When a large software company makes an acquisition in a particular niche, several other comparable acquisitions soon follow. This post discusses this market dynamic and the importance for owners of similar software companies to reevaluate their exit plans.
Our firm was engaged as a merger and acquisition advisor in 2007 to sell a Content / Document Management Software Firm. We put together a database of likely buyers in that software category and began our contact process. Fast Forward to early 2010. We have been engaged by a second Content / Document Management Firm to sell their software company. From our earlier engagement, we dusted off our database of mid-market software companies in that space and began making our phone calls.
A very interesting thing happened. 40% of these middle market software companies had been acquired by one of the large software companies. We would call one document management software company expecting the receptionist to answer by the company name in our database. Instead, we got, "Thank you for calling OpenText." Next call, instead of the expected company name, we got an EMC Company. Another call and this time, "thank you for calling Oracle." Two calls later, we reach an IBM Company.
Wow. Between mid 2007 and early 2010, there was a buying spree by the enterprise software vendors shoring up their product offering to become a much more comprehensive offering, now called ECM or enterprise content management. It was almost like a heavyweight fight - IBM punches, EMC counters, and Oracle lands a blow while OpenText dodges a punch.
For the midsized software companies in this space, these were exciting times. This rapid consolidation and active buying caused the transaction values to increase rapidly. Once the enterprise companies have added what they needed, however, the buying stops, the market returns to normal and sellers no longer command a premium price.
Now the bad news. If you were a mid-sized competitor of the acquired companies, you are now competing with very large, powerful competitors. They will dwarf your company in terms of sales force size, marketing resources, brand awareness and pricing power. Their product now becomes the safe choice in a head-to -head competition with yours.
To now compete effectively will require even more skill. Your firm can continue to provide outstanding service and responsiveness. You can provide the small company customer attention that many customers require. You can be nimble and innovate with new products and features as another way to successfully compete.
You often hear the stock market pundits say, “the trend is your friend" or "don't fight the trend." There is a certain wisdom to this sentiment. If you are in a software category that suddenly has become the target for the big software vendors, you may do best to exit according to the market conditions rather than your original retirement schedule.
Actually, the buying company will most likely want you to stay on board for a period of time to transfer customer relationships and intellectual property. So you can take your chips off the table today at an opportune time for rich valuation multiples and then retire a few years later.
If you are younger, you can secure your family's financial future, work for the new company for a few years, gain valuable experience and then exit. Now you are ready to launch your next great idea. This time it will be far easier. You will have a large base of resources and influential contacts. Also the venture capital guys might even give you money under reasonable terms. Home Run, touch em all!
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
Saturday, March 27, 2010
Wednesday, March 17, 2010
Elements of a Successful Sell-Side Engagement
Our Latest Presentation - Welcome to our brief presentation on the MidMarket Capital Selling Process – Elements of a Successful Sell-Side Engagement. We believe there are several desired results from a successful process including completing the sale in the shortest amount of time, minimizing the demands on the company executive team, maximizing the price and terms for the owners, and finding the right buyers that will serve both current employees and acquired customers while preserving the legacy of quality the owners have built.
http://www.slideshare.net/davekauppi/selling-your-business-the-successful-sell-side-engagement-process
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
http://www.slideshare.net/davekauppi/selling-your-business-the-successful-sell-side-engagement-process
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
Monday, March 1, 2010
Selling Your Healthcare Company – Finding the Right Buyers
We are in the middle of a merger and acquisition engagement representing a Healthcare Consulting Company. We had contacted several industry players and had gotten some good initial interest. Several buyers dropped out because their entire management team was comprised of family members. We asked our client to take their company off the market and to bring in at least one non family executive that had the authority and the ability to run the company. They successfully implemented this change and asked us to take them back out to market.
Because their business is counter cyclical and actually grew during the economic downturn they posted some pretty impressive growth and profit numbers. It was difficult to determine how much of the improvement was due to the addition of the new senior manager.
As we re-launched our marketing efforts, we identified several interested buyers. One buyer was particularly interested and after signing the confidentiality agreement and reviewing the memorandum, contacted us almost daily with additional detailed information requests. Before long he started to grill us about selling price expectations. As we usually do, we deflected his requests and asked him to put together his letter of intent based on the value of the business to his company.
He started giving us a lecture about valuing services companies whose assets (meaning people) walked out the door every evening. He pointed out that their revenues were based on new sales each year and not “contractually recurring revenue”. We had our client put together for us a chart that showed the “historically recurring revenue” generated from their top 20 clients over the past five years. This was our way to demonstrate some consistency and predictability of revenues.
As we conversed further, my radar started buzzing loudly. This guy was getting ready to provide a low ball offer and was trying to sell me on all the reasons why I should go back to our client and pitch his offer. I politely listened to his well practiced approach for a little while longer. Then he came up with the statement that I just could not let go. He said that last year’s revenues were an unusual upward spike and “I am just going to use 2008’s revenues as my basis for my offer. Well, I just could not let that one go. I asked him how he would have made an offer if last year was unusually bad, but the prior five years were strong. He would not respond, but of course, the answer was that he would have made his offer based on the new trend.
There are thousands of business buyers out there that are just like this guy. There is a famous residential real estate investor that has written a book and gives classes to help individuals become real estate moguls. I could sum up his book and his class in one sentence. Find 100 people with their homes for sale. Approach them aggressively and make a low ball offer and one of them will take it.
