Business Sale Negotiation - Our Most Unusual Deal Term

The deal process is very stressful so every once in a while it is refreshing when we can break the tension with a good laugh. In retelling this story I am changing the names to honor the privacy of our clients and buyers. So let me set the stage. We have negotiated and have received a dual signed letter of intent between our client, a privately held healthcare information technology company and a much larger publicly traded company. We are ending due diligence and have had some very stressful discussions regarding the future role , title, salary and duties of our founder/seller. We were able to come to agreement and had started the process of crafting the definitive purchase agreement. So the basic economics of the deal are set, but just need to be memorialized in a formal contract.

I get a call from our client, let's call her Sarah. She says that she is going to fax me over a document and after I read it, to call her back. A minute later the fax starts to print out a page from the buyer's annual report where they identify the price and terms of another acquisition they had completed during the reporting period. I recognized the company because Sarah and I had discussed it before and she had shared that the company was similar to hers in terms of product offering and revenues. In my mind I had formulated a potential transaction range for this very similar company. 

We had been able to negotiate what we felt was a very favorable deal for our client, well beyond a typical EBITDA financial buyer valuation.  Because it had strategic value to a couple of the major players in the space and we had them both competing for the acquisition, we were being valued at a multiple of revenue not a multiple of EBITDA.

Back to the fax. I start reading the deal terms being described about this very similar company and the valuation was significantly above our lucrative offer. I call up Sarah and the first thing she says to me is, "I want Becky's deal." Becky was the owner of the other acquired company and she and Sarah were professionally acquainted.  Being the cool-headed deal guy that I am, I stammered, "Sarah, I looked at this deal and there is no way I can justify the price that the buyer paid for them."  She said to me, "Didn't I tell you that Becky was having an affair with the buying company's previous CEO?"

OK now is my time to actually be cool-headed. I said, "Well Sarah, are you prepared to come up with that deliverable, and how will your husband feel about that deal term?" Silence followed for what seemed like an eternity.  Soon the silence was broken with a very loud and hearty belly laugh from the other end of the phone.  Finally she said, "OK, OK, I get it. Let's get my deal done."

Whew, I dodged a bullet there and even got a funny story out of it. It was not funny until the substantial wire transfer had hit Sarah's bank account.

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

Surviving Due Diligence in the M&A Process

New Article just published on Divestopedia https://www.divestopedia.com/2/7767/sale-process/negotiation/the-1-cause-of-middle-market-ma-deal-failures

I believe one of the biggest reasons for M&A deals blowing up is a poorly worded letter of intent (LOI). The standard process to solicit offers from buyers in the form of an LOI includes terms and conditions that are negotiated until one winner emerges and the seller and buyer dual sign the LOI, which is non-binding. This basically gives either party an "out" should something be discovered in the due diligence process that is not to their liking or is not as presented in the initial materials. Buyers Have the Advantage of Experience

When I say poorly worded, what I really should have said is that it is worded much to the advantage of the buyer and gives them a lot of wiggle room in how the letter is interpreted and translated into the definitive purchase agreement. The best comparison I can make is a lease agreement for an apartment. It is so one-sided in favor of the landlord and protects him/her from every conceivable problem with the renter.

Business buyers are usually very experienced and the sellers are generally first-time sellers. The buyers have probably learned some important and costly lessons from past deals and vow never to let that happen again. This is often reflected in their LOI. They also count on several dynamics from the process that are in their favor. Their deal team is experienced and is at the ready to claim that "this is a standard deal practice" or "this is the calculation according to GAAP accounting rules." They count on the seller suffering from deal fatigue after the numerous conference calls, corporate visits and the arduous production of due diligence information.

