New Engagement HealthCare Technology Company

 We just engaged with the company below to locate buyers/investors for their healthcare technology company.

Smart Pharma Reminder and Monitoring System to improve Medication Adherence

·        4 Billion prescriptions filled annually in the US - non-adherence results in $300 Billion Cost to healthcare system

·        Catalyst for outcome-based healthcare delivery

·        Device protected by a granted US Patent + one pending

·        Inexpensive device ($3 per unit in volume cost) is programmed by the prescribing pharmacist

·        Device records patient use of medication for HIPPA compliant Web reporting allowing additional care giver interventions and sale of adherence data to insurers, Pharma companies

·        Recipients of 3 NIH SBIR Grants to prove the technology & study the impact on patient adherence

·        Competitive solutions are expensive and complex - requiring set up by the patient or care giver

According to published research, only about 50% of prescribed medication is taken as scheduled.  This issue leads to problems with patient health outcomes, and it adds almost $300B to the annual cost of healthcare when diseases aren’t controlled effectively and unnecessary complications lead to hospital and nursing home admissions. 

Company's solution to the problem of medication adherence is the @CAP which is unique from any product on the market because it is automatically programmed, wirelessly in the pharmacy as part of the regular work flow in filling a prescription.  Of course it provides the visual and audible reminders to help the patients remember to take their medication, but it doesn’t require any programming by the patient. Medicare part D’s Medication Therapy Management (MTM) program allows for the cost of this product to be covered at the pharmacy for patients that qualify. The @CAP is also priced to be disposable or reused. Additionally, @cap and related products record and report adherence in real time, giving interested parties patient-level data in real-world settings to understand drug usage, and treatment outcomes, and influence behavior change.

Company's product benefits the entire value chain in delivering an improvement in outcome-based healthcare.  The patient increases adherence thus reducing the likelihood of adverse conditions requiring additional medical care. Their care givers can utilize the system's information to provide additional interventions.  The pharmacies, pharmacy benefit managers and manufacturers all benefit from increased consumption/sales. The insurance companies benefit from increased adherence resulting in far fewer expensive medical issues, hospital admissions, emergency room visits and other treatments. Finally, fewer preventable medical procedures reduce the strain on the entire healthcare system.

Our Client has engaged MidMarket Capital to locate a Strategic Buyer that could capitalize on their industry leading solution, leverage their patents and intellectual property and scale into a very large and receptive market space.

We are exclusively representing this Company to your firm as part of an offering to a select group of qualified investors. MMC specializes in mergers, acquisitions, financing and divestitures of privately held middle market businesses. No reproduction, in whole or part of this Confidential Acquisition/Investment Profile may be made without prior written permission of MMC.
Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital

Sell Your Information Technology Company -Why Pay an Investment Banker?

Perhaps the most important transaction you will ever pursue is the sale of your business. Many owners of information technology companies attempt to do it themselves and often times these very capable business people approach the sale of their business with less formality than in the sale of a home. The purpose of this article is to answer the questions - Why would I use an investment banker and what am I getting for the fees I will pay?

More than any other type of business sale, the intellectual property based business is the most complex and difficult. The primary reason is that the seller is not interested in selling their company for a financial multiple like 5 X EBITDA. They almost always want that amount plus a premium for strategic value. Another very important factor is that most smaller information technology companies run their financials on a cash basis and the buyers usually employ the accrual method. The adjustments in transaction value that often occur during the due diligence process are often surprising and expensive. Below are several reasons why a seller of an IT business should seek a firm that specializes in this type of business sale.

1. Confidentiality. If an owner tries to sell his own business, that process alone reveals to the world that his business is for sale. Employees, customers, suppliers, and bankers all get nervous and competitors get predatory. The investment banker protects the identity of the company he represents for sale with a process designed to contact only owner approved buyers with a blind profile - a document describing the company without revealing its identity. In order for the buyer to gain access to any sensitive information he must sign a confidentiality agreement. That generally eliminates the tire kickers and deters behaviors detrimental to the seller’s business

2. Business Continuity. Selling a business is a full time job. The business owner is already performing multiple functions instrumental to the success of his business. By taking on the load of selling his business, many of those essential functions will get less attention, sometimes causing irreparable damage to the business. The owner must maintain focus on running his business at its full potential while it is being sold.

