all markets in which the company operates and how to address them. Owners should also be aware of the value proposition for each product sold in every market. Such knowledge sustains the firm’s competitive capabilities.
Companies should position their products to boost customers’ success and maximize their own likelihood of prosperity. Clients typically are loyal to firms that help improve their success rate.
14. Market Development Competence—This includes new products and new market segments (new geographies). Note that while market development is part of marketing, it is a distinctly different capability that needs its own focus, since a company’s future success largely depends upon its ability to penetrate new markets (vertical or geographical) with new products.
15. Market Opportunities—Companies should be able to win in both large market segments and smaller, more focused sectors. To achieve market domination, organizations must recognize and take advantage of opportunities, as well as gain market share. They can also look for ways to broaden their market opportunities.
16. Growth—It is important for owners to know both the growth of the markets in which their firms participate and relative growth. Corporate growth must be measured against the market. Obviously, companies with growth rates higher than the market are more attractive and valuable than their slower-growing counterparts.
17. Sales Performance (measure success through established metrics)—The sales team must be appropriately sized to the company and market opportunity. For best results, sales folk should have long-term relationships with customers and be focused on the proper channels for the firm’s products. Ideally, sales compensation should be tied to the company’s annual business objectives.
18. Customers—Healthy businesses typically have long-term customer retention. Loyalty is particularly critical for OEM suppliers as a large portion of their revenue might be derived from a small portion of total customers. Customer concentration is important too, since many clients seek support relative to their base of operation.
19. Organizational Footprint (should be reflective of the size, scale, and growth objectives of the business)—The sales channel must support the corporate growth initiative. Similarly, manufacturing locations should support local market objectives (e.g., Made in Asia for Asia, Made in North America for North America, etc.).
20. Reimbursement—Products should have a reimbursement pathway within the geographies in which they are sold. Such pathways are easier to obtain with clinical studies that prove efficacy and economic value.
These are just some of the considerations to contemplate when selling a business. There are more steps to take to maximize enterprise value throughout the exit process, which we’ll address in future columns.
In the meantime, business owners would be wise to perform regular strategic and tactical reviews of their organizations as outlined in this article to optimize the current and future intrinsic value of their enterprises. In doing so, they will satisfy their fiduciary responsibility to stakeholders (including themselves) every year (and decade).
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 is currently CEO of MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now a Managing Director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
Established medtech firm owners may be considering exits for various reasons: They could be ready for retirement and ready to sell in the right situation; they might be thinking about an exit but unsure about selling the business; or they may be enjoying running a company and have no intention of selling anytime soon.
Regardless of motive, it is important for business owners to always manage their organizations with an exit in mind. Doing so will result in a better business for all stakeholders. Business owners seeking the best value for their medtech companies should take the following steps to ensure a successful outcome.
Consider the desired result for all stakeholders—Those stakeholders may include the owner, other investors, management team, family, local community, employees, customers, suppliers, and anyone else with an interest in the future outcome of the business. A successful exit strategy begins with a clear understanding of the outcome and the necessary course of action to achieve the desired result.
Complete a strategic review of business operations—Regular performance reviews are a necessary (and basic) part of corporate management, but it is important for owners to routinely assess their organization as if they were going to buy them today or at some point in the future. Following are 20 areas to consider.
1. Revenue Performance (to increase the base of potential buyers)—The greater the revenue, the greater the number of potential suitors for the business.
2. EBITDA Results (to increase value)—Many transactions are valued either as a multiple of the revenue or a multiple of the EBITDA. Interesting correlation to note: the greater the revenue, the greater the EBITDA multiple.
3. Management Team Competence (makes a business easier to sell, especially if the owner wants to step away from it)—Can management make daily decisions without the owner/founder? Is the management team functionally competent? Is one of them (or more) a possible candidate to fill the owner’s shoes?
4. Employee Engagement (helps buyer confidence)—Is employee retention a positive attribute of the business? Do employees care about their work? (This often shows up in quality metrics.) Does some innovation come from within the organization? (It could be process innovation as well as product ideas.)
5. Financial Records (must be in good order to give confidence)—This includes up-to-date balance sheets, regularly updated P&Ls, and current taxes. Note that financials don’t necessarily need to be audited; it depends on the seller’s and buyer’s respective businesses. If the buyer is a public company, then having audited financials will likely be a requirement. Otherwise, “audited” records will be a negotiation depending upon the buyer’s confidence in the seller’s records.
6. Intellectual Property—This includes patents (filed, issued, etc.) and trade secrets (i.e., proprietary processes). Freedom to operate is more important than actual patents, especially if a strategic buyer is involved. Large strategic buyers are more likely to be sued than smaller medtech mid-market businesses.