When the LOI is then translated into the definitive purchase agreement by the buyer's team, any term that is open for interpretation will be interpreted in favor of the buyer and, conversely, to the detriment of the seller. The seller can try to fight each point, and usually there are several attacks on the original value detailed in the dual-signed LOI that took the seller off the market for 45-60 days. The buyer and his/her team of experts will fight each deal term from the dispassionate standpoint on one evaluating several deals simultaneously. The seller, on the other hand, is fully emotionally committed to the result of his/her life's work. He/she is at a decided negotiating disadvantage.

The unfortunate result of this process is that the seller usually caves on most items and sacrifices a significant portion of the value that he/she thought he/she would realize from the sale. More often than not, however, the seller interprets this activity by the buyer as acting in bad faith and simply blows up the deal, only to return to the market as damaged goods. The implied message when we reconnect with previous interested buyers after going into due diligence is that the buyers found some dirty laundry in the process. These previously interested buyers may jump back in, but they generally jump back in at a transaction value lower than what they were originally willing to pay. How to Even the Playing Field

How do we stop this unfortunate buyer advantage and subsequent bad behavior? The first and most important thing we can do is to convey the message that there are several interested and qualified buyers that are very close in the process. If we are doing our job properly, we will be conveying an accurate version of the reality of the deal. The message is that we have many good options, and if you try to behave badly, we will simply cut you off and reach out to our next best choices. The second thing we can do is to negotiate the wording in the LOI to be very precise and not allow room for interpretation that can attack the value and terms we originally intended.

We will show a couple examples of LOI deal points as written by the buyer (with lots of room for interpretation) and we will counter those with examples of precise language that protects the seller.

Sample Earnout Clause Within an LOI

Buyer's Proposal

The amount will be paid using the following formula:

-75% of the value will be paid at closing

-The remaining 25% will be held as retention by the BUYERs to be paid in two equal installments at the 12 month and 24 month anniversaries, based on the following formula and with the goal of retaining at least 95% of the TTM revenue. In case at the 12 and 24 month anniversaries the TTM revenue falls below 95%, the retention amount will be adjusted based on the percentage retained. For example, if 90% of the TTM revenue is retained at 12 months, the retention value will be adjusted to 90% of the original value. In case the revenue retention falls at or below 80%, the retention value will be adjusted to $0.

Seller's Counter Proposal

The amount will be paid using the following formula:

-75% of the value will be paid at closing

-The remaining 25% will be held as earnout by the BUYERs to be paid in four equal installments at the 6, 12, 18 and 24 months anniversaries, based on the following formula:

We will set a 5% per year revenue growth target for two years as a way for SELLERS to receive 100% of their earnout (categorized as "additional transaction value" for contract and tax purposes).

So, for example, the TTM revenues for the period above for purposes of this example are $2,355,000. For a 5% growth rate in year one, the resulting target is $2,415,000 for year one and $2,535,750 in year two. The combined revenue target for the two years post-acquisition is $4,950,750.

Based on a purchase price of $2,355,430, the 25% earnout would be valued at par at $588,857. We can simply back into an earnout payout rate by dividing the par value target of $588,857 by the total targeted revenues of $4.95 million.

The result is a payout rate of 11.89% of the first two years' revenue. If SELLER falls short of the target, they fall short in the payout; if they exceed the amount, they earn a payout premium.

Below are two examples of performance:

Example 1 is the combined two years' revenues total $4.50 million - the resulting two-year payout would be $535,244.

Example 2 is the combined two years' revenues total $5.50 million - the resulting two-year payout would be $654,187.

Comparison and Comments

The buyer's language contained a severe penalty if revenues dropped below 80% of prior levels, the earnout payment goes to $0. Also, they have only a penalty for falling short and no corresponding reward for exceeding expectations. The seller's counter proposal is very specific, formula-driven and uses examples. It will be very hard to misinterpret this language. The seller's language accounts for the punishment of a shortfall with the upside reward of exceeding growth projections. The principle of both proposals is the same - to protect and grow revenue, but the results for the seller are far superior with the counter proposal language.