3. Time to Close. Since the investment banker's function is to sell the business, he has a much better chance of closing a transaction faster than the owner. The faster the sale, the lower the risk of business erosion, customer defection, employee problems and predatory competition.

4. Large Universe of Buyers. The investment banking firm that specializes in information technology and software companies already has a developed list of target companies with contact information for the individual that runs the merger and acquisition process. They recognize that information technology companies with the same SIC Code 5734-01 can be vastly different and need a further categorization like document management software, SaaS CRM Systems, or healthcare financial software.

5. Marketing. A merger and acquisition advisor can help present the business in its best light to maximize selling price. He understands how to recast financials to recognize the EBITDA potential post acquisition.  He understands the key value drivers for buyers and can position the selling company to enhance its strategic value in the eyes of the buyer.

6. Valuation Knowledge. The value of a business is far more difficult to ascertain than the value of a house. Every business is unique and has hundreds of variables that effect value. This is especially true with companies with a strong component of intellectual property. Investment Bankers have access to business transaction databases, but those should be used as guidelines or reference points. The best way for a business owner to truly feel comfortable that he got the best deal is to have several strategic industry buyers bidding for his business. An industry database may indicate the value of your business based on certain valuation multiples, but the market provides the real answer.

7. Balance of Experience. Most corporate buyers have acquired multiple businesses while sellers usually have only one sale. In one situation we represented a first-time seller being pursued by a buyer with 26 previous acquisitions. Buyers want the lowest price and the most favorable terms. The inexperienced seller will be negotiating in the dark. To every term and condition in the buyer’s favor the buyer will respond with, “that is standard practice” or “that is the market” or “this is how we did it in ten other deals.”  Our firm has saved our clients transaction value greater than our total fees during the due diligence and closing adjustments process.  By engaging an investment banker that specializes in information technology companies, the seller has an advocate with an experience base to help preserve the seller’s transaction value and deal structure.

8. Maximize the Value of Seller’s Outside Professionals. Experienced investment bankers can save the seller significantly on professional hourly fees by managing several important functions leading up to contract. His compensation is usually comprised of a reasonable monthly fee plus a success fee that is a percentage of the transaction value. The M&A advisor and seller negotiate with the buyer the business terms of the transaction (sale price, down payment, seller financing, etc.) prior to turning the purchase agreement over to outside counsel for legal review. In the absence of the investment banker, that sometimes-exhaustive negotiation process would default to the outside attorney. The economics of the deal are not your attorney's area of expertise and could result in significant hourly fees or even a breakdown of the transaction.

9. Maintain Buyer - Seller Relationship. The sale of a business is an emotional process and can become contentious. The investment banker acts as a buffer between the buyer and seller. This not only improves the likelihood of the transaction closing, but helps preserve a healthy buyer - seller relationship post closing. Often buyers want sellers to have a portion of their transaction value contingent on the successful performance of the company post closing. Buyer and seller need to be on the same team after closing.

Our experiences with information technology companies that engaged our firm as a result of an unsolicited offer from a buyer have been quite instructive. The eventual selling price averaged over 30% higher than the first offer. In no case was the business sold at the initial price.

The technology focused investment banker helps reduce the risk of business erosion with improved confidentiality while allowing the owner to focus on running the business. The advisor- led sale helps maximize sales proceeds by involving a large universe of qualified and targeted buyers in a competitive bidding process. Finally, the investment banker can improve the likelihood that the sale closes by buffering buyer - seller negotiations and by balancing the experience scales.

Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital

Taking Your Information Technology Company to the Next Level - It Could Be Time to Sell

Thinking of taking your information technology company to the next level with a major capital investment or hiring additional sales resources? These are decisions that can impact your company's future. It might be time to consider the alternative of selling your business.
We are often approached by information technology company owners at a crossroads of taking the company to the next level. The decision in most cases is whether they should bring on the one or two hot shot sales people or channel development people necessary to bring the company sales to a level that will allow the company to reach critical mass. For a smaller company with sales below $5 million this can be a critical decision.

For frame of reference, prior to embarking on my merger and acquisition advisor career, I spent my prior 20 years in various sales capacities in primarily information technology and computer industry related companies from bag carrying salesman to district, regional, to national sales manager and finally Chief Marketing Officer. So when I look at a company, it is from the sales and marketing perspective first and foremost. I am sure that if I had a public accounting background, I would look at my clients through those lenses.

