Douglas Group talks M&A in medical business

Deborah Douglas is managing director of Douglas Group, a US merger and acquisition (M&A) firm for mid-sized companies.  She offers advice for companies involved in M&A activity

M&A activity in plastic medical product manufacturing has been a key topic over recent years.  There are companies in this segment that are competitively desirable and prognosis for growth is tremendous, with rapidly changing technology supporting steady development of new product and with increasing age and longevity of the population supporting market size.

Medical device manufacturers may experience calls from would-be buyers, probing potential interest in sale. The most successful sellers, however, aren’t the ones who respond personally to such inquiries.  Premium acquisition pricing and terms come from a carefully managed competitive process. Buyers will pay the top premium when, and only when competitive process demands that they must. It is every buyer’s job to make acquisitions as cheaply as possible.  In today’s marketplace the range of capable and ready buyers can make that a challenge.

So, given the count of ready buyers and the heat in the marketplace, what can the potential seller do to ensure optimum results?

First of all, have the selling process managed off-site, by professionals who know how it works.  There are not enough hours in the day, for a private company seller to do it alone. It is impossible to keep it confidential if all of the related calls have to be done by an in-house owner. There are many capable intermediaries who do just seller representation. Find one you like.

Consider a range of possible buyers. Sellers often think they know who the best buyers are likely to be.  We have learned, over 23 years in this business, that they almost never are right.  The ‘off-centre’ outside buyer will pay more than the obvious choice because he gets more when he makes an acquisition in a new area, that he couldn’t have penetrated without the buy.

Consider multiple potential buyers but spend significant time only with the top few.  A preliminary letter of interest with pricing and terms outlined should always be obtained before spending significant time on any one buyer.

Resist or delay entering into an exclusive agreement with any one buyer. Buyers will often present a proposed letter of intent very quickly. That letter will provide that the seller agrees to talk to only the one buyer.  Competition is gone from that point forward.  Never enter into such a letter until you know what competitive buyers will pay, and until all substantive terms have been written, and agreed to with the buyer.

Make sure final terms of any purchase agreement are clearly articulated with thorough understanding by both sides. Clean deals, without later dispute or litigation, come from very clear written agreements.

Never accept an offer with less than 80% of the total cash you expect, unless the upside is huge and you’re personally comfortable that the risk is worth it.  A large upside can be worth the risk but be sure that you understand that the cash at close is all that is guaranteed to be paid.

Be sure the agreement for you to continue working is for a time period you can live with.  Define duties that are to be yours and provide assurance that no move will be asked, if that’s important to you.

If you hold real estate used by the company, any company sale agreement is not complete without clear articulation of the rental price and terms for the ongoing use of the property.  Owners need to ensure that at some point in the future, that risk too can be eliminated.

If you keep a minority interest in the sold enterprise, make sure there’s a binding agreement for your later buyout, at a firm formula price. Equity fund buyers are aggressive and commonplace in today’s M&A environment and they often want the seller to retain a portion. That can actually work wonderfully, for an exciting ‘second bite of the apple’ for the seller but if the enterprise could be held for many years, the seller needs protection.

In the purchase agreement the seller will be required to make certain representations and warranties.  Sellers need to carefully read and consider those representations, and they should make sure that any indemnification they must provide to buyers, regarding those representations, has a clear cap – not to exceed maybe 20% of the purchase price.

Sellers who correctly manage the selling process may have the home run win of a lifetime in today’s acquisitive and competitive environment.  The owner of a company gets one chance only to sell well.  It is worth serious attention and hard work to do it right!