7. Regulatory Status of Current and Future Pipeline Products—Must be relevant and current for the company’s markets, such as the U.S. Food and Drug Administration (United States), CE mark (Europe), and National Medical Products Administration (China).
8. Manufacturing Operations (usually the first item reviewed is product operating margins)—Good margins often translate to positive EBITDA. Conduct a line item (by SKU) review of product margins. Start with the highest volume products regardless of current margin. It often makes more sense to turn good margins into great margins on high-volume products rather than trying to improve a low-volume product. Then, make a list of tactical actions to improve company margins for the year, and prioritize those action. It’s important to tackle the most rewarding improvements first.
9. Quality (can be a deal maker or breaker)—Quality metrics do not have to be perfect, but the lack of a tactical plan to improve mediocre metrics will certainly discourage potential buyers. Quality can provide an important first impression to all stakeholders and potential buyers. Strive to make a good first impression on everyone.
10. R&D Roadmap (surprisingly, many companies don’t have a formal R&D pipeline plan)—Review the roadmap regularly. R&D pipeline failures are okay; no roadmap, however, is unacceptable.
The roadmap for OEM suppliers that manufacture products for others may actually be capabilities (enhanced or new) rather than new technology or new devices. It is important for companies developing new technologies or new products to ensure their efforts specifically address a proven unmet clinical need. There have been many great technologies and products that were unsuccessful because they did not fulfill a market requisite. The only way to win in R&D is to find and address unmet clinical needs in the market.
11. Clinical Evidence (helps create confidence for future successes)—Have key opinion leaders involved in clinical decisions. Clinical evidence can be (in order of most helpful):
- Double blinded, competitive comparisons in a published study in a respected journal
- Published study in a respected journal
- Published study in any journal
- Whitepaper in any forum
- Posters presented at a relevant conference (Note: For some new products where the clinical outcome is established, it will be equally important to establish a positive clinical use case. Many great potential medical products have failed because there was no clear understanding of “clinical use” and they therefore could not be clinically adopted.)
12. Markets Served—This includes vertical market segments (e.g., cardiovascular, respiratory, orthopedics, etc.) and geographical markets, such as North America (United States, Mexico, Canada) and Europe. There are 28 countries in the European Union (EU). Companies should understand their ability to serve each country within Europe, since targeted, individualized market plans will likely be more successful than a universal (broad) EU strategy.
13. Marketing Capabilities—Business owners should know all markets in which the company operates and how to address them. Owners should also be aware of the value proposition for each product sold in every market. Such knowledge sustains the firm’s competitive capabilities.
Companies should position their products to boost customers’ success and maximize their own likelihood of prosperity. Clients typically are loyal to firms that help improve their success rate.
14. Market Development Competence—This includes new products and new market segments (new geographies). Note that while market development is part of marketing, it is a distinctly different capability that needs its own focus, since a company’s future success largely depends upon its ability to penetrate new markets (vertical or geographical) with new products.
15. Market Opportunities—Companies should be able to win in both large market segments and smaller, more focused sectors. To achieve market domination, organizations must recognize and take advantage of opportunities, as well as gain market share. They can also look for ways to broaden their market opportunities.
16. Growth—It is important for owners to know both the growth of the markets in which their firms participate and relative growth. Corporate growth must be measured against the market. Obviously, companies with growth rates higher than the market are more attractive and valuable than their slower-growing counterparts.
17. Sales Performance (measure success through established metrics)—The sales team must be appropriately sized to the company and market opportunity. For best results, sales folk should have long-term relationships with customers and be focused on the proper channels for the firm’s products. Ideally, sales compensation should be tied to the company’s annual business objectives.
18. Customers—Healthy businesses typically have long-term customer retention. Loyalty is particularly critical for OEM suppliers as a large portion of their revenue might be derived from a small portion of total customers. Customer concentration is important too, since many clients seek support relative to their base of operation.
19. Organizational Footprint (should be reflective of the size, scale, and growth objectives of the business)—The sales channel must support the corporate growth initiative. Similarly, manufacturing locations should support local market objectives (e.g., Made in Asia for Asia, Made in North America for North America, etc.).
20. Reimbursement—Products should have a reimbursement pathway within the geographies in which they are sold. Such pathways are easier to obtain with clinical studies that prove efficacy and economic value.
These are just some of the considerations to contemplate when selling a business. There are more steps to take to maximize enterprise value throughout the exit process, which we’ll address in future columns.
In the meantime, business owners would be wise to perform regular strategic and tactical reviews of their organizations as outlined in this article to optimize the current and future intrinsic value of their enterprises. In doing so, they will satisfy their fiduciary responsibility to stakeholders (including themselves) every year (and decade).
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 is currently CEO of MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now a Managing Director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.