The Secrets of Medtech Enterprise Valuation for Sellers

Middle market business owners in the medtech and life sciences industries are constantly striving to understand the value of their enterprise. Whether a sale is forthcoming or far down the road, it is crucial for business owners to understand the intrinsic value of their companies and the “multiple math” used to negotiate a valuation during a sale.

Regardless of a sale’s timing (tomorrow or 20 years from now), it is fundamental to an organization’s overall health for its owner(s) to understand its fundamental value and to take steps to ensure they are maximizing its core value on a daily basis.

Such value maximization is important, even for companies that are not up for purchase. Why? For starters, consider the common commercial interactions involving key stakeholders, including employees, investors, lenders, vendors, and customers.

Employees care about the strength of the company for which they work because it directly impacts their job security, career progression, and work atmosphere. A financially stable and growing enterprise may offer competitive compensation as well as possibilities for advancement. Strong companies tend to invest in staff development and are less likely to have layoffs—a combination that usually produces a positive workplace culture and a stable environment.

Investors focus on profits and sustained growth. They usually will remain loyal to a company for as long as their confidence lasts in the enterprise’s ability to generate profits and growth. Companies posting strong fiscal performances will more easily attract new investment for expansion, as financial stability can help businesses entice potential backers and create better (i.e., more lucrative) investment terms.

Lenders (banks) monitor companies’ fiscal health and cash flow. They continuously assess an organization’s ability to generate sufficient income to cover debt and other ongoing obligations. A bank’s relationship with a company is similar to that of investors: Financially strong enterprises can drive more favorable terms while also ensuring the necessary access to capital for maintaining operations and growth.

Vendors exist to conduct business. As such, they are mainly concerned with their partners’ dependability and overall stability. Vendors must be comfortable that a company can meet its present and future payment obligations. They’ll prioritize a business relationship if they understand its growth possibilities. Companies that can demonstrate both security and growth can often get the best financial terms, collaboration on innovation, and production flexibility from their suppliers. Sometimes this factor alone can be a competitive advantage with customers.

Customers are concerned with a business’ viability because it can directly impact both their experience and satisfaction. Strong companies not only deliver timely supplies, they also innovate to improve their overall product portfolio value. Financially sound businesses are better able than their struggling counterparts to develop trusting, long-lasting customer relationships. Trust is a key factor in customer retention and a competitive differentiator.

Equally as important as a company’s daily fiscal health maintenance is its “intrinsic” value, which is critical at the time of sale. Regardless of a transaction’s timing (now or well into the future), business owners will benefit from understanding their company’s valuation, including the “multiple math” involved.

Enterprise valuation is determined by assessing a company’s “intrinsic value” against current market conditions. Put simply, it’s the combination of what business owners can control (intrinsic value), what they cannot control (market conditions), and what is negotiable (multiple math).

The key factors influencing “multiple math” negotiations during enterprise valuation assessments include financial performance, market conditions, business operations, and perceived IP (intellectual property) and brand value.

Financial performance entails revenue, growth, profitability, and cash flow, though the latter is often overlooked. The ability to generate cash is the ultimate measurement of a return on investment. Therefore, it’s important to not underestimate this key metric.

Market conditions include such key factors as industry trends and the macro economic environment. Our May column discussed the importance of staying “on trend” in the medtech industry. Buyers usually will place more value in a company whose products reflect a budding market opportunity than an organization that is clearly riding the tail end of an ongoing trend. The greater economic environment simply cannot be controlled but business owners nevertheless must heed its signals because the overall investor mood created by macro economic conditions might impact a buyer’s perceived valuations. The good news is that medtech and life sciences companies are highly coveted investments, even during economic slumps due to the markets’ overall macro demographic factors.

Business operations is kind of self-explanatory—it includes a company’s overall operational efficiency and its management team. Investors recognize that one of the key ingredients of buyer confidence is the corporate management team. And an organization’s overall operational efficiency is a key metric of its management team’s efficacy.

Last but certainly not least, IP and brand value are important enterprise valuation contributors, as a buyer’s perceived confidence in these items will only help the “multiple math” used to determine a company’s ultimate valuation. It’s important for business owners to understand, however, that IP includes more than just patents. While patents are indeed an asset, FTO (freedom-to-operate) is significantly more crucial to a valuation. Of course, it is entirely possible to have an issued patent and not FTO, but that issue is best suited for a separate column. Also, proprietary processes/trade secrets can be as valuable or more valuable than patents (just ask the Coca-Cola Company). When assessing brand value, remember that “beauty is in the eye of the beholder” for smaller to medium size companies, so it’s all negotiable.

While there are many factors to consider when determining enterprise value, the truth is that it simply is a matter of “multiple math and negotiations.” Nothing more, nothing less. Most large accounting firms and consulting companies would argue otherwise, as they favor fancy calculations like CCA (comparable company analysis), DCF (discounted cash flow), precedent transactions, and asset-based valuation to devise a “directionally correct” payment figure.

These accounting and consulting firms are not wrong in their methods, but the “multiple math” involved in business sales tend to be affected more by strategic fit and timing than CCAs or discounted cash flows (regardless of whether it’s a financial buyer or a strategic one). If a company is a great fit for a buyer’s future goals, then the “multiples” will be exciting and interesting for the seller.

And keep in mind the “multiple math” is based on various negotiable factors—EBITDA, revenues, cash flow, your proforma, etc. It is important for sellers to create the appropriate value proposition for their business that helps the buyer understand how the purchasable company can meet the interested party’s strategic fit. If the timing is right, then the “multiple math” negotiations will be in the seller’s favor. Here’s hoping the strategic fit and timing is always on the right side, for both the buyer’s and seller’s sake. 

Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at [email protected].

Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at [email protected].