Preparing for your next Life Sciences transaction
Even though the world has been challenged by the current COVID-19 pandemic, the life sciences marked is booming and investors are continuously looking for exciting targets. Whether you have a transaction heading towards you or this is somewhat longer down the road, our life sciences practice group has prepared a short list of buckets to tick off when preparing your company for the next transaction.
What kind of transactions may you need to prepare for?
The ideal preparation steps for a transaction will naturally vary with the kind of transaction you are preparing for. When talking about "transaction" within the life sciences sector it usually means (i) funding transactions, (ii) collaborations, or (iii) exit transactions.
Funding transaction usually occur when the founders' savings are spent and resources from friends and family are exhausted. Possibly the company has been granted public grants (soft money), but is now at a stage where it needs to attract bigger funding, which it may do so in the capital marked from different types of investors: passive investors, which will not be actively engaged in the management of your company, or special investment funds or strategic investors, which will usually engage more actively in your company. Passive investors let you keep control of the company and the process will often be less document heavy (e.g. issuance of new shares, which investors subscribe for in the minutes of the shareholder meeting), while a specialist fund or strategic investor on the other hand usually has a desire to actively engage in the company, which may provide you with valuable management skills, advisors or other types of strategic resources that enable you to succeed with bringing the company further in its development. However, strategic investors or specialist funds often ask for certain rights that give them the opportunity to influence the company decisions and sometimes also preference rights to the company share capital.
Collaboration transactions cover i.a. product development and marketing collaborations where you team up with another company to bring your product to the market. This category includes everything from the smallest type of collaborations, e.g. with a research institution for some product development for a limited period of time, to the big collaborations, e.g. with large international pharmaceutical companies.
The third type of transaction is what we typically call merger and acquisitions (M&A), meaning situations where you either sell all or a controlling part of the shares of the company (exit). Sometimes this is a planned event, e.g. certain investors invest on the clear assumption that there will be an exit, but other times the exit event could be more unplanned, e.g. your company receives a takeover bid and you have to decide quickly.
What may give you a transaction on favorable terms?
Again, this will vary depending on the type of transactions and of course the type of your company. However, there are three basic key takeaways which we deem applicable for all kind of transactions:
- The quality, value and potential of your company's products or services. When assessing your own company, both you and investors will (or should) decompound this into three basic questions:
- Taking into account the marked for the company's product/service and the competitive landscape, what is the value potential of the company?
- What kind of milestones need to be put in place to unlock this value potential?
- How likely is it that these milestones will be met?
- The Quality of your team. Having a great team obviously should not be for the sole purpose of attracting equity into your company, but there is no doubt that there are investors out there who are more concerned about the team than the actual product, believing that investing in the right people will eventually make a successful product.
- Be prepared for it. When looking back at a transaction and identifying the situation(s) where the seller(s) or the company left money on the table, those can often be blamed to not being well enough prepared. Lack of preparation may not only make you lose out of opportunities, but you may also lose value in a deal if you are not well enough prepared as a seller.
How may you prepare for the next transaction?
Having the above in mind, these are the six boxes you should be able to tick off in order to successfully prepare for the next transaction:
- Follow your plan. Make sure that you develop your business according to your plan. This will be the best proof once the questions comes up what the likelihood is that the company will succeed in unlocking its value potential. Not being able to meet your own business plan may increase not only the actual risk, but also the impression that the company will neither meet its business plan in the future. Thus, continuing development according to plan and meeting set milestones will be valid selling points for investors.
- Team improvement. Consider the need of improving your team, not only because it might trigger bigger investment appetite, but also because it is always good to have an extra look at your team to see if there is a need to change board members or get more expertise, e.g. in financial functions.
- Your equity story. Consider the need of improving your ability to articulate you equity story. An investor will consider three things about your company: (i) what is the value potential, (ii) what is required to unlock the value potential, and (iii) what is the likelihood to succeed. You may have a great business, but not being able to articulate your equity story may make you miss out on opportunities. Sometimes you just get one chance with an investor, thus you should be well prepared to make your equity story as clear and attractive as possible.
- Prepare for DD process. Seek to avoid material due diligence findings. If material findings are discovered in the middle of a process and the seller or the company is not prepared, this will often create less favorable terms in the transaction. By preparing you may identify issues that are adverse, meaning you cannot do anything to fix them, but you can still take them into account when presenting your equity story by accounting for the risk or the adverse event. Other times you can actually fix the issue, but it is still hard to fix an issue in the middle of the transaction negotiations, that will more often lead to less favorable terms for you as the seller.
- Select the right advisors and partners. Pick your transaction team based on the transaction, your company and the investor. You may need an investment bank, financial advisors, and sometimes special advisors and in any case lawyers. Sometimes using a more general counsel is fine because there are no special features in the deal. However, often in the life sciences sector or in transactions in general appointing specialist lawyer(s) from the beginning will increase the potential of getting the deal through and securing favorable terms.
- Align with key stakeholders. Make sure that you are aligned with your key stakeholders. Having a large shareholder base, obtaining a clear mandate from the board or the CEO is important as it is often complicated to go back and anchor certain positions in a transactions process. Also, if you have strong active shareholders, even though they are not controlling owners, generally it makes sense to involve them and keep the process anchored with that type of investors.