Sample Working Capital Clause Within an LOI

Buyer's Proposal

This proposal assumes a debt free cash free (DFCF) balance sheet and a normalized level of working capital at closing.

Seller's Counter Proposal

At or around closing, the respective accounting teams will do an analysis of accounts payable and accounts receivable. The seller will retain all receivables in excess of payables plus all cash on cash equivalents. The balance sheet will be assumed by the buyer with a $0 net working capital balance.

Get the Specifics

The buyer's language is vague and a problem waiting to happen. So, for example, if the buyer's experts decide that a "normalized level of working capital" at closing is a surplus of $400,000, the value of the transaction to the seller dropped by $400,000 compared to the seller's counter proposal language. The objective in seller negotiations is to truly understand the value of the various offers before countersigning the LOI. For example, an offer for cash at closing of $4,000,000, with the seller retaining all excess net working capital when the normal level is $800,000, is superior to an offer for $4.4 million with working capital levels retained at normal levels.

These are two very important deal terms and they can move the effective transaction value by large amounts if they are allowed to be loosely worded in the letter of intent and then interpreted to the buyer's advantage in translation to the definitive purchase agreement. Why not just cut off that option with very precise and specific language in the LOI with formulas and examples prior to execution by the seller? The chances of the deal going through to closing will rise dramatically with this relatively easy-to-execute negotiation element.

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

Healthcare Information Clients We Have Served

We got our start after working for a very fine "Generic" Merger and Acquisition Advisory firm. I do not mean this to be a dig, but just a way to describe that our former firm was industry agnostic in engaging with all types of companies. Generally they did an excellent job relying on a proven M&A process. One area that they struggled with, however, was in representing software and information technology companies. In analyzing the competitive landscape, we found this to be the case with the vast majority of lower market M&A firms and business brokers. They did not speak the language and felt uncomfortable in pursuing transaction values that were not based on rules of thumb or a multiple of EBITDA. They struggled with unlocking strategic value for their clients.

MidMarket Capital was originally founded based on our deep roots in technology in our prior business experience. Our ideal client is one that has a significant part of their company value contained in their technology and intellectual property. We have chosen to focus on representing businesses in this space and our value proposition is to drive strategic transaction value for our clients.

For buyers of healthcare technology companies, it is important that the seller's representatives "speak the language" and if you are a technology, software, information technology, or healthcare information technology company, odds are that we have represented a similar company to yours during the past fifteen years. Please see below for a list describing companies we have represented in this market niche:

MidMarket Capital Clients

A Pathology Laboratory Information Systems Company

A Cost Analysis and Control Software Company for Healthcare Facilities

An Evidence Based Patient Acuity Measurement and Nurse Staffing Systems and Services Company

A Web-Based Staffing, Scheduling and Nurse Shift Bidding Software Company

HOSPITAL INTEGRATION SOFTWARE COMPANY

Ophthalmology Information System (OIS) Company

Healthcare Revenue Cycle Management Company

Cloud-Based Vendor Neutral Archiving & PACS Software Company

Hospital Services & Software Company

Electronic Health Record and Personal Identification Wristband Company

Big Data Analysis Engine for Repositioning Drug Discovery

Smart Pharma Cap for Medication Adherence and Compliance Recording

An IBM Cognos Partner - Performance Management, Professional Services, and Software Development Firm

A Distribution ERP Systems Software Company

Web Enabled Supply Chain Management System

eCommerce Company

Document Imaging & Management Software Company

Textbook Content Service Provider

Managed Information Security Services Company

Information Technology Consulting Company

IT Services Provider SMB

Affiliate Marketing Management Firm

Digital Communications Company

Pension Administration Software Company

CRM and Integrated Product Performance Management Software Company

Live Virtual Computer Training Company

Telecom Alliance Channel Partner

Rich Media & Interactive Marketing Software and Services Company

Wireless Electronic Monitoring Company Hardware, Software, Firmware, Software as a Service