When I reviewed where our buyer had originated, I traced it back to a posting we had made on our business broker’s association Web Site. As I think about it, these Business-for-Sale Web Sites actually give these buyers a powerful tool to actively and aggressively contact their 100 potential sellers. As I thought about this, sure enough, I have seen this behavior repeated multiple times and the source was always a Business-for-Sale Web Site.
So we are always preaching to our prospective clients to get multiple buyers involved in the process. If they post their business on one of the Business-for-Sale Web Sites, they may get multiple buyers interested, but they are those buyers that are contacting 100 sellers very efficiently through the power of the Internet in order to make their low ball offers.
But I digress. Let’s get back to our client. The good news is that we had 6 other industry buyers that we had contacted and they were looking for acquisitions that were based on acquiring new customers or adding another product offering, or leveraging their sales force or install base. In other words, their buyer motivation was not to buy a company with a low-ball offer.
The only way we can encourage buyers to make fair offers is to conduct an outbound marketing campaign to industry buyers that have strategic reasons for making acquisitions. If we can get several involved, then the buyer that comes in and says that he is going to base his offer on 2008 performance, is easily eliminated from consideration. If a business seller is only going to attract these inbound, bargain seeker buyers from Web Sites, he/she will only be getting low ball offers and wasting a lot of time.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
Because their business is counter cyclical and actually grew during the economic downturn they posted some pretty impressive growth and profit numbers. It was difficult to determine how much of the improvement was due to the addition of the new senior manager.
As we re-launched our marketing efforts, we identified several interested buyers. One buyer was particularly interested and after signing the confidentiality agreement and reviewing the memorandum, contacted us almost daily with additional detailed information requests. Before long he started to grill us about selling price expectations. As we usually do, we deflected his requests and asked him to put together his letter of intent based on the value of the business to his company.
He started giving us a lecture about valuing services companies whose assets (meaning people) walked out the door every evening. He pointed out that their revenues were based on new sales each year and not “contractually recurring revenue”. We had our client put together for us a chart that showed the “historically recurring revenue” generated from their top 20 clients over the past five years. This was our way to demonstrate some consistency and predictability of revenues.
As we conversed further, my radar started buzzing loudly. This guy was getting ready to provide a low ball offer and was trying to sell me on all the reasons why I should go back to our client and pitch his offer. I politely listened to his well practiced approach for a little while longer. Then he came up with the statement that I just could not let go. He said that last year’s revenues were an unusual upward spike and “I am just going to use 2008’s revenues as my basis for my offer. Well, I just could not let that one go. I asked him how he would have made an offer if last year was unusually bad, but the prior five years were strong. He would not respond, but of course, the answer was that he would have made his offer based on the new trend.
There are thousands of business buyers out there that are just like this guy. There is a famous residential real estate investor that has written a book and gives classes to help individuals become real estate moguls. I could sum up his book and his class in one sentence. Find 100 people with their homes for sale. Approach them aggressively and make a low ball offer and one of them will take it.
When I reviewed where our buyer had originated, I traced it back to a posting we had made on our business broker’s association Web Site. As I think about it, these Business-for-Sale Web Sites actually give these buyers a powerful tool to actively and aggressively contact their 100 potential sellers. As I thought about this, sure enough, I have seen this behavior repeated multiple times and the source was always a Business-for-Sale Web Site.
So we are always preaching to our prospective clients to get multiple buyers involved in the process. If they post their business on one of the Business-for-Sale Web Sites, they may get multiple buyers interested, but they are those buyers that are contacting 100 sellers very efficiently through the power of the Internet in order to make their low ball offers.
But I digress. Let’s get back to our client. The good news is that we had 6 other industry buyers that we had contacted and they were looking for acquisitions that were based on acquiring new customers or adding another product offering, or leveraging their sales force or install base. In other words, their buyer motivation was not to buy a company with a low-ball offer.
The only way we can encourage buyers to make fair offers is to conduct an outbound marketing campaign to industry buyers that have strategic reasons for making acquisitions. If we can get several involved, then the buyer that comes in and says that he is going to base his offer on 2008 performance, is easily eliminated from consideration. If a business seller is only going to attract these inbound, bargain seeker buyers from Web Sites, he/she will only be getting low ball offers and wasting a lot of time.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
Tuesday, February 16, 2010
Thursday, February 4, 2010
An Alternative to Venture Capital for the Healthcare Entrepreneur
If you are an entrepreneur with a small healthcare company looking to take it to the next level, this article should be of particular interest to you. Your natural inclination may be to seek venture capital or private equity to fund your growth. This article discusses a different strategy that provides smart money for the entrepreneur, a growth engine, and a way to participate in upside growth.
If you are an entrepreneur with a small healthcare company looking to take it to the next level, this article should be of particular interest to you. Your natural inclination may be to seek venture capital or private equity to fund your growth. According to Jim Casparie, founder and CEO of the Venture Alliance, the odds of getting Venture funding remain below 3%. Given those odds, the six to nine month process, the heavy, often punishing valuations, the expense of the process, this might not be the best path for you to take. We have created a hybrid M&A model designed to bring the appropriate capital resources to you entrepreneurs. It allows the entrepreneur to bring in smart money and to maintain control. We have taken the experiences of several healthcare entrepreneurs and combined that with our traditional investment banker Merger and Acquisition approach and crafted a model that both large industry players and the high tech business owners are embracing.