So with that backdrop, let's look at what might be a typical situation. The company is doing $3.5 million in sales, has a good group of loyal customers, produces a nice income for its owner or owners, and has a lot more potential for sales growth in the opinion of the owner. Some light bulb has been lit that suggests that they need to step this up to the next level after relying on word of mouth and the passion and energy of the owner to get to this stage.

I have either spoken with more than 30, primarily information technology based companies over the years that have faced this exact situation and can count on one hand the ones that had a successful outcome. The natural inclination is to bite the bullet and bring on that expensive resource and hope your staff can keep up with the big influx of orders. The reality is that in most cases the execution was a very expensive failure. Below are several factors that you should consider when you are at this crossroads:

1.    The 80 20 rule of salesmen. You know this one. 80% of sales are produced by 20% of the salespeople. If you are only hiring one or two, the likelihood is that you will not get a top performer.

2.    The founder of the company is a technology guy and has no sales background, so the odds of him making the right hiring decision are greatly diminished. He will not understand how to properly set milestones, judge progress, evaluate performance objectively, or coach the new hire.

3.    To hire a good salesman that can handle a complex sale requires a base salary and a draw for at least 6 months that puts him in a better economic condition than he was in on his last job. So you are probably looking at $150,000 annual run rate for a decent candidate.

4.    If you have not had a formalized sales effort before, you are probably lacking the sales infrastructure that your new hire is used to. Proper contact management systems, customer and prospect databases, developed collateral materials and sales presentations, sales cycle timeframes and critical milestones and developed competition feature benefit matrixes will need to be developed.

5.    Current customers are most likely the early adapters, risk takers, pioneers, etc. and are not afraid of making the buying decision with a small more risky company. These early adaptors, however, are not viewed as good references for the more conservative majority that needs the security of a big company backing their product selection decision.

6.    Your new hire is most likely someone that came from a bigger company like IBM or Oracle and may be comfortable performing in an established sales department. It is the rare salesman that can transform from that environment to a new role of developing the sales infrastructure while trying to meet a sales quota.

7.    Throw on top of that the objection that he has never had to deal with before, the small company risk factor, and the odds of success diminish. When he was hired he assured you that he would bring his very productive address book and deliver all of these customers from his Blue Chip prior employer. He and you soon discover that he may not have been totally responsible for his sales success. Having IBM or Oracle on his business card may have been the predominant success factor.

8.    Finally, this transformation from a core group of early adapters to now selling to the conservative majority elongates the sales cycle by 25% to as much as twice his prior experience. If you don't fire him first, he will probably quit when his draw runs out.

With all this going against the business owner, most of them go ahead and make the hire and then I hear something like this, "Yes, we brought on a sales guy two years ago who said he had all the industry contacts and in nine months after he hadn't sold a thing and cost us a lot of money, we fired him. That really hurt the company and we have just now recovered. We won't do that again."

What are the alternatives? Certainly strategic alliances, channel partnerships, value added resellers are options, but again the success rate for these arrangements are suspect without the sales background in the executive suite. A lower risk approach is to outsource your VP of Sales or Chief Marketing Officer function. There are a number of highly experienced and talented free lancers that you can hire on a consulting basis that can help you establish a sales and marketing infrastructure and guide you through the staffing process. That may be the best way to go.

An option that one of our clients chose when faced with the eight points to consider from above was to sell his company. This is a very difficult decision for an entrepreneur who by nature is very optimistic about the future and feels like he can clear any hurdle. This client had no sales background but was a very smart subject matter expert with an outstanding background as a former consultant with a Big 5 accounting firm.

 He did not make the hiring mistake, but instead went the outsourcing of VP of Sales function as step 1. When their firm wanted to make the transition from the early adapters to the conservative majority, the sales cycle slowed to a crawl. Meanwhile their technology advantage was being eroded by a well funded venture backed competitor that had struck an alliance with a big vendor.

We were able to find him the right buyer.  His effective sales force has been increased from one (himself) to 27 reps. His install base has been increased from 14 to 800. Every one of the buyers current customers is a candidate for this product. The small company risk has been removed going from a little known start-up with $1 million in revenues to a well known industry player, publicly traded stock with a market cap of $2.5 billion.

A portion of his transaction value was based on post acquisition sales performance, and things worked out very well.