Third-party Provider of Software for Bentley’s MicroStation

Mobile, On-Demand Data Collection, Management & Reporting

IT and telephony system design and support SMB

Publishing Management Software and Services

Network Integrity and Switch Provisioning Software Company

Advanced Networking Technology Development Contractor

ECommerce software-as-a-service (SaaS) Company

PRINT MANAGEMENT AND DISTRIBUTION COMPANY

Smart Grid Software and Engineering Company

Web Content Distribution and Compliance Management Software Company

Recreational Team Management and Group Management Portal

.Net - SaaS Based Sales Collateral Management Software and IT Services Company

Pool and Spa Service Management and Store Software Systems

Systems integrator and reseller of IT products to Federal Government clients

Mobile Field Merchandising & Data Collection Software

The BI Life Cycle Management Company - IBM/Cognos Enhancement Software Solutions

Security Solutions Value Added Distributor

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

Investor Analysis - the Economics of the Blockbuster Drug

I am having an eye-opening experience representing a client that is introducing a technology designed to improve the economics of getting new drugs to market. Their platform is drug repurposing, so in order to compete, we must prove the wisdom of this approach versus the prevailing thinking in Big Pharma and Bio Tech - the quest for the next Blockbuster.  

Just for fun, I took the latest DDD metrics shown in the graphic below (courtesy of S.M. Paul's analysis $1.78 billion and 13.5 years) and translated that into an Internal Rate of Return calculation which theoretically will remove emotion and focus our analysis on the rigorous framework  that most of industry uses to allocate capital. I also ran the same model against the metrics for a repurposed drug.

To perform the analysis I used the cost and time metrics shown above and made the following assumptions:

1. We did, in fact, end up with a blockbuster drug, producing $1 billion in revenue in years  15 to 24 (the period of exclusivity for the intellectual capital). Note: this is a very generous benefit of the doubt position to assume that a blockbuster drug emerges.

2. The repositioned drug was a reasonably successful product, producing annual revenues of $300 million for its period of exclusivity, beginning in year 7 and continuing on through year 24.

3. The metrics we used for the repositioned drug were 6 years and $320 million in cost based on the compounds already existing and already approved for toxicity and safety.
 

What I found really surprised me. The IRR for the de novo process was 14% and the IRR for the repurposed process was 37% or 2.64 times the return of  a de novo success. If I do a net present value analysis and I enter a 30% cost of capital (appropriate risk adjusted rate for a venture capital investment), the NPV is actually negative. I might have been surprised, but industry executives have realized this for some time now which may explain why they are doing everything possible to outsource the risk associated with this process from universities' technology transfer offices to NCATS.

Weekly a new deal is announced of a small bio tech being acquired with a pre-Stage 3 clinical trials drug at what seems like an incredible valuation. But if you look at where it gets the buyer in the process and compare that to the costs they would have incurred internally,  the investment does not look out of line. It is too bad that their comparative metric is such an easy target to beat.

In studying the portfolios of the major large pharmaceutical companies' venture arms, I found a robust amount of investing in what I call the word jumble of new drug opportunity. You remember that game where you randomly put together a noun, verb, subject, and adverb and come up with some amusing sentences.  Well I did that with the descriptions of the investments that are being supported:

new class of|||  exquisitely selectively target|||  siRNA (DsiRNA) molecules |||    ALRN-6924|||  orphan ophthalmologic conditions ||| Phase 1b/2 |||    today announced the completion of a $45 million Series A financing

novel technology|||    potent inhibitors|||  calcium release-activated calcium (CRAC) channel|||  OC459   |||  moderate-to-severe plaque psoriasis |||  Phase 2  |||  announced the successful completion of an oversubscribed $43 million Series B financing

     

 breakthrough|||  selectively regulating translation|||  Cadherin 11, a surface protein|||  CM2489 ||| lymphoma and other malignancies|||  pre-clinical|||   Completion of $17 million Series A Financing

I am having a little fun here, but this does not fill me with a lot of confidence that these are high probability bets on bringing new effective treatments to markets in the near future and at a reasonable cost.