Our experiences in the healthcare space led us to the conclusion that new product introductions were most efficiently and cost effectively the purview of the smaller, nimble, low overhead companies and not the healthcare giants. Most of the recent blockbuster products have been the result of an entrepreneurial effort from an early stage company bootstrapping its growth in a very cost conscious lean environment. The big companies, with all their seeming advantages experienced a high failure rate in new product introductions and the losses resulting from this art of capturing the next hot technology were substantial. Don't get us wrong. There were hundreds of failures from the start-ups as well. However, the failure for the edgy little start-up resulted in losses in the $1 - $5 million range. The same result from an industry giant was often in the $100 million to $250 million range.
For every Google, Ebay, or Salesforce.com, there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the example of the popular TV show, Deal or No Deal, to hold out for the $1 million briefcase. What about that logical contestant that objectively weighs the facts and the odds and cashes out for $280,000?
As we discussed the dynamics of this market, we were drawn to a merger and acquisition model commonly used by technology bell weather, Cisco Systems, that we felt could also be applied to a broad cross section of companies in the high tech niche. Cisco Systems is a serial acquirer of companies. They do a tremendous amount of R&D and organic product development. They recognize, however, that they cannot possibly capture all the new developments in this rapidly changing field through internal development alone.
Cisco seeks out investments in promising, small, technology companies and this approach has been a key element in their market dominance. They bring what we refer to as smart money to the high tech entrepreneur. They purchase a minority stake in the early stage company with a call option on acquiring the remainder at a later date with an agreed-upon valuation multiple. This structure is a brilliantly elegant method to dramatically enhance the risk reward profile of new product introduction. Here is why:
For the Entrepreneur: (Just substitute in your healthcare industry giant's name that is in your category for Cisco below)
1. The involvement of Cisco- resources, market presence, brand, distribution capability is a self- fulfilling prophecy to your product's success.
2. For the same level of dilution that an entrepreneur would get from a VC, angel investor or private equity group, the entrepreneur gets the performance leverage of "smart money." See #1.
3. The entrepreneur gets to grow his business with Cisco's support at a far more rapid pace than he could alone. He is more likely to establish the critical mass needed for market leadership within his industry's brief window of opportunity.
4. He gets an exit strategy with an established valuation metric while the buyer helps him make his exit much more lucrative.
5. As an old Wharton professor used to ask, "What would you rather have, all of a grape or part of a watermelon?" That sums it up pretty well. The involvement of Cisco gives the product a much better probability of growing significantly. The entrepreneur will own a meaningful portion of a far bigger asset.
For the Large Company Investor:
1. Create access to a large funnel of developing technology and products.
2. Creates a very nimble, market sensitive, product development or R&D arm.
3. Minor resource allocation to the autonomous operator during his "skunk works" market proving development stage.
4. Diversify their product development portfolio- because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the probability of creating a winner.
5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful.
Let's use two hypothetical companies to demonstrate this model, Big Green Technologies, and Mobile CRM Systems. Big Green Technologies utilized this model successfully with their investment in Mobile CRM Systems. Big Green Technologies acquired a 25% equity stake in Mobile CRM Systems in 1999 for $4 million. While allowing this entrepreneurial firm to operate autonomously, they backed them with leverage and a modest level of capital resources. Sales exploded and Big Green Technologies exercised their call option on the remaining 75% equity in Mobile CRM Systems in 2004 for $224 million. Sales for Mobile CRM Systems were projected to hit $420 million in 2005.
Given today's valuation metrics for a company with Mobile CRM Systems' growth rate and profitability, their market cap is about $1.26 Billion, or 3 times trailing 12 months revenue. Big Green Technologies invested $5 million initially, gave them access to their leverage, and exercised their call option for $224 million. Their effective acquisition price totaling $229 million represents an 82% discount to Mobile CRM Systems' 2005 market cap.
Big Green Technologies is reaping additional benefits. This acquisition was the catalyst for several additional investments in the mobile computing and content end of the tech industry. These acquisitions have transformed Big Green Technologies from a low growth legacy provider into a Wall Street standout with a growing stable of high margin, high growth brands.
Big Green Technologies' profits have tripled in four years and the stock price has doubled since 2000, far outpacing the tech industry average. This success has triggered the aggressive introduction of new products and new markets. Not bad for a $5 million bet on a new product in 1999. Wait, let's not forget about our entrepreneur. His total proceeds of $229 million are a fantastic 5-year result for a little company with 1999 sales of under $20 million.
MidMarket Capital has borrowed this model combining the Cisco hybrid acquisition experience with our investment banking experience to offer this unique Investment Banking service. MMCA can either represent the small entrepreneurial firm looking for the "smart money" investment with the appropriate growth partner or the large industry player looking to enhance their new product strategy with this creative approach. This model has successfully served the technology industry through periods of outstanding growth and market value creation. Many of the same dynamics are present today in the high tech industry and these same transaction structures can be similarly employed to create value.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
If you are an entrepreneur with a small healthcare company looking to take it to the next level, this article should be of particular interest to you. Your natural inclination may be to seek venture capital or private equity to fund your growth. According to Jim Casparie, founder and CEO of the Venture Alliance, the odds of getting Venture funding remain below 3%. Given those odds, the six to nine month process, the heavy, often punishing valuations, the expense of the process, this might not be the best path for you to take. We have created a hybrid M&A model designed to bring the appropriate capital resources to you entrepreneurs. It allows the entrepreneur to bring in smart money and to maintain control. We have taken the experiences of several healthcare entrepreneurs and combined that with our traditional investment banker Merger and Acquisition approach and crafted a model that both large industry players and the high tech business owners are embracing.
