Looking to Sell Your Life Science or Biotech Business? Make Sure Your Company is Camera-Ready
By Jeffrey Solomon, New England Life Science & Biotech Industry Leader
Exit strategies come in all shapes and sizes. It is important to understand that all transactions are unique and gauge the outcomes desired by all parties involved. In preparing for the due diligence process, it is a healthy exercise to try to put yourself into the shoes of the potential acquirer and ask yourself what information you would want from their perspective. Doing so may enlighten you as to your own company’s strengths and weaknesses.
This is particularly true in transactions in the life science and biotech industry. The sector is one in which partnership, merger, and exit opportunities abound throughout a company’s lifecycle, from idea conception through revenue generating transactions. Whether you are looking for investors to support research and development activities, partners to lead your company’s manufacturing, marketing, information technology efforts, or buyers to ultimately acquire your business, it is essential to have your company prepared operationally and financially to illustrate your strengths and be aware of your potential risks and shortcomings.
Mature Companies with Revenue Producing Activities
If your company is a revenue generating entity with a medical device or pharmaceutical actively selling in the marketplace, potential investors and buyers will no doubt focus on your company’s financial statements and detailed forecasts. At minimum, you will need to produce accurate rolling twelve-month profit and loss statements and monthly balance sheets from which the investors and buyers will want to understand the company’s working capital calculations, and determine if the sales cycle has any peaks and valleys to it. Potential buyers will further delve into your company’s gross margin analysis and begin to think of where synergies could lead to operational efficiencies. Buyers and partners will want to understand the key drivers behind your company’s sales streams – customer concentrations, price determination, and average sales by month by customer and product lines. On the balance sheet side, buyers and partners will need to determine the plausible relationships between balance sheet accounts, such as cash, receivables, and inventory, and income statement accounts.
Each of these documents produce historical data. Since what the buyer is seeking to buy is your future cash flows, a well-thought out, detailed, forecast becomes especially valuable. The forecast is a tool for the potential buyer to assess the inherent risks within your company’s pre-merger/sale structure. While openly providing that information may appear to be a risky proposition, it may not actually be as problematic to the potential buyer.
One of the more valuable financial metrics identified in the industry is EBITDA, or Earnings before Interest, Taxes, Depreciation and Amortization. If you are positioning your company for sale, you had better get familiar with the term and its relevance. EBITDA provides an accounting measure for how much profit a company makes with its present assets and its operations on the products it produces and sells or services it provides, as well as providing a representation for cash flow. The aforementioned forecast should clearly calculate the prospective EBITDA – perhaps with some sensitivity analysis as to what the range of EBITDA may be, based on performance-based objectives. The calculation of EBITDA allows for a comparison of profitability between different companies. Further, EBITDA is a financial measurement of cash flow from operations that is widely used in mergers and acquisitions.
Adjustments to EBITDA such as salaries to owners and related parties, rents that may no longer be needed if the buyer acquires the business, and one-time expenditures are commonly made to normalize the measurement. The ultimate purchase price in a business acquisition very often boils down to a multiple of normalized historical or prospective EBITDA.
It is also very common in the life science industry for biotechnology companies to attract potential buyers when they are anywhere from the concept stage to late-stage clinical trials. In these instances, prospective investors will analyze a different set of financial and operational measurements and targets.
For the vast majority of startups in the life sciences space, the focus when positioning your company to take on a buyer or investor will be strategic value (versus financial value for mature companies). Strategic value represents the degree to which a particular action or planned action is important or useful in relation to something that it wants to achieve. In these circumstances, the investor or acquirer will likely focus on the market data, such as the number of people impacted by your company’s product or service and competition, market and technology risks, and synergies with its existing portfolio (e.g. clinical trial capabilities, manufacturing capacity, suppliers, and sales/marketing function). Accordingly, documentation around your company’s clinical trials and financial data integral to revenue projections must be in good order and readily available. While there may not be historical EBITDA to flaunt, a well-planned forecast of EBITDA will be eminently more valuable to the potential buyer that can incorporate the synergies that they may be capable of bringing to the table.
While there are numerous factors that need to be considered from an income tax planning perspective, be aware that the potential buyer will be interested in tax planning consequences. You will want to consult with your accountants and attorneys early in the process to ensure tax minimization strategies are considered and that contracts, such as partnership agreements and buy/sell agreements, are written so that tax advantageous strategies can be implemented. Your company should evaluate the contemplated acquisition to identify any potential unintended consequences, such as loss of NOL’s (net operating loss carryovers) or credits, and the potential cash flow impact to the company’s owners. An awareness of these potential issues early on in the process could serve to prevent delays at more intense stages of the process.
Overall, exit strategies often present an exciting time for business owners and can result in substantial financial consideration. However, before putting your company on the market consider both the financial information that will be most important to a potential buyer and the desired financial outcomes of your company’s owners. To do so fully means consulting with your professional services teams, making sure the i’s are dotted and the t’s are crossed when it comes to your financial statements and tax returns, and properly planning for what the after tax cash flow will be to the sellers upon successful execution of a purchase agreement.