With our clear advantage in time, cost, and risk, why hasn't big pharma embraced the repurposing approach as another tool in replenishing their drug pipelines? What am I missing?

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

Bio Tech Venture Investing - Novel Drug Discovery Versus Repurposing and Reformulation

A recent study shows that for the past decade more than 80% of the venture capital invested in therapeutics went toward “novel drug R&D” as opposed to improvements on existing drugs (e.g., new formulations, repurposing, drug delivery, etc. This post questions the wisdom of that approach based on the time, risk, and cost of de novo drug discovery. After extensive research on the repurposing space, we will discuss our theory on why it hasn't attracted a greater percentage of the funding. We believe it is, more than anything else, based of 4 common misperceptions about the viability of drug repurposing. 

I recently reviewed a white paper by David Thomas, CFA and Chad Wessel of Bio Industry Analysis entitled Venture Funding of Therapeutic Innovation A Comprehensive Look at a Decade of Venture Funding of Drug R&D, published in February 2015 . In this excellent paper they covered a number of different topics and trends, but for this article, I would like to focus on one. They point out that over the past ten years, nearly 80% of venture capital for therapeutics went toward “novel drug R&D” as opposed to improvements on existing drugs (e.g., new formulations, repurposing, drug delivery, etc.

The percentage of de novo investments compared to repurposing or reformulations would not surprise me if the group the study was analyzing was the venture arm of large pharma. However, this is astounding to me when you think of the financial rigor normally associated with the venture community. De novo drug discovery is simply a bad bet. Here are the latest metrics - $1.7 billion cost, 12 to 15 years, 1 in 10,000 compounds makes it and only 1 in 3 compounds that are commercialized recover their original investment.

Compare that with the far superior metrics for repurposing. Because your universe of drug candidates is drugs already treating another disease in humans, you eliminate or greatly reduce the safety and toxicity component of the trial process. Since the drugs are already known you eliminate the 4.5 years and $674 million on average for the discovery process. Now if you can identify the best candidates with precision and supply the companion diagnostics for safety, toxicity, efficacy and patient stratification you can  remove several years and hundreds of $ millions compared to de novo.

There has got to be a reason that big pharma and this universe of very savvy investors have largely ignored this seemingly superior bet. In hearing the objections in the marketplace, my conclusion is that they are operating under four misperceptions.

1. We can only get method of use patents and that is not sufficient to provide us the period of exclusivity commensurate with this sizable investment. A: We can argue the composition of matter versus the method of use patent protection issue until the cows come home, but let's just let the numbers do the talking: 1/4 of the total drug marketplace is comprised of repurposed drugs.  Examples of Repurposed Blockbusters –include:

              -Tecfidera (Biogen)  - Multiple Sclerosis  $2.91 Billion  (2014)

              -Rituxan (Biogen ) – Rheumatoid Arthritis $1.2 Billion (2013)

              -Viagra (Pfizer) – Erectile Dysfunction  $2.05 Billion (2008)

2. Generics prescribed off-label will limit our pricing power and our market share potential. A: this is simply not supported by the facts. A simple reformulation of a repurposed drug will make it immune to  off-label prescribing. In the many examples of successful repurposed drugs, the availability of a generic has had very limited impact on its pricing or market share for the new indication. The pricing mechanisms in the market do not distinguish between a de novo drug and a repurposed drug. 

3. It costs “about the same” to take a repurposed drug through the commercialization process as it does a de novo discovery. As shown above, you simply eliminate much of the process (discovery, tox). Also the FDA has recently approved the use of remote monitoring in running clinical trials especially when it involves a repurposed drug. Estimates are as high as an 80% reduction in clinical trials cost by fully implementing this approach. The more precision you can provide in the areas of companion diagnostics for toxicity, efficacy, and patient stratification, the faster and cheaper you can bring a repurposed drug to market. 

