Mark Herbert, managing director at corporate finance firm Shawpoint and Michael Squirrell, corporate partner at law firm Shakespeare Martineau, explore the steps MedTech companies can take in advance of a sale or investment.
An ageing population and increasing public health expenditure makes the NHS an appealing market to overseas healthcare investors, with UK MedTech businesses being particularly attractive.
Mark Herbert says the public perception of the NHS is that its services are resourced internally, whereas in reality, a host of products and services are provided by external parties. Meanwhile, to overseas healthcare investors, the macro trends of the UK (an ageing population and increasing public health expenditure, for example) make it an appealing, but nominally daunting, market to enter due to public sector dominance.
An area where perception and reality collide is MedTech. In the wake of scrapping the UK’s National IT System project in 2011, there has been a general reluctance to sponsor large, headline-grabbing IT projects from within the NHS. Instead, there has been de facto ‘risk transfer’ to private sector suppliers who are paid based on their ability to deliver tangible outcomes.
UK MedTechs are particularly attractive to strategic (trade) and financial acquirers alike beyond the aforementioned macro trends due to excellent financial returns derived from long-term, predictable, B2B contract revenues (where the counter-party is effectively the UK government) and relatively light capital employed.
It is in this context that Shawpoint recently acted for the shareholders of Insignia Medical Systems Limited, the UK’s leading independent medical picture archiving and communications systems (PACS) provider, on their sale to Intelerad.
Insignia built its reputation versus much larger (typically OEM) suppliers through a culturally aligned approach to dealing with the NHS and being at the forefront of technology trends that have been turbocharged by Covid-19, such as home reporting, sharing, artificial intelligence and cloud-based infrastructure.
Insignia had been approached by potential acquirers and advisors before. Each time, Insignia was focused on building the business and uninterested in engaging. This changed, however, when they were approached by a prominent corporate finance house’s private equity (PE) arm and, although the terms offered were unattractive, it opened their mind to a subsequent, bilateral, trade approach.
So why did Insignia choose Shawpoint? Having got to know the principals beforehand was clearly key, but our approach is different too. Firstly, we believe value is driven by a comprehensive and competitive outreach programme and not a list of ‘the usual suspects’ in a given sector.
Secondly, as an SME-focused corporate finance firm, we have no blue-chip relationships to protect, no audit clients to favour or large institutions who are regular subscribers of equity or debt placements. Thirdly, our senior people do the heavy lifting and are front and centre on the assignment from start to finish.
The first question we always ask a potential client is: What do you want to achieve? A simple question, but one that is rarely considered in advance. Therefore most SMEs looking at a liquidity event either haven’t considered, or are not even aware, of the full range of options available to them.
In Insignia’s case, all the options were potentially on the table, a full trade sale; an alternative strategy that allowed the business to accelerate the growth available to it with the assistance of an external NED/mentor; or a PE investment to take some money off the table but still retaining a continuing involvement and participating in the growth potential upside.
The merits of each option are not best considered in the middle of a sales process where time for reflection is often in short supply. For these reasons, having an experienced corporate finance advisor like Shawpoint on hand can prove invaluable.
While the trade disposal option is relatively easy to understand, SME sellers typically have limited experience in the process and underestimate the demands on their time and the preparation required.
With regard to PE firms, their structures can appear exotic and overwhelming to an SME and need some time to digest. There is also a range of different PE approaches and finding a style that is compatible with a seller is essential – in Insignia’s case, Shawpoint curated a selection of PE houses (all MedTech specialists) with distinctly contrasting styles and strategic outlooks.
Exploring a range of options allowed Insignia’s shareholders to evaluate and decide the best approach for them and to develop a Plan B if their preferred outcome didn’t deliver the desired market outcomes.
A common refrain from potential sellers is “I want to restrict the number of parties we approach so news of the potential sale doesn’t get out”. This is a misplaced concern for a number of reasons:
- The best way to achieve value is through competition, which requires an extensive outreach programme. Investor outreach is typically undertaken under non-disclosure agreements to maintain confidentiality of information.
- Competition is not just a list of key players in a given sector. The reasons one business buys another are many and varied just within a given sector, but the interest in a particular business always develops beyond those anticipated, driving further competitive tension.
- Leaks about a sale can be disruptive, but this is essentially a communication problem. Should an employee or a customer leave as a result of becoming aware of a possible sale, then this is almost always due to a pre-existing issue in the relationship.
Size matters when it comes to valuation as £1m of EBITDA does not attract the same multiple as £5m of EBITDA and significant value can be added by being aware of value inflection points, whether they be financial, operational, product offering or customer footprints. Sometimes the best answer is not to sell a business but to take another year to pass a particular milestone.