Our experiences in the healthcare space led us to the conclusion that new product introductions were most efficiently and cost effectively the purview of the smaller, nimble, low overhead companies and not the healthcare giants. Most of the recent blockbuster products have been the result of an entrepreneurial effort from an early stage company bootstrapping its growth in a very cost conscious lean environment. The big companies, with all their seeming advantages experienced a high failure rate in new product introductions and the losses resulting from this art of capturing the next hot technology were substantial. Don't get us wrong. There were hundreds of failures from the start-ups as well. However, the failure for the edgy little start-up resulted in losses in the $1 - $5 million range. The same result from an industry giant was often in the $100 million to $250 million range.
For every Google, Ebay, or Salesforce.com, there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the example of the popular TV show, Deal or No Deal, to hold out for the $1 million briefcase. What about that logical contestant that objectively weighs the facts and the odds and cashes out for $280,000?
As we discussed the dynamics of this market, we were drawn to a merger and acquisition model commonly used by technology bell weather, Cisco Systems, that we felt could also be applied to a broad cross section of companies in the high tech niche. Cisco Systems is a serial acquirer of companies. They do a tremendous amount of R&D and organic product development. They recognize, however, that they cannot possibly capture all the new developments in this rapidly changing field through internal development alone.
Cisco seeks out investments in promising, small, technology companies and this approach has been a key element in their market dominance. They bring what we refer to as smart money to the high tech entrepreneur. They purchase a minority stake in the early stage company with a call option on acquiring the remainder at a later date with an agreed-upon valuation multiple. This structure is a brilliantly elegant method to dramatically enhance the risk reward profile of new product introduction. Here is why:
For the Entrepreneur: (Just substitute in your healthcare industry giant's name that is in your category for Cisco below)
1. The involvement of Cisco- resources, market presence, brand, distribution capability is a self- fulfilling prophecy to your product's success.
2. For the same level of dilution that an entrepreneur would get from a VC, angel investor or private equity group, the entrepreneur gets the performance leverage of "smart money." See #1.
3. The entrepreneur gets to grow his business with Cisco's support at a far more rapid pace than he could alone. He is more likely to establish the critical mass needed for market leadership within his industry's brief window of opportunity.
4. He gets an exit strategy with an established valuation metric while the buyer helps him make his exit much more lucrative.
5. As an old Wharton professor used to ask, "What would you rather have, all of a grape or part of a watermelon?" That sums it up pretty well. The involvement of Cisco gives the product a much better probability of growing significantly. The entrepreneur will own a meaningful portion of a far bigger asset.
For the Large Company Investor:
1. Create access to a large funnel of developing technology and products.
2. Creates a very nimble, market sensitive, product development or R&D arm.
3. Minor resource allocation to the autonomous operator during his "skunk works" market proving development stage.
4. Diversify their product development portfolio- because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the probability of creating a winner.
5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful.
Let's use two hypothetical companies to demonstrate this model, Big Green Technologies, and Mobile CRM Systems. Big Green Technologies utilized this model successfully with their investment in Mobile CRM Systems. Big Green Technologies acquired a 25% equity stake in Mobile CRM Systems in 1999 for $4 million. While allowing this entrepreneurial firm to operate autonomously, they backed them with leverage and a modest level of capital resources. Sales exploded and Big Green Technologies exercised their call option on the remaining 75% equity in Mobile CRM Systems in 2004 for $224 million. Sales for Mobile CRM Systems were projected to hit $420 million in 2005.
Given today's valuation metrics for a company with Mobile CRM Systems' growth rate and profitability, their market cap is about $1.26 Billion, or 3 times trailing 12 months revenue. Big Green Technologies invested $5 million initially, gave them access to their leverage, and exercised their call option for $224 million. Their effective acquisition price totaling $229 million represents an 82% discount to Mobile CRM Systems' 2005 market cap.
Big Green Technologies is reaping additional benefits. This acquisition was the catalyst for several additional investments in the mobile computing and content end of the tech industry. These acquisitions have transformed Big Green Technologies from a low growth legacy provider into a Wall Street standout with a growing stable of high margin, high growth brands.
Big Green Technologies' profits have tripled in four years and the stock price has doubled since 2000, far outpacing the tech industry average. This success has triggered the aggressive introduction of new products and new markets. Not bad for a $5 million bet on a new product in 1999. Wait, let's not forget about our entrepreneur. His total proceeds of $229 million are a fantastic 5-year result for a little company with 1999 sales of under $20 million.
MidMarket Capital has borrowed this model combining the Cisco hybrid acquisition experience with our investment banking experience to offer this unique Investment Banking service. MMCA can either represent the small entrepreneurial firm looking for the "smart money" investment with the appropriate growth partner or the large industry player looking to enhance their new product strategy with this creative approach. This model has successfully served the technology industry through periods of outstanding growth and market value creation. Many of the same dynamics are present today in the high tech industry and these same transaction structures can be similarly employed to create value.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
Selling Your Healthcare Company- Beware of the Tire Kicker
If you are approached by an unsolicited offer to buy your healthcare company, you might think this a good thing. If not handled properly, it could be a real drain on your company's performance.