4. The approaches used in drug repurposing do not provide enough precision and systematic repeatability in order for us to invest in this strategy. This was true until the introduction of a technique called high throughput knowledge screening. It is a Big Data play on researching the research pioneered by a company called CureHunter. By adding this final puzzle piece to the other advantages of repurposing, it makes the investment thesis for repurposing even more compelling.

The market is just beginning to embrace this considerable risk/reward advantage, but it is not the giant pharmaceutical or bio tech companies (although Celgene repositions their new drugs while still in the clinical trials process for the original indication). Rather it is the smaller nimble bio techs that develop a repurposed candidate, form a drug/disease specific subsidiary, move the drug through phase 1 and limited phase 2 trials, and then sell the subsidiary to a large pharmaceutical or bio tech company. It will probably take a series of small company successes before the big players start to pursue this strategy in earnest. Once that gate opens we will see a resounding level of drug pipeline growth, more rapid drug introduction, more favorable pricing and choices for the patients.

 



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

Generic Drug Manufacturer Unlocking the Hidden Value in Drug Portfolios

There is huge untapped potential in the pharma and Bio Tech industry in drug repositioning (identifying new uses for existing drugs). Up until now the process has been largely the result of serendipity or accidental discovery and therefore has not had much impact outside of a few success stories like Viagra. If you think about Aspirin, we have discovered 10 additional uses but it has taken mankind 89 years to do so. With the CureHunter discovery engine we have compressed that process down to a couple of weeks. We are looking for a few JV partners to unlock the hidden value in drug portfolios.



Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital

Do Your Healthcare Software Sales Match the Excellence of Your Product

Smaller healthcare software companies often face a very difficult time penetrating the larger customers and achieving a critical mass in sales. The industry is quite conservative and has a bias toward doing business with the old reliable legacy providers. This post discusses this dynamic and approaches to minimizing the impact on growing sales.

When asked if their company sales matched the excellence of their products,  many entrepreneurs, technology based companies or healthcare companies, the answer to that question is a resounding, NO! There is an exception to this with the rapid rise of the new economy, new media, highly scalable companies like Open Table, Uber, Airbnb, YouTube, and others.

In their case, their prospective customers highly value their newness, their breaking the mold, their non-establishment approach. They are viewed as doing what they do far better than the technology establishment stalwarts. The notable exception to this is Apple who has been able to transcend old establishment and be accepted as both old and new economy.

But I digress. Back to topic. Most companies that sell to other companies, or B2B companies are evaluated by their potential customers in a traditional risk reward analysis. Or using computer terminology, their buying decisions are made using a legacy system. It was once said that no one ever got fired for making an IBM decision.

Let's look at this legacy buying model and see exactly why your company's sales do not match the elegance of your solution.

One of our healthcare clients insisted that we read CROSSING THE CHASM by Geoffrey Moore to give us greater perspective on his company's situation. By the way, if you are a smaller technology based or healthcare company selling in the B2B space, this should be required reading.

Our client was a two year old company selling a cutting edge, on-line nurse shift bidding and self scheduling system to hospitals. This is a great product. The ROI's were easily quantifiable. The handful of installed accounts loved it. Most importantly, it had a positive effect on the nursing staff's morale. This alone could justify the cost of the system.

Our client had some very encouraging early success selling his solution to some of the more progressive hospitals. They received some outstanding early PR. After that initial success, however, our little edgy technology based company hit the wall.

The sales cycle went from six months to beyond twelve months. Cash flow became an issue and, to top it off, a generously funded venture backed competitor with well known industry executives was aggressively developing this new market.

What was happening? Our clients were very smart people and figured out what was happening. They knew that they would have to make some difficult and dramatic decisions in short order. Turns out the majority of hospitals are legacy buyers and make buying decisions based on a risk avoidance paradigm.