He avoided the big cash drain that a bad sales person hiring decision would have created and he sold his company before a competitor dominated the market and made his technology irrelevant and of minimal value.

My professional contacts sometimes tease me and suggest that I think every company should be sold. That may be a slight exaggeration, but in many instances, a company sale is the best route. When a business owner is faced with that crossroads decision of bringing on a significant sales resource that will be faced with a complex sale and the executive suite does not have the sales background, a company sale may be the best outcome.
Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital

Software Company Valuation - Theory Versus Market Reality

Business valuations of software companies use proven methodologies to arrive at an indication of value. If the technology is one in demand, however, the valuations provided by the markets can be off the charts. This article discusses how the pros value software companies and the limitations to their approach.
Software company owners looking to sell their companies are often inspired to start the process after reading about the latest high profile, stratospheric acquisition price paid by a large tech bell weather company. The transaction metrics, i.e. transaction value to sales or transaction value to EBIT sometimes defy all logic.

The new, would-be seller applies these metrics to his company's sales and EBIT and determines that IBM, Microsoft, Google, Oracle, Cisco, etc. should be ready to get into a bidding war over his $5 million in revenue, game changing, best in breed software company for a value of 8 X revenue.

Let's break down the methodology that professional business valuation firms use as their standard in arriving at a company's indicated value. Their approach calls for a triangulation of three valuation methodologies.

The first is a comparison to publicly traded companies in the same category. It is very interesting to look at the lists that the valuators come up with. Technically they are all software companies with SIC Code 5734-01, but they are as alike as apples, coconuts, watermelons, and blueberries. True, they are all fruit, but that is where the similarity ends.

Next, they take the valuation metrics of these publicly traded companies. The most commonly used are sales to enterprise value and EBIT to enterprise value. Next they come up with the median value (one half of the companies are above the value and one half are below). They then apply what I can best describe as an arbitrary discount factor to account for the value differential between public companies and small, closely held companies. They come up with their adjusted metrics then apply them to the target company and voila, you have one of the valuation legs completed.

The valuation analyst next applies the same approach to actual completed transactions. If the buyer was a public company then the metrics are publicly available. If the transaction is between two privately held companies, the metrics are only available on a voluntary basis. Maybe 10% of these participants release information about these transactions. These unreported deals are probably the best fit in terms of comparables.

In order to get a meaningful number of transactions, the analyst often is forced to use transactions from a 5-10 year period. Do you know how to say Tech Bubble/Tech Meltdown? Wow, this isn't sounding quite as scientific as I originally thought.

Wait, maybe we can add some needed precision with the third valuation technique, the discounted cash flow method. My Wharton Finance Professor would be so proud. First they calculate a risk adjusted discount rate. After three pages of explanation, they usually arrive at a discount rate of between 24-30%. They next project the after tax cash flow for the next five years and discount it to present value.

They then calculate the terminal value of the company (five years of year five cash flow discounted by the risk adjusted rate less the projected growth rate). They discount that number to present value and add that to the discounted cash flow to create the third leg of the valuation stool.

How many software companies are not projecting hockey stick growth during the valuation period in question? Not only are these projections very aggressive, but cash flow margins are projected to improve by a factor of three times during this same period.

Now our seller is armed and dangerous with his company's value. That becomes his minimal acceptable offer and it must all be in cash at closing. To use a Wall Street term - this company is priced for perfection. We often discover during a sell-side engagement that these projections are not just missed, but they are missed by a large margin. In spite of this, the seller's valuation expectations remain the same.

All is not lost, however. One of the unique aspects of selling a software company is that if the technology is fresh (think SaaS, Mobile Apps, Virtualization, Cloud Computing) financial multiples are often not the driving force in the buyer's valuation equation.

One thing that we have learned in the representation of software companies for sale is that the value is subject to broad interpretation by the market. We find that strategic buyers in this space are driven by such considerations as first mover advantage, time to market, development costs, customer acquisition costs, customer defections, and enhancing an existing product suite.

The better the target company addresses these issues, the greater the post acquisition value creation potential. If the right buyer is located and recognizes the seller's potential when integrated with the new owner's distribution channel and customer base, we may find an even bigger hockey stick then our very optimistic sellers. If two or three buyers recognize a similar dynamic, then the valuations can become very exciting.
Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To view our lists of buyers and sellers click to visit our Web Site MidMarket Capital