We are often contacted by a healthcare company owner after he has been approached by a buyer. He wants information from us on the merger and acquisition process, which we are happy to provide. He wants to wait, however, to engage our firm to sell his company "until this situation with the buyer plays itself out."This is the start of the death spiral. I don't want to sound overly dramatic, but this rarely has a happy ending. These supposed buyers will drain your time, resources, focus on running your business and, your company's performance. They want to buy your business as the only bidder and get a big discount. They will kick your tires, kick your tires, and kick your tires some more.
If they finally get to an offer after months of this resource drain, it, to the surprise or chagrin of the owner, is woefully short of expectations. A second potential outcome is that when the offer does come, the owner doesn't know if it is a good or bad offer. Finally, once the buyer has tied up the owner with the LOI, he then proceeds to attack transaction value through every step of due diligence. He is the only suitor so there is nothing to stop bad behavior.
This is so costly to the business owner. Many owners repeat this process several times before they acknowledge the damage being done to their software company. When they do eventually hire a merger and acquisition firm or a business broker, the company value has eroded substantially.Even though we have watched this situation unfold from a distance many times, we have been frustrated by our lack of success in changing the owner's incurable optimism about this buyer. Being the deal guys that we are, we needed to come up with a creative solution and a deal structure to move the healthcare business owner toward a better outcome. If we feel so strongly that this buyer will not be the actual buyer in the end, we should be willing to "carve out" that buyer in the form of a discounted success fee.
By George, that's it! If an owner has an identified buyer, we can incorporate a sliding scale discount on the success fee over time if this identified buyer becomes the actual buyer. If he becomes the actual buyer very quickly the discount is big. If the deal closes after five months of our M&A work, the discount has slid to zero because we have thrown him into the mix with several other qualified buyers and his offer will have been leveraged higher by 25% or more.
The benefits to the healthcare business owner with this approach are meaningful. First, if this is that rare occurrence of a legitimate buyer with a legitimate offer, the owner will not pay a big success fee for a small amount of work. Secondly, the owner can turn the burden of the process over to the M&A firm, freeing him up to successfully run his business during the process. Next, we end the endless, resource draining, tire kicking that erodes business value. Finally, by changing this from an auction of one to a truly competitive bidding situation involving the universe of qualified buyers, the owner will have no doubt that he got the best the market had to offer for his business.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
We are often contacted by a healthcare company owner after he has been approached by a buyer. He wants information from us on the merger and acquisition process, which we are happy to provide. He wants to wait, however, to engage our firm to sell his company "until this situation with the buyer plays itself out."This is the start of the death spiral. I don't want to sound overly dramatic, but this rarely has a happy ending. These supposed buyers will drain your time, resources, focus on running your business and, your company's performance. They want to buy your business as the only bidder and get a big discount. They will kick your tires, kick your tires, and kick your tires some more.
If they finally get to an offer after months of this resource drain, it, to the surprise or chagrin of the owner, is woefully short of expectations. A second potential outcome is that when the offer does come, the owner doesn't know if it is a good or bad offer. Finally, once the buyer has tied up the owner with the LOI, he then proceeds to attack transaction value through every step of due diligence. He is the only suitor so there is nothing to stop bad behavior.
This is so costly to the business owner. Many owners repeat this process several times before they acknowledge the damage being done to their software company. When they do eventually hire a merger and acquisition firm or a business broker, the company value has eroded substantially.Even though we have watched this situation unfold from a distance many times, we have been frustrated by our lack of success in changing the owner's incurable optimism about this buyer. Being the deal guys that we are, we needed to come up with a creative solution and a deal structure to move the healthcare business owner toward a better outcome. If we feel so strongly that this buyer will not be the actual buyer in the end, we should be willing to "carve out" that buyer in the form of a discounted success fee.
By George, that's it! If an owner has an identified buyer, we can incorporate a sliding scale discount on the success fee over time if this identified buyer becomes the actual buyer. If he becomes the actual buyer very quickly the discount is big. If the deal closes after five months of our M&A work, the discount has slid to zero because we have thrown him into the mix with several other qualified buyers and his offer will have been leveraged higher by 25% or more.
The benefits to the healthcare business owner with this approach are meaningful. First, if this is that rare occurrence of a legitimate buyer with a legitimate offer, the owner will not pay a big success fee for a small amount of work. Secondly, the owner can turn the burden of the process over to the M&A firm, freeing him up to successfully run his business during the process. Next, we end the endless, resource draining, tire kicking that erodes business value. Finally, by changing this from an auction of one to a truly competitive bidding situation involving the universe of qualified buyers, the owner will have no doubt that he got the best the market had to offer for his business.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
Selling Your Healthcare Company- Prepare for the Buyer Visit
The buyer visit is an essential element of every M&A transaction. Do not be fooled to think it is simply a show and tell. The buyers come armed with questions designed to help them negotiate a better deal. This article discusses that process and how to counteract their tactics.
In our healthcare mergers and acquisitions practice, a very important event prior to receiving letters of intent is the buyer visit. Don't be fooled into thinking that this is a simple headquarters tour. Experienced buyers know just the right questions to ask to uncover risks and to discover opportunities. We try to coach our sellers on how to present and how to answer these carefully scripted questions.Unfortunately, a man or a woman that has called his or her own shots for the last 25 years is not always receptive to coaching. If we get a feeling that our advice is falling on deaf ears, we schedule the first visit with a buyer that is not the top candidate. Once our seller has made a few tactical errors in this dry run, they are then open to some coaching.This is what we tell them. Acquiring another company is very risky. Mistakes can damage the buying company. Therefore, a buyer is looking to identify and mitigate risks. Their questioning will focus on what they can expect once they are the owner of your business.
