Planning the Sale of a Pharmaceutical Manufacturing Firm
Every successful M&A transaction begins with an exit strategy; what’s yours?
It seems like we are constantly being bombarded with outrageous headlines stating that American manufacturing is dead. While we do outsource some of our manufacturing to reduce costs, the fact is that we are still manufacturing billions of everyday items right here on America soil. Manufacturing casts a wide net over everything from car parts to makeup and within that mega-industry lies another massive sector that is thriving and growing everyday: pharmaceutical manufacturing. Pharmaceutical manufacturing in the U.S. accounts for a combined annual revenue of around $200 billion dollars and is expected to grow by 3% in 2017. Healthcare reform has led to millions of newly-insured Americans will contribute to growth in the next few years. In addition to that, our aging baby boomers are also expected to boost industry growth due to issues like heart disease and Alzheimer’s.
When we think of manufacturing, we often think of massive factories that pump out thousands of items per day but 94% of manufacturing businesses are considered small businesses. Companies like Pfizer and Bayer have a large market share, there are still thousands of smaller firms that are successful in this industry. If you own a pharmaceutical manufacturing firm and have been thinking about planning your exit, the timing could not be better. The economy is strong, your industry is expecting growth and depending on your financials, you might be in for a big payout if you were to list your business now. The first step to exploring exit options of getting a professional valuation to analyze the worth of your business and if that is enough to help sustain your future. While only a professional business broker can tell you the true value of your pharmaceutical manufacturing business, these numbers below are typically used during the valuation process.
- 75% of annual sales
- 5x SDE
- 4-5x EBIT, 6x EBITDA
Hopefully, these formulas will tell you a little about where your business is strong and where it may need some work. To learn more about building value within your pharmaceutical manufacturing and preparing it for sale, check out the tips below.
Ensuring that you have balanced client concentrations in the first step to preparing your business for sale. Unbalanced client concentrations happen when any one client accounts for more than 30% of your sales. This creates risk in the eyes of a buyer because that customer could potentially take away the business under new ownership and threaten the success of the business. Your industry offers a wide range of potential clients including chain and independent pharmacies, grocery stores, medical providers, and mail-order pharmaceutical businesses. If you see that you are primarily catering to a certain type of client, try going after someone in a different realm. While client concentrations take time to fix, they are fixable and preventable. Taking the time to work on this issue 1-2 years prior to when you want to sell will ensure you get a higher price for your business and that buyers don’t view your business as high-risk. To learn more about identifying, resolving and preventing high customer concentrations, check out our guide on preventing this potential deal killer.
It’s difficult for a business to stay competitive without a structured marketing plan. For the pharmaceutical industry, there are infinite ways for you to advertise your product but it is going to cost some money. To start your marketing plan, there are two main areas of focus: print and digital. In our digital world, it’s critical for any successful business to have an online presence. Your pharmaceutical manufacturing firm can achieve this through a Google AdWords campaign, sponsoring physician’s websites, and banner ads on other products relevant to your industry. It is also wise to have a visually appealing website that has been fully optimized for search engines and mobile. For print advertising, we recommend advertising in medical journals, direct mail campaigns, and sending samples to potential clients. In addition to these two focus, you could also invest some money ion radio or TV advertising and attend networking events such as trade shows and seminars. Marketing is expensive and can take time to yield results, but eventually, you will see your pipeline come to fruition and buyers will take an interest in a business that has sales building behind the scenes.
M&A Growth Strategy
In industries such as yours, where the market segmentation is typically massive conglomerates and fewer small to medium sized business, M&A is used a growth tactic. Pharmaceutical manufacturing businesses will acquire smaller firms as a way of growing their own business. This tactic allows the larger firm to gobble up patents, revenues, R&D projects, market share and clients to grow their business. If you don’t think you’d be ready to sell within the next 5-10 years, this might be a viable growth strategy for your firm. By pursuing this type of growth strategy prior to selling, your revenues, cash flow and product lines would be much more impressive and would pull a high sales price at closing. Your business would also become a strong candidate for a larger company to purchase, which would hasten the buying process.
Managing Cash Flow
A consistent cash flow is one of the key factors in determining the value of a business. Brokers will use your last three years’ financials to determine value, usually with the highest emphasis on the most recent year. In the pharmaceutical industry, businesses like yours do not come out with new drugs every year so we recommend strategically releases. Developing a new drug can take years and cost billions of dollars, and when it finally goes to market, it will produce high revenues for years to come. While your cash flowing from the recent release and working on new drugs, make sure to strategically space your releases to ensure a steady cash flow over the years.
Patents are critical in this industry, especially if you want to corner the market and secure your product. After all of money and time it took to develop your drug, you’ll want to protect it and ensure no one is profiting off it except you. Patents prevent other companies from duplicating your product, but that protection only goes so far unfortunately. From the time an application is submitted, a product will be protected for 20 years but by the time is ready to be sold, the time to reap profits becomes relatively short. Arming yourself with a strong legal team in addition to patent protection will help you maximize the window for sales and reduce risk that your product idea will be stolen.
If you have been thinking about the future of future of your pharmaceutical manufacturing firm, the time to begin planning is now. The manufacturing industry is thriving and buyers are looking in the Southeast for acquisition opportunities. If you are thinking about selling your business, the first step is finding out how much it is worth and we can tell you with a no-cost, no-obligation valuation. Even if you are 6 months to a year away from selling, taking these steps now can help you increase the sales price for when the time is right for you.