Simon Stone, an associate in the corporate team at Goodman Derrick LLP, the London law firm, advises on how to get your medtech business ready for investment or sale in 2022.
For many medtech business owners, 2022 will involve securing that first (or further) investment, or it could be the year that you pass your business on to the next pair of hands.
Working towards a successful investment or sale can be a stressful process, likely to put a strain on the business itself. Whether an external investment or sale is a priority or something you are mulling over, thorough early preparation is vital - it will undoubtedly alleviate some of the pressures later down the line.
First steps
It is crucial to put the right advisory team in place at the outset. Your solicitors and other professional advisors should have some sector familiarity, they should get to know the commercials and operation of your business and understand its short and longer-term goals.
Working with your accountants, financial planners and corporate finance advisors from an early stage is vital. Whether preparing for a sale or seeking an investment, valuing the business accurately means that you should neither be short-changed nor see the business left behind on the shelf. Due to the impact of the COVID-19 pandemic, be prepared for the inevitable questions from potential buyers or investors about business impact. Some business owners may prefer to wait until their business has ‘bounced back’ or returned to pre-pandemic growth but it may well be that you have enjoyed record demand, as has been the case for many medtech sector businesses.
If planning an exit, consider your personal tax situation (and what tax reliefs are available) in addition to working out when you can afford to leave the business in terms of achieving your personal finance goals and short-term cash flow.
Your employees are crucial to the success of your business and will be vital in securing an exit or investment - the buyer or investor will be banking on the continued performance of your staff. Consider whether you want to lock-in your key employees with financial incentives such as share options. Strategically, decide when you want to bring your senior employees into the circle. The timing of such disclosure is important; too early and this may cause unnecessary anxieties as the key terms of the transaction are not yet known, too late and you may undermine trust and confidence relationships with your management team.
Housekeeping
Prior to opening up your business to examination, as a priority, have your legal and financial advisers conduct a due diligence exercise on the business. Addressing any ‘red flags’ prior to a due diligence process has a number of key advantages, including:
- The number of issues to be discovered by the buyer or investor’s advisory team is likely to be greatly reduced, increasing the likelihood of preferable terms and price. Years of hard work in the business could be undone if significant issues are exposed, eroding the value in the business.
- Nobody wants to be forced onto the back foot during negotiations, wasting valuable time fixing issues that need not persist. Addressing red flags will alleviate some time pressure and will focus minds on getting the deal done.
- Fixing significant or even nagging issues will leave your business in better shape to thrive going forward even if the deal collapses (which can happen for any number of reasons). An added bonus is that any professional fees incurred may justifiably be charged to the business.
Common issues discovered in due diligence
We tend to see the same issues crop up in due diligence, issues which can often be easily resolved if discovered early. Here are five such issues:
- Gaps in document coverage. Do you have possession of key documentation and records? Ensure that documents are complete, signed and dated properly. If gaps emerge, for example an agreement that was never formalised, put the necessary documentation in place. Ensure that any regulatory licences are in place.
- Assess the ownership of any assets used in the business. Are the business’ assets in the company’s name? Identify the extent to which open-source software has been used in the business and consider the ownership of any developed software. As intellectual property is likely to be critical, check that any intellectual property created by employees or consultants is assigned to the company and that the ownership of any substantial intellectual property assets is not about to expire, for example, patents or domain names.
- Is your data protection compliance in order and up to date? You may have carried out an audit of your processes and contracts in 2017 or 2018 prior to the General Data Protection Regulation and Data Protection Act 2018 coming into force. Now is the time to repeat that audit to ensure that there are no data protection skeletons in the closet.
- Your employees are a key asset of your business; some may have never been issued with an employment contract, or such agreements may have been inadequately drafted. Do your employment contracts contain robust and enforceable restrictive covenants guarding against the risk of competition and ensuring non-solicitation of customers and staff? Are your employees on sensible notice periods and are intellectual property rights reserved to the company? Issue new terms if need be and if consultation is required, start that process early.
- Facility agreements, customer and supplier contracts and licences are valuable assets of the business and may be subject to ‘change of control’ clauses. Such provisions can cast doubt as to whether a contracting party might terminate its relationship with the business in the event of a sale/significant investment. Audit your key contracts to identify these clauses early and put in place a strategy for obtaining any necessary consents.
Key takeaways
If you are planning for an exit or investment in 2022, put your business on a solid foundation to achieve the best possible deal terms and price: put your legal and financial advisory team in place early, arrive at a sensible value for the business, plan for tax and act on the results of your housekeeping. Undertaking thorough preparation will be well rewarded.