In summary, many successful SMEs reach inflection points in their development through changes in size, life stage of the owners or market events. In order to secure the best value for a business owner, an intellectually curious and dynamic view on potential liquidity options with the assistance of a corporate finance professional needs to be explored long before the day arrives.
Michael Squirrell says once a preferred buyer or investor has been identified, it is imperative to instruct the right law firm to represent you, from heads of terms/letter of intent phase through to completion of the transaction.
With extensive experience in the healthcare sector, Shakespeare Martineau’s national team of experts support a number of health and social care providers, as well as medicine, medical device and digital health businesses. We have acted on an increasing number of MedTech sales and purchases in recent years, as interest in the market has grown significantly for the reasons set out by Mark above.
When it comes to the sale itself, there’s no way to sugar-coat it; a company sale process is a gruelling one, with an extraordinary amount of work involved from stakeholders. To add to the pressure, you’ll need to keep it confidential from your employees, suppliers and customers – other than a select group who need to be in the know – alongside doing your ‘day job’ of running the business.
Good advisors will take you through the process offering strategic advice, project management and support, but you may still need to take a crash course in corporate law, corporate finance and tax when it comes to the intricacies of the deal.
Because of these pressures, it is far preferable to get your proverbial ducks in a row prior to entering sales discussions to avoid time-consuming distractions when efforts need to be focussed on the transaction itself.
The owners of most SMEs will no doubt spend the majority of their time concentrating on driving sales and growth, rather than on legal niceties. So there may well be areas of your business in relation to which a buyer will raise issues to be addressed, in order for the sale to get over the line. These areas include:
- Share history, statutory registers and Companies House records
- Supplier and customer contracts
- Intellectual property (IP)
Share history
When selling a company, the most fundamental assurance the buyer needs is that the selling shareholders own the shares. This might be patently obvious, but on almost every share sale, issues arise with demonstrating to the buyer that there are no questions or concerns over the ownership of the shares being sold. This is especially the case in companies that have been established for a number of years.
Common areas needing to be addressed include: (1) stock transfer forms not being stamped, creating potentially invalid historic share transfers; (2) procedural errors made with historic share buybacks (meaning that shares purportedly bought back and cancelled years ago could still exist); and (3) failures by directors to obtain appropriate consent to the issue of shares.
While most issues can be remedied, it is far better to do so far in advance of any sale, rather than while entrenched in sale negotiations. If, for example, a court application is required to remedy a defective share buyback, this can hold up matters and such delays could put off a buyer from completing a purchase.
Contracts
Customer contracts may be the most valuable asset of a company; buyer’s valuations are frequently based on current and anticipated revenue. Many contracts can be terminated (a) as a result of a ‘change of control’ of a party, and/or (b) by one or both parties on giving notice, even without any fault.
If you are planning to sell your company, then it is worth taking particular care when key contracts are up for renewal, or when entering into new contracts. View the contract through the lens of a future buyer: Is the contract as watertight as it could be? Does it favour the other party?
You will no doubt have strong relationships with key customers and suppliers so as a consequence, perhaps neither party pays excessive attention to written contracts, relying instead on mutual trust. However, the buyer won’t have that comfort and so will need assurances that the other party isn’t going to exercise a right to terminate as a result of, or soon after, completion of the sale.
Intellectual property (IP)
A company’s key assets might also comprise IP (including trade marks, patents, design rights or proprietary software). To the extent that such IP can be protected by registration, check whether it has been. Where third party developers/designers have been engaged, has the IP been properly assigned to your company?
In the absence of agreement to the contrary, IP will usually be owned by the third party creator, even if commissioned by you. Carrying out an IP audit to identify any areas that could be better protected will make the sale process much smoother and reassure the buyer it will be acquiring your business’ valuable IP.
There are a multitude of other areas (leasehold/freehold property, employment, for example) that also bear close attention.
To summarise, we’re not here to put you off selling, but to flag that steps can be taken in advance of a sale to help that process run smoothly. Many businesses are built with an exit in mind, or they reach the stage where third party investment or expertise is required to take a business to the ‘next level’ and so there are very good reasons to facilitate a sale.
Just be aware that a sale process can be demanding, even if ultimately rewarding in realising years – or sometimes a lifetime – of work. A smoother process means less pressure for the shareholders and management and can even mean a higher sale price; the purchaser won’t have reasons to chip away at your valuation by identifying issues to be addressed prior to or after the completion of the sale.
