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I’ve enjoyed writing this newsletter in 2024 and will continue to do so in 2025.

It has provided a creative platform where I can share insights from our story in the hopes to inspire and educate others on a similar journey.

Please feel free to email with any suggestions on topics you’d like to hear more about in 2025.

I have a lot planned for 2025 - my consulting business continues to grow and I look forward to showcasing some of the exciting innovations and companies I’ve been working with; R&D activities are well underway on a new device; and I’m working on a new concept to make my commercial knowledge more readily available to start-ups.

I’ll keep it brief this month - I wish you all a very Happy New Year and all the best for 2025! Let’s get started with this month’s topic…

When selling a medical device business, an earn-out often forms part of the deal structure, but how do you negotiate this component?

There are several variables to consider. This month, I share a brief overview of my personal experience in navigating an earn-out during our company’s exit.

An earn-out in simple terms is a provision that allows additional future compensation to be received by the selling company based on specific and mutually agreed milestones.

A buyer will often use an earn-out to de-risk the acquisition from their perspective (milestones achieved, greater financial benefit) and the seller can utilize this component to derive more value from the deal (milestones achieved, additional pay-out received).

In our case, we agreed a simple one-year earn-out based on a revenue milestone, and were able to achieve the full target at the end of twelve months. Achieving the milestone was a huge achievement for both parties.

If you end up in a similar negotiation one day, here are a few considerations.

Agree the majority of consideration to be paid upfront

Milestones set over multiple years inherently mean uncertainty in achieving the agreed upon results. Predicting one year-ahead is challenging enough, let alone 2-3 years into the future.

By agreeing to substantial consideration being pushed out into future years, this increases the chances of value being left on the table.

This might work in the acquiring company’s favour as they might end up paying very little for your business (if the milestones are not achieved, additional consideration does not become due).

In our experience, we were able to agree the majority of consideration to be paid on day one and this was important for two reasons:

1) Confidence behind our valuation (we had achieved great success with a small team and limited resources. We knew the potential behind our business in the right hands, and wanted this reflected in the deal structure i.e. upfront consideration).

2) No interest in being tied into a deal for more than one-year (how much influence would we really have after one-year, but more importantly how could we make accurate projections around milestones?)

If structured so that the majority of payment comes in later years, does the acquiring company truly value your business at its current stage?

Are they de-risking the deal from their perspective or structuring it in a way that they might ultimately pay very little for your business?

Minimise the length of an earn-out period

For us, a one-year earn-out would the maximum length for us to accept a deal.

As the time horizon increases 1-3 years beyond this, milestones become less transparent, less predictable, and potentially less achievable (depending on what’s been agreed).

The forecasts might become less achievable for a host of factors - milestones might simply be unrealistic; how much time will the acquiring company dedicate to this product in future years; and how much influence will and can you have over this extended period of time?

The acquiring company’s direction might change or you might simply have less influence over key commercial decisions.

Ask yourself – do you want to be tied in for multiple years chasing milestones or do you have other important life goals to pursue?

For me personally, I was willing to work for one-year but then wanted to take some time out to spend with my family and young children!

Remain involved with the business during the earnout

I would suggest that you don’t leave the possibility of a future pay-out purely in the hands of an acquiring company. In reality, they would want you to be part of this journey. Those many years of experience and knowledge will be hugely valuable for their ongoing success after the earn-out period.

You’ll need to transfer your years of knowledge, contacts, and experience over to the acquiring company to help drive commercial success.

From the seller’s perspective, you’ll also play an important role in guiding these commercial decisions and ensure you’re well positioned to achieve the agreed milestones.

You should clearly define your role and responsibilities during this period, as part of your employment contract, but also within the detailed commercial plan. Ensure you have some level of decision making power during the earn-out period.

Agree a detailed commercial plan to achieve the milestones

This is critical to success. You now have milestones agreed but what are the practical steps that the acquiring company will take to ensure these are achieved.

The specifics here will depend on various factors, but a few key considerations might include:

• Pricing strategy (will this be consistent with current pricing in the market or will discounts be offered, how will existing customer contracts be negotiated etc)

• Dedicated resources being directed to your product or business (for example, the number of sales reps available)

• Marketing strategy (materials to be published, conferences to attend, how will the existing network be leveraged etc)

• Customer segmentation - in our case, we would identify the key hospitals and systems to be targeted, and how this would be mapped out geographically.

• Key Opinion Leader Engagement - identify prominent clinicians in the field who could advocate for national adoption of our product

The above are just a few examples to think-through. Ultimately, you need to work closely with the acquiring business to map out key commercial objectives, and ensure the best chance of success for both parties.

Agree financial metrics around how the earn-out will be calculated

Revenue milestones are an easy metric to track and mean less ambiguity at the end of one year. You simply track the units sold (and at what price), data already recorded in the acquiring company’s invoicing system, which would feed into the financial accounts.

Similarly, a physical single use-disposable device is simple from a revenue recognition perspective, when compared with subscription models for example.

It can become further complicated as you move down the profit & loss account to the operating profit level. You will need clarity around which operating costs are directly attributable to your product (costs may cover several parts of the acquirer’s business), so that operating profit will be based on a mutually agreed cost allocations.

The above is just one simple example but earn-out calculations can become increasingly complex over multiple years, several products, and various geographies (for instance, how will these be converted to the reported currency).

You will need to have a clear methodology on the earn-out calculation, to be included in the share purchase agreement. My suggestion is to keep this simple, if at all possible.

If appropriate for your business, a top-line revenue milestone will be the easiest to track and achieve, given there is less scope for ambiguity.

How can I help you and your business?

OBG Access is a consulting business that provides strategic support for early stage medical device companies in the women’s health space, including commercialisation and international expansion.

We offer access to a large network of key opinion leaders, clinicians, OB decision makers, hospital systems, and distribution partners throughout the US market.

We can develop strategic plans for US market entry and help build a corporate infrastructure for non-US companies entering the market.

We can also provide an objective view on company valuation, prepare your business for an exit, and provide access to potential buyers or strategic partners.

I appreciate you taking the time to read this month’s newsletter. Any questions, comments or feedback, feel free to email me.

Have a great weekend!

Nish Varma

[email protected]

A note on the author - Nish Varma

After several years working in finance, I partnered with my father, an obstetrician who invented a medical device (Fetal Pillow) to solve an important clinical problem in his field (detailed in issue one).

After initially launching into the UK market in 2011, several years later, Fetal Pillow was cleared by the FDA in 2017. We then focused our efforts on bringing Fetal Pillow to the US market.

I spent the next few years building our US business and in early 2021, our company (Safe Obstetric Systems) was acquired by CooperSurgical, a leading global player in Women’s Health. I spent one year post completion working for the company during an earnout period to support the national launch strategy.

It was a 10 year journey to commercialise and bring the product to market - we were able to prove our business model in the US and that garnered interest from some of the key industry players.

This newsletter is a passion project to share some of our journey with others who might be on a similar path.