Maximizing value: A roadmap in preparing life sciences ventures for acquisition success

Even in the early stages of building a life sciences company, CEOs need to envision their company’s future growth. We aren’t suggesting that you should be planning an exit before your company is even off the ground, but you can (and should) implement value-added structures now to make scaling and exiting even more attainable when you’re ready. 

To better understand what early-stage CEOs can do to make their companies more valuable to buyers, One TEAM’s Marketing Lead Melissa Fackler sat down (virtually) with an M&A expert for some powerful insights. 

Joe Farach has over 35 years leading businesses and helping companies formulate strategies, develop business, expand markets, improve operations, develop leaders, and carry out mergers and acquisitions.  He believes CEOs should plan to “grow [their] company faster, better and become more attractive to potential buyers” from the beginning. 

Joe, what do you currently see happening in the lower mid-market M&A world?

Amidst the pandemic, both private equity entities and strategic buyers found themselves holding substantial reserves of capital,(often referred to as ‘dry powder’) and paying notably higher multiples for acquisitions compared to traditional norms. This presented two significant realizations: 

  1. Heightened prices made it increasingly challenging for companies to meet the anticipated returns of investors 
  2. The concurrent surge in interest rates further expanded the gap

In today’s landscape, private equity firms and strategic buyers have adopted a more discerning approach to their investment strategies. They exercise heightened scrutiny when considering acquisitions, meticulously evaluating companies, and assessing their intrinsic value and potential fit within their portfolios.

Sellers too are exhibiting a cautious stance, anticipating potential upticks in valuations once interest rates decline. I’d argue that the market dynamics might not align with this expectation. As the impending wave of baby boomer-led business exits looms closer, a surge in available companies for sale is anticipated. This influx of options for potential buyers is expected to maintain a balanced realism in valuations, curbing excessive inflationary pressures.

How can a company increase its business value?

Boosting business value is a multi-faceted approach. 

  • Run a thorough valuation to allow comprehension of where your business value ranks
  • Become educated on  the factors that determine business value – market positioning, growth prospects, operational efficiency, and competitive advantages to name a few,
    • Note: while a business might generate substantial cash flow, this alone does not guarantee high value. 
  • Create strategic initiatives aimed at optimizing value by enhancing operation efficiency, strengthening market presence, and fortifying customer relationships. 

So there are many ways a company can build value – can you further explain these factors you mentioned being educated on?

 Sure – let’s discuss eight that are great starting points, knowing the list can be much longer. The important reminder is that early-stage companies can focus on implementing these upon conception to set themselves up for an M&A when ready, there is no need to wait to prep for exit.

1. Owner dependency and next-level management

In mergers or acquisitions, the departure of the CEO/owner underscores the necessity for independence from individual leadership. Overreliance on them for day-to-day operations can weaken or hinder the development of the management team, limiting their autonomy and decision-making abilities.

The critical focus lies in the subsequent tier of management – their competence and readiness for scaling the business. Potential buyers seek a capable, proactive team capable of driving value independently, without constant direction from the former owner/CEO.

It is imperative to cultivate a team with the right skill sets and foster ongoing development in business acumen, leadership, and operational proficiency, as the strength of the management team directly correlates with the attractiveness and value of the company. A team that can steer the ship without overreliance on previous leadership significantly elevates the company’s appeal to potential buyers.

2. Operating systems

Companies that have systems, processes, and procedures already in place are both more attractive and valuable to potential buyers because they can predict performance from day one and significantly scale.

These systems also help the current owner grow the business and generate higher profit margins.  It is a no-brainer that CEOs/owners should implement operating systems early on.

3. Diverse customer base

Relying heavily on a narrow client pool not only diminishes the company’s overall value but also acts as a deterrent for prospective buyers. 

Dependency on the sustained performance of specific clients – especially if the CEO/owner plays a pivotal role in maintaining the relationship – further intensifies the risk. 

Find ways to diversify your customer base and expand a larger audience creatively.

4. Strategic growth plan

A well-crafted strategic plan should serve as a roadmap, steering a company toward its long-term goals and significantly impacting its overall value by aligning every facet of the business to a unified vision. 

It provides a framework for informed decision-making by:

  • Delineating clear objectives 
  • Outlining actionable steps 
  • Defining measurable milestones 

This clarity both enhances operational efficiency and fortifies the company’s resilience in the face of challenges.  A strategic plan showcases the company’s foresight, vision, and adaptability to stakeholders, instilling confidence in investors and potential buyers about its capacity to deliver sustained growth and returns. This stability and growth potential contribute significantly to elevating the company’s overall value in the market.

5. Recurring revenues

Recurring revenues provide a consistent and predictable income stream – again increasing company value. Unlike sporadic or one-time transactions, recurring revenues create a stable foundation, offering financial security and reliability, and demonstrating the loyalty of a customer base. 

From an investor’s perspective, a higher proportion of recurring revenues signifies reduced risk and increased predictability in future cash flows, thereby enhancing the company’s valuation. This consistent income stream not only fuels ongoing operations but also enables strategic planning, innovation, and long-term growth, amplifying the overall appeal and market resilience of the business.

6. Profitability

Profitability stands as a cornerstone in determining a company’s valuation, wielding significant influence on its perceived worth in the market. A profitable enterprise not only demonstrates its ability to generate earnings but also showcases operational efficiency, prudent management, and sustainable growth potential

Investors and stakeholders keenly evaluate profitability metrics as a key indicator of financial health and prospects. A consistent track record of robust profits not only bolsters a company’s resilience during economic fluctuations but also enhances its attractiveness to potential buyers or investors. 

7. Business growth

The growth rate of a company stands as a pivotal factor shaping its valuation, often serving as a key determinant of future potential and market attractiveness. A robust growth trajectory signifies not just past success but a promising outlook for expansion, increased market share, and amplified profitability

Investors and analysts closely scrutinize growth rates, as they offer insights into a company’s ability to innovate, capture new markets, and sustain competitive advantages. 

A high growth rate provides confidence for increased revenues, enhanced brand value, and shareholder returns, thereby amplifying a company’s appeal to investors seeking opportunities for substantial returns on their investment.

8. Understand and review financials

Understanding and routinely reviewing a company’s financials not only fosters operational insights but also significantly impacts its valuation. A deep comprehension of financial statements allows business owners to identify key value drivers within their operations. By assessing revenue streams, cost structures, and profit margins, owners can strategically enhance the company’s financial performance, thereby bolstering its attractiveness to potential investors or buyers. 

A meticulous review of financials aids in:

  • Pinpointing areas for optimization
  • Showcasing prudent financial management 
  • Illustrating a track record of profitability and growth potential 

This contributes to a stronger valuation proposition, instilling confidence in stakeholders about the company’s stability, growth trajectory, and its ability to generate returns, thereby elevating its market value.

Learning from experts in their field is something we never tire of at One TEAM. We thank Joe for his time and willingness to share unique insights. Find Joe on LinkedIn here.

Set yourself up for success 

We can help you successfully build strategies that incorporate the above exit criteria so that when the time comes you are prepared. Schedule an ‘Innovation Unleashed’ call with us or shoot Carlo a DM on LinkedIn to chat through some ways we can get involved with your company.


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