Are you bailing on a business that is on a downward spiral? When you leave, will major customers leave with you? Will your key employees stay? Will our company have your strong support in transitioning your knowledge and intellectual capital to our staff?The number one question is: why are you selling your healthcare company? The unacceptable answer is: so I can get away as quickly as possible and sip umbrella drinks on an island. The correct positioning of your exit is: we have built this business and are nearing retirement. In order to realize the future potential we will have to invest back into it at a time when we should be diversifying our assets. A strategic larger company could leverage our assets to achieve much greater market penetration than we could.
Another important theme is that you are in control. You understand your costs and your margins. You can identify the opportunities for growth that a better capitalized company could capture. You can articulate your strengths. You know your weaknesses and they are simply that you do not have enough resources, capital, or distribution to capitalize on all this potential you have created. You understand your market and your competition.
Buyers like to believe they are buying a business at a discount. You should try to present your weaknesses in such a way that the buyer will think, we can easily correct that. For example, an eight week order backlog could be considered a negative. A smart buyer will think that is a high class problem. I wonder how many orders they lose because of the order delay. We could hire three more people, open two more work bays and cut that backlog down to ten days, immediately capturing 10% greater sales.Another example is that the selling healthcare company is technology focused and really lacks sales and marketing expertise. The savvy buyer with a fully developed sales and marketing engine pictures a 20% increase in sales immediately.
If the selling company already had these weaknesses corrected, the buyer would certainly have to reflect that in the purchase price. Because the weaknesses exist and the buyer has already identified how his company will correct them, he views it as buying potential at a discount.A corporate visit should be a good two-way exchange of information. The seller should ask such things as: How long have you been in business? How many locations do you have? How many employees work for your company? (This question is a good way to back into company revenues by applying industry metrics of revenue per employee.
Sometimes private companies are hesitant to reveal sales figures. The seller wants to determine whether the buyer is big enough to make the acquisition.) What are your biggest challenges? Who are your biggest competitors? How do you see the market? Where are your best opportunities? Have you made any prior acquisitions? How do you feel about them? What are you really good at? What areas would you like to improve? How would you see integrating our company with yours?
There is some very important information that you are seeking from this line of questioning. First, their answers give you some hooks on which to hang the assets of your company in order to drive up your perceived value to the buyer. Find their opportunities and show how your company combined with theirs can help capture them. Show how your assets will give them an advantage over their competitors. Show how your combined assets can eliminate some of their problems or weaknesses.You want to determine if there is a cultural and a philosophical fit. Is there trust? Do you feel comfortable? Do they "get it" in terms of recognizing your healthcare company's strategic value or are they just trying to buy your company at some rule of thumb financial multiple?
Often a company acquisition is comprised of cash at close and some form of deferred transaction value like an earnout. If your deal was structured like this, do you have confidence that you would reach your maximum in future payments? Have they been able to articulate their growth plan after they acquire you?
As you can see, the buyer visit should not be looked at as simply a show and tell corporate visit. It should be viewed as an opportunity for the seller to gather valuable information that will help him answer three questions: 1. Is it a fit? 2. How can my healthcare company help them grow and better compete? 3. Are they willing and able to pay me for that?
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
In our healthcare mergers and acquisitions practice, a very important event prior to receiving letters of intent is the buyer visit. Don't be fooled into thinking that this is a simple headquarters tour. Experienced buyers know just the right questions to ask to uncover risks and to discover opportunities. We try to coach our sellers on how to present and how to answer these carefully scripted questions.Unfortunately, a man or a woman that has called his or her own shots for the last 25 years is not always receptive to coaching. If we get a feeling that our advice is falling on deaf ears, we schedule the first visit with a buyer that is not the top candidate. Once our seller has made a few tactical errors in this dry run, they are then open to some coaching.This is what we tell them. Acquiring another company is very risky. Mistakes can damage the buying company. Therefore, a buyer is looking to identify and mitigate risks. Their questioning will focus on what they can expect once they are the owner of your business.
Are you bailing on a business that is on a downward spiral? When you leave, will major customers leave with you? Will your key employees stay? Will our company have your strong support in transitioning your knowledge and intellectual capital to our staff?The number one question is: why are you selling your healthcare company? The unacceptable answer is: so I can get away as quickly as possible and sip umbrella drinks on an island. The correct positioning of your exit is: we have built this business and are nearing retirement. In order to realize the future potential we will have to invest back into it at a time when we should be diversifying our assets. A strategic larger company could leverage our assets to achieve much greater market penetration than we could.
Another important theme is that you are in control. You understand your costs and your margins. You can identify the opportunities for growth that a better capitalized company could capture. You can articulate your strengths. You know your weaknesses and they are simply that you do not have enough resources, capital, or distribution to capitalize on all this potential you have created. You understand your market and your competition.
Buyers like to believe they are buying a business at a discount. You should try to present your weaknesses in such a way that the buyer will think, we can easily correct that. For example, an eight week order backlog could be considered a negative. A smart buyer will think that is a high class problem. I wonder how many orders they lose because of the order delay. We could hire three more people, open two more work bays and cut that backlog down to ten days, immediately capturing 10% greater sales.Another example is that the selling healthcare company is technology focused and really lacks sales and marketing expertise. The savvy buyer with a fully developed sales and marketing engine pictures a 20% increase in sales immediately.
