How Much is My Company Worth? The Value Strategy Behind MedTech Acquisitions

MedTech companies and startups that have a strategic plan related to a future exit will be primed not only for an eventual acquisition, but will lay the framework for a successful, in-demand product.

Bringing a medical device to market is a massive undertaking. Beyond product development, demonstrating efficacy, and navigating clinical trials, MedTech executives are fundraising, managing budgets, and building a world-class team. They are focusing on market validation, ensuring not only that there is demand for their product, but that its value proposition is strategically designed to meet the market need. They are developing sales and marketing strategies and road-mapping growth, all while trying to provide robust leadership to the members of their team.

In short, medical device executives are hustling – working hard to bring their product and brand to life. Yet, for many entrepreneurs in the MedTech field, a flourishing business is not the final destination.

The reality is that the majority of successful MedTech companies will be acquired by a purchaser. Sector-commanders like Medtronic, Boston Scientific, and others are eager to add thriving products to their portfolios, which puts viable start-ups in a great position.

And MedTech acquisitions have continued to grow, even as other industries falter beneath the challenges of COVID. According to global professional services firm EY, MedTech valuations in August 2020 were up 50% compared to January 2019. The same study found that MedTech financing levels have doubled from July 2019 to June 2020.

But one of the questions that entrepreneurs have when it comes time to sell is simple: how much is my company worth? Here we will delve into what evaluators consider when buying an entity and how to evaluate your company’s value to help you understand what your business is worth.

What Are Larger MedTech Companies Seeking to Acquire?

To understand how valuable your company is, it’s important to understand what companies want to acquire and how it affects your value.

There are critical metrics, depending on your product or service, that evaluators will consider, such as:

• Inventory turnover
• Operating margin
• Days of inventory that are on hand
• The costs of goods sold as a percentage of sales

However, valuation and whether a buyer is interested goes beyond your physical stock or potential value of goods. Some things the evaluators look at include:

• What space your product is filling?
• What is the strategic fit for the purchaser?
• Is your IP in order?
• Have you mapped a clear regulatory path?
• What is the growth potential?

Take, for example, Amazon’s recent acquisition of the online pharmacy PillPack for $753 million. Even though Amazon was not currently in the pharmacy or MedTech space, they saw the strategic advantage of owning a company that could take on other pharmacy middlemen. Because of how well PillPack fit for Amazon, it was worth a significant amount despite slow growth in their first years.

Likewise, Best Buy acquired remote senior monitoring service, Critical Signal Technology, for $125 million in 2019. While the two companies may not seem to have much in common on the surface, it is part of Best Buy’s strategic moves to serve senior citizens at home with another in-home monitoring tool they acquired the year before.

How well your company can fit into a buyer’s overall product need and strategy will affect whether they decide to proceed and how much they will offer.

How to Evaluate How Much Your Company is Worth

Three valuation models are most commonly used when assessing the value of a MedTech company:

• Extrinsic Valuation. This method entails looking at companies similar to yours when evaluating your company’s worth and seeing where they are trading. For example, if you are in telehealth, consider how companies like Teladoc are valued. Also, extrinsic valuation looks at recent deals in your space. Be as specific as possible to find a comparable acquisition.
• Intrinsic Valuation. This valuation model takes into account assumptions related to your specific business. Intrinsic considers factors such as your five-year projections and revenue growth to create a valuation exclusive to your company. However, you must build a sensitivity table to your forecasts and models. Getting a to a specific point is not going to happen, but it is ideal to get as tight of a range as possible, such as if revenue drops or margins increase. You can then take on best-case and worst-case scenarios.
• The Leveraged Buyout Model. This model, also called LBO, is a great way to consider what investors think about your company and how a private equity firm would value you. The LBO looks at the projections leadership has give to them and determines the most amount of money a firm can invest and still earn a 17% internal return rate. This model is typically used for larger mergers, but it gives critical insights into how you look to potential buyers.

While they are all separate models, there is no need to pick just one to determine your company’s value. Each method requires both research and common sense. Look at similar publicly traded companies, any recent deals, and discounted cash flow analysis to get a stronger sense of your company’s worth to potential buyers.

Determining Your Company’s Value

In the early stages of launching a company, many entrepreneurs forget to keep the end in mind if they plan to eventually sell their business. However, strategic exit planning should start at the beginning. Take time to consider your company’s value and how you fit into the market to develop a plan and resolve marketplace problems or unmet demand.

No matter what stage the company is in, Jaunt helps MedTech executives and entrepreneurs succeed in market validation, fundraising, and strategically planning for successful exits and acquisitions. Contact us for a consultation.