• Published in MPO Magazine (November/December 2018)

Exit Strategies: Beginning with the End in Mind


Recent U.S. tax cuts and the growth of available capital has kept the spotlight focused on M&A in almost every industry, including medical technology. Although 2018 has not seen the multi-billion-dollar blockbuster deals of recent years (i.e., Medtronic–Covidien, Zimmer–Biomet, BD–Bard, Abbott–St. Jude Medical Inc., etc.), M&A activity continues at a consistently high historical pace. While many deals are huge successes, approximately 30 percent to 50 percent of M&A transactions actually fail before they are finalized, according to estimates; most of these botched deals impact small and medium-sized medtech enterprises. Whether a business is considering uniting with a larger firm in the next month, the next year, or in 10 to 20 years, it is important for leadership to understand why transactions fail on a consistent basis throughout the business lifecycle because these issues will help drive value both today and in the future. Although growth drivers in M&A deals are well understood (innovation, market share, margins, etc.), the cause for unsuccessful transactions is seldom discussed. One of the main reasons for failure is that smaller companies simply are not prepared for the exit. While the desire exists to sell the business for the maximum possible value, business owners often neglect to take the appropriate steps to increase the sale price. In many cases, actually, executives’ own actions reduced their final profit. This issue of M&A failures was a popular topic at a recent international meeting of business advisors who specialize in helping corporate clients increase their current enterprise value as well as their potential for maximum realized cash upon exit. The conversation began with a discussion of the key challenges for a successful exit. Financial experts from all regions of the world (Asia, the Middle East, Africa, Europe, Latin America, Russia, and North America) participated in the conversation and identified various issues impacting potential successful M&A transactions. They include:

  • Lack of planning

  • Unclear or unmanaged expectations

  • Cultural issues

  • Stakeholder (shareholder, board, employee) communication

  • Cross-border challenges

  • Emotional issues (especially in family-run organizations)

  • Earn-outs

  • Having the right type of M&A advisor for the deal

Certainly, these topics must be addressed by all businesses, regardless of size and the timing of the sale. Exit strategy preparations, however, should be a priority too, as every business should be planning with the “end” in mind. Even if a company is not sold for 20 years, executives should begin planning today for the sale, as there are major benefits from planning properly (and early) for a strategic exit. The main positives are: improved stakeholder (including employees, shareholders, management, board, suppliers, etc.) communication to drive better corporate disciplines that usually result in positive impacts on financial performances; and increased enterprise value for today and for the future exit. Impacts of Lack of Planning While some businesses benefit from great capital and the ability to withstand various outside dynamics, many companies cannot withstand numerous external stresses. Realizing that businesses cannot control outside influences like regional economies, market demands, industry trends, interest rates, and competition, leadership should focus on activities that will consistently improve their intrinsic value. These factors include intellectual property, management strength, sales team efficiency, growth rates, customer diversity, vendor relationships, geographic coverage, margins, and other items specific to each business. These topics should be consistently reviewed to maximize organizational value. Corporate planning also should incorporate short- and long-term strategies for managing and addressing these issues. Unclear or Unmanaged Expectations It’s important for all stakeholders (internal and external) to agree on both current and future financial performance prospects. Aligned expectations can consistently improve a company’s performance, because key stakeholders will be working in unison toward the same goal. This may seem like a simple issue to address, but it can be difficult to accomplish when corporate stakeholders are assumed to be working toward the same end game as company leadership. Therefore, it is critical that companies consistently deploy a tactical communication strategy to ensure that key stakeholders are working together to achieve the appropriate desired results. Cultural Issues Interestingly, cultural issues are not necessarily limited to geography. Obviously, regional differences must be addressed to assure that accountabilities are transparent and aligned with the greater corporate interests. Additionally, any cultural issues regarding employee diversity should be identified and discussed. A full understanding of existing internal cultural issues is necessary to resolve the “elephant in the room” challenges most companies face during their various growth spurts. Once the key cultural issues are understood, leadership can then implement a plan to recognize and resolve those matters. Open communication is key to overcoming cultural issues, as it shows that leadership recognizes the internal differences and is committed to working with all stakeholders to address them. Employees, consequently, will appreciate the transparency and be more willing to engage with leadership to constructively address these matters. Stakeholder Communication As discussed previously, all stakeholders must agree on corporate performance measures and objectives. For maximum achievement levels, businesses in all stages of growth must assure that stakeholder goals are properly aligned and communication is transparent throughout the organization. These two factors are particularly critical when planning for a proper exit. Cross-Border Challenges In today’s medtech environment, most companies are blessed with cross-border opportunities that also create unique challenges for the organization. Having customers, suppliers, and manufacturing in other countries is an exciting proposition for even relatively small companies. And while current travel and telecommunication capabilities have made it easier than ever before to expand the number of stakeholders in different geographies, globalization does not give companies the right to manage all worldwide stakeholders the same way. Clearly, treatment needs to be fair and consistent. However, these terms are relative to the specific geographical location. To maximize value and generate positive results, reasonable efforts must be taken by the organization to ensure that all stakeholders are valued and treated with relatively similar values and policies. It is this respect for equal treatment (not necessarily in exactly the same manner) that will lend the best results for global corporate successes now and in the future. Emotional Issues Stakeholders can develop strong emotional attachments to an organization, especially in family-run businesses. Emotions also can run high in startups or relatively small entities where stakeholders have worked extraordinarily hard together toward common goals like a product launch, market growth, or new innovations. In these situations, company owners may want to consider the potential impacts of an exit on these stakeholders. If done properly, these stakeholders will either be rewarded by the future outcomes of an exit; maintain loyalty to the owners; or be given the opportunity to purchase the company in a mutually beneficial structure. All these possibilities should be considered early and often to make sure every key stakeholder feels valued throughout a company’s growth and during a possible sale. Earn-Outs Specific to an actual transaction, this is a key issue that must be considered prior to an actual purchase agreement. Earn-outs are the top way to possibly create future litigation between the sale parties. They are useful, as these types of payments can increase the overall value of a company and be used to close a possible valuation gap between the buyer and seller. Therefore, it is important the seller considers the earn-out structure before conducting a transaction. Planning for this possibility can help the seller steer the transaction to the appropriate type of future payments that will most likely be successful. Having an Appropriate M&A Advisor Like earn-outs, this item is specific to an actual transaction. However, it should be considered and planned before actually starting the sale process. Retaining the right type of M&A advisor for the specific type of business is often critical to ensuring that maximum value is obtained for all stakeholders. Advisors should thoroughly understand the overall business so he/she can properly represent it, and advisors also should know the likely types of buyers (and potential value from these procurers) for the company. In addition, M&A advisors should comprehend the aforementioned issues and help business owners properly address them before, during, and after the sale (while also recognizing that post-transaction integration planning is critical for a successful exit). Moreover, an exceptional M&A advisor will recognize other items specific to a business owner’s goals/future plans and help the entrepreneur achieve those objectives. Whether business owners are planning to sell their corporate offspring now, in the next few years, or in the next generation of their staff/family, it is imperative they begin planning today with the end in mind. Happy planning! Florence Joffroy-Black, CM&AA, is a long-time 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 can be reached at florencejblack@medworldadvisors.com. Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now a principal at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.

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