If the selling company already had these weaknesses corrected, the buyer would certainly have to reflect that in the purchase price. Because the weaknesses exist and the buyer has already identified how his company will correct them, he views it as buying potential at a discount.A corporate visit should be a good two-way exchange of information. The seller should ask such things as: How long have you been in business? How many locations do you have? How many employees work for your company? (This question is a good way to back into company revenues by applying industry metrics of revenue per employee.
Sometimes private companies are hesitant to reveal sales figures. The seller wants to determine whether the buyer is big enough to make the acquisition.) What are your biggest challenges? Who are your biggest competitors? How do you see the market? Where are your best opportunities? Have you made any prior acquisitions? How do you feel about them? What are you really good at? What areas would you like to improve? How would you see integrating our company with yours?
There is some very important information that you are seeking from this line of questioning. First, their answers give you some hooks on which to hang the assets of your company in order to drive up your perceived value to the buyer. Find their opportunities and show how your company combined with theirs can help capture them. Show how your assets will give them an advantage over their competitors. Show how your combined assets can eliminate some of their problems or weaknesses.You want to determine if there is a cultural and a philosophical fit. Is there trust? Do you feel comfortable? Do they "get it" in terms of recognizing your healthcare company's strategic value or are they just trying to buy your company at some rule of thumb financial multiple?
Often a company acquisition is comprised of cash at close and some form of deferred transaction value like an earnout. If your deal was structured like this, do you have confidence that you would reach your maximum in future payments? Have they been able to articulate their growth plan after they acquire you?
As you can see, the buyer visit should not be looked at as simply a show and tell corporate visit. It should be viewed as an opportunity for the seller to gather valuable information that will help him answer three questions: 1. Is it a fit? 2. How can my healthcare company help them grow and better compete? 3. Are they willing and able to pay me for that?
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
The Pricing Dynamics of Selling a Healthcare Company
When you sell your healthcare company, the method of selling can have a major impact on your selling price. This article discusses the various selling methods and the relative values that result.
How much is my medical company worth? That depends. Of course it depends on profits, sales, EBITDA, and other traditional valuation metrics. A surprisingly important factor, however, is how you choose to sell it. If I could share with you how you could realize at least 20% more for your business would you read the rest of this article?The way to achieve the most value from selling your healthcare company is to get several strategic buyers all competing in a soft auction process. That is the holy grail of company valuation. There are several exit or value options.
Let's examine each one starting with the lowest, which is liquidation value.Liquidation Value- This is basically the sale of the hard assets of the business as it ceases to be a going concern. No value is given for good will, brand name, customer lists, or company earnings capability. This is a sad way to exit a business that you spent twenty years building.
Book Value- is simply an accounting treatment of the physical assets. Book value is generally not even close to the true value of a healthcare company. It only accounts for the depreciated value of physical assets and does not take into account such things as earnings power, proprietary technology, competitive advantage, growth rate, and many other important factors. In case you are working on a shareholder agreement and looking for a methodology for calculating a buy-out, Book value is a terrible metric to use. A better approach would be a multiple of sales or EBITDA.
Unsolicited Offer to buy from a Competitor- This is the next step up in value. The best way I can describe the buyer mindset is that they are hoping to get lucky and buy this healthcare company for a bargain price. If the unsuspecting seller bites or makes a weak counter offer, the competitor gets a great deal. If the seller is diligent and understands the real value of his company, he sends this bottom-feeder packing.Another tactic from this bargain seeker it to propose a reasonable offer in a qualified letter of intent and then embark on an exhaustive due diligence process. He uncovers every little flaw in the target company and begins the process of chipping away at value and lowering his original purchase offer. He is counting on the seller simply wearing down since he has invested so much in the process and accepting the significantly lower offer.
Buyer Introduced by Seller's Professional Advisors- Unfortunately this is a commonly executed yet flawed approach to maximizing the seller's transaction value. The seller confides in his banker, financial advisor, accountant, or attorney that he is considering selling. The well-meaning advisor will often "know a client in the same business" and will provide an introduction. This introduction often results in a bidding process of only one buyer. That buyer has no motivation to offer anything but a discounted price.
Valuation From a Professional Valuation Firm- At about the midpoint in the value chain is this view of business value. The valuations are often in response to a need such as gift or estate taxes, setting up an ESOP, a divorce, insurance, or estate planning. These valuations are conservative and are generally done strictly by the numbers. Valuation firms use several techniques, including comps, rules of thumb, and discounted cash flow. These methods are not great in accounting for strategic value factors such as key customers, intellectual capital, or a competitive bidding process from several buyers.
Private Equity or Financial Buyer- In this environment of too much money chasing too few deals, the Private Equity Groups are stepping up with some surprisingly generous purchase deals. They still have their roots as financial buyers and go strictly by the numbers, but they have increased the multiples they are willing to pay. Where two years ago they would buy a bricks and mortar company for 5 1/2 X EBITDA, they are now paying 7 X EBITDA.