Our client's early success was realized as a result of selling to the small minority of early adapters in their industry. These are the pioneers that don't mind the arrows in their backs from heading out West with new products or new vendors.

Legacy buyers, however, do not value references that are early adapters. They are known to have a much higher risk tolerance than the traditional majority. Below are some buying criteria from these legacy buyers:

1. Big is good. Bigger is better. Buying inferior technology solutions from a blue chip publicly traded company wins most of the time.

2. Old is good. There is no replacement for experience and the grey haired company beats the gelled hair Tech Wizard company more often than not.

3. Industry Cred means everything. If you are a company that adapted your product from success in another vertical market and you are entering our space, the old familiar face carries the most weight.

4. Will the little guy be in business next year? The failure rate for the sub $ million company is a thousand times greater than for the $ billion company. This change in technology is painful enough. Do I want to risk having to do it over again in a year?

5. If I have problems, the big guy can fill the skies with blue suits until my problem is solved. The little guys cannot appropriately respond to my problem.

This is a punishing gauntlet for the small companies and it is amazing that any new companies survive in this environment. Let's look at a few of the "crossing the chasm" strategies that have been effective in swaying legacy buyers decision making in favor of the smaller provider with superior technology.

A. A well-known executive from an established healthcare company is put at the helm of the new company. The thinking from the buyer is that if he did it once, he can do it again.

B. Get an industry-recognized authority to endorse your solution or, better yet, have them join your board or advisory council.

C. Close a deal with a conservative, well respected customer and make them your marquee account with all the trimmings - i.e. a contract with a favored nations clause, the technology or computer code held in escrow with specific instructions if you go out of business, case studies and Public Relations glorifying the progressive decision maker, and providing an equity stake in your company are some examples.

D. Forging a strategic alliance, joint marketing agreement or resellers agreement with an industry giant. All of a sudden your small company risk factors have been eliminated and it has only cost you 30%-50% of revenue on each sale they make.

E. Sell your company to the best strategic buyer. Sometimes the best solution is to sell your company to the best strategic buyer for your greatest economic value. This is the most difficult decision for an entrepreneur to make. Below are some of the market dynamics that would point to that decision. Note: several of these factors influenced our entrepreneurial clients to ultimately sell their business to an industry giant.

You see your window of opportunity closing rapidly. You may have great technology and the market is starting to recognize the value of the solution. However, you have a small competitor that was just acquired by a big industry player. The bad news is you probably have to sell to remain competitive. The good news is that the market will likely bid up the value of your company to offset the competitive move of the big buyer.

The strategic alliance is with the right company, but the sales force has no sense of urgency or no focus on selling your product. The large company lacks the commitment to drive your sales. An amazing thing happens with an acquisition. The CEO is out to prove that his decision was the right one. He will make his decision right. All of a sudden there is laser focus on integrating this new product and driving sales.

You have created a strategic alliance and poured your company's resources into educating, supporting, and evangelizing your product. Whoops, you have counted on this golden goose and it has not met your expectations. Also you have neglected your other business development and sales efforts while focusing on this partner.

Many large healthcare companies now employ a try it before you buy it approach to M&A. They find a good technology, formalize a strategic alliance, dangle the carrot of massive distribution and expect the small company to educate and integrate with his sales force. Often this relationship drains the financial performance of the smaller company. If you decide to sell at this point your value to another potential buyer has been diminished.

Do not despair. If you have demonstrated a cultural fit and have helped your products work in conjunction with the big company's product suite, you have largely eliminated post acquisition integration risk. This can often more than offset any short-term profit erosion you may have suffered.

It is not easy for the smaller healthcare company to reach critical mass in this very competitive and conservative environment. Working harder will not necessarily get you where you need to be. Step back and look at your environment through the eyes of your buyers. Implement some of these strategies to remove the risk barriers to doing business with your company. Now you have created an opportunity for your sales to match the elegance of your technology solution.

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