Strategic Buyers in a Bidding Process- The Holy Grail of transaction value for business sellers is to have several buyers that are actively seeking to acquire the target company. One of the luckiest things that has happened in our client's favor as they were engaged in selling their company was an announcement that a big company just acquired one of the seller's competitors. All of a sudden our client became a strategic prized target for the competitors of the buying company. If for no other reason than to protect market share, these buyers come out of the woodwork with some very aggressive offers.This principal holds as an M&A firm attempts to stimulate the same kind of market dynamic. By positioning the seller as a potential strategic target of a competitor, the other industry players often step up with attractive valuations in a defensive posture.Another value driver that a good investment banker will employ is to establish a strategic fit between seller and buyer. The advisor will attempt to paint a picture of 1 + 1 = 3 1/2. Factors such as eliminating duplication of function, cross selling each other's products into the other's install base, using the sellers product to enhance the competitive position of the buying company's key products, and extending the life of the buyer's technology are examples of this artful positioning.
Of course, the merger and acquisition teams of the buyers are conditioned to deflect these approaches. However, they realize that their competitors are getting the same presentation. They have to ask themselves, "Which of these strategic platforms will resonate with their competitors' decision makers?"As you can see, the value of your healthcare company can be subjectively interpreted depending on the lenses through which it is viewed. The decision you make on how your business is sold will determine how value is interpreted and can result in 20%, 30%, or even 40% differences in your sale proceeds.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
How much is my medical company worth? That depends. Of course it depends on profits, sales, EBITDA, and other traditional valuation metrics. A surprisingly important factor, however, is how you choose to sell it. If I could share with you how you could realize at least 20% more for your business would you read the rest of this article?The way to achieve the most value from selling your healthcare company is to get several strategic buyers all competing in a soft auction process. That is the holy grail of company valuation. There are several exit or value options.
Let's examine each one starting with the lowest, which is liquidation value.Liquidation Value- This is basically the sale of the hard assets of the business as it ceases to be a going concern. No value is given for good will, brand name, customer lists, or company earnings capability. This is a sad way to exit a business that you spent twenty years building.
Book Value- is simply an accounting treatment of the physical assets. Book value is generally not even close to the true value of a healthcare company. It only accounts for the depreciated value of physical assets and does not take into account such things as earnings power, proprietary technology, competitive advantage, growth rate, and many other important factors. In case you are working on a shareholder agreement and looking for a methodology for calculating a buy-out, Book value is a terrible metric to use. A better approach would be a multiple of sales or EBITDA.
Unsolicited Offer to buy from a Competitor- This is the next step up in value. The best way I can describe the buyer mindset is that they are hoping to get lucky and buy this healthcare company for a bargain price. If the unsuspecting seller bites or makes a weak counter offer, the competitor gets a great deal. If the seller is diligent and understands the real value of his company, he sends this bottom-feeder packing.Another tactic from this bargain seeker it to propose a reasonable offer in a qualified letter of intent and then embark on an exhaustive due diligence process. He uncovers every little flaw in the target company and begins the process of chipping away at value and lowering his original purchase offer. He is counting on the seller simply wearing down since he has invested so much in the process and accepting the significantly lower offer.
Buyer Introduced by Seller's Professional Advisors- Unfortunately this is a commonly executed yet flawed approach to maximizing the seller's transaction value. The seller confides in his banker, financial advisor, accountant, or attorney that he is considering selling. The well-meaning advisor will often "know a client in the same business" and will provide an introduction. This introduction often results in a bidding process of only one buyer. That buyer has no motivation to offer anything but a discounted price.
Valuation From a Professional Valuation Firm- At about the midpoint in the value chain is this view of business value. The valuations are often in response to a need such as gift or estate taxes, setting up an ESOP, a divorce, insurance, or estate planning. These valuations are conservative and are generally done strictly by the numbers. Valuation firms use several techniques, including comps, rules of thumb, and discounted cash flow. These methods are not great in accounting for strategic value factors such as key customers, intellectual capital, or a competitive bidding process from several buyers.
Private Equity or Financial Buyer- In this environment of too much money chasing too few deals, the Private Equity Groups are stepping up with some surprisingly generous purchase deals. They still have their roots as financial buyers and go strictly by the numbers, but they have increased the multiples they are willing to pay. Where two years ago they would buy a bricks and mortar company for 5 1/2 X EBITDA, they are now paying 7 X EBITDA.
Strategic Buyers in a Bidding Process- The Holy Grail of transaction value for business sellers is to have several buyers that are actively seeking to acquire the target company. One of the luckiest things that has happened in our client's favor as they were engaged in selling their company was an announcement that a big company just acquired one of the seller's competitors. All of a sudden our client became a strategic prized target for the competitors of the buying company. If for no other reason than to protect market share, these buyers come out of the woodwork with some very aggressive offers.This principal holds as an M&A firm attempts to stimulate the same kind of market dynamic. By positioning the seller as a potential strategic target of a competitor, the other industry players often step up with attractive valuations in a defensive posture.Another value driver that a good investment banker will employ is to establish a strategic fit between seller and buyer. The advisor will attempt to paint a picture of 1 + 1 = 3 1/2. Factors such as eliminating duplication of function, cross selling each other's products into the other's install base, using the sellers product to enhance the competitive position of the buying company's key products, and extending the life of the buyer's technology are examples of this artful positioning.
Of course, the merger and acquisition teams of the buyers are conditioned to deflect these approaches. However, they realize that their competitors are getting the same presentation. They have to ask themselves, "Which of these strategic platforms will resonate with their competitors' decision makers?"As you can see, the value of your healthcare company can be subjectively interpreted depending on the lenses through which it is viewed. The decision you make on how your business is sold will determine how value is interpreted and can result in 20%, 30%, or even 40% differences in your sale proceeds.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of healthcare companies. For more information about selling your healthcare company, visit our website MidMarket Capital
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