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June 19, 2023

M&A is inherently risky, but the rewards of a successful deal can exponentially grow a company overnight. There are many things to consider before closing a transaction, and big companies are finding new deal structures to minimize risks when doing acquisitions. In this article, Finn Haley, SVP of Corporate Development at Edwards Lifesciences, discusses the build-to-buy option structure they use in the healthcare industry. 

“When you’re first in developing a segment, you get to shape how it develops. You get to work with the regulatory bodies, and you get to work with the governmental agencies.” - Finn Haley

At Edwards Lifesciences, they are very focused on groundbreaking innovations. They want to change medicine in a meaningful way that will prolong patients' lives while creating value for their stakeholders. Because of this very specific strategy, they usually end up working with very early-stage startup companies, and they use the build-to-buy option structure.

Build-to-Buy Option Structure

The build-to-buy option structure is a strategic approach where a corporation invests in a startup company and helps them grow into an ideal acquisition in the future. This process involves understanding the target's development plan and funding them to alleviate financing risk allowing founders to focus on growing the company. Oftentimes, the money given is non-dilutive, which makes it more attractive to startup companies. 

Additionally, the future acquisition agreement is negotiated at this point, together with a fixed purchase price. However, the acquisition is not an obligation, but rather an option, if the startup  achieved the predetermined milestones. The target company still remains independent but is closely monitored by the large company. 

Benefits of the Build-to-buy Option Structure

The build-to-buy option structure has several compelling benefits for both buyers and sellers. 

For sellers, the build-to-buy option structure removes the risk associated with fundraising and provides access to capabilities that they may not have had otherwise. This allows them to focus on executing their development plan without the added pressure of raising additional funds.

For buyers, the agreement locks the target company on a fixed exit price, giving them the possibility of acquiring the company at a cheap price, without any contention or competitors. 

Additionally, working with early-stage startups allows them to stay at the forefront of innovation and potentially gain access to new and emerging technologies. Finally, the option to buy provides flexibility and the ability to evaluate the startup more thoroughly before committing to a full acquisition. 

Risks of the Build-to-buy Option Structure

While the build-to-buy option structure may seem like a win-win for both entities, it’s not without risks. There are instances where the organization doesn’t wish to execute the buying option and has to waive the right to do so. Here are some of the most common reasons:

  • The market opportunities did not develop as expected
  • The clinical impact did not meet the expectations
  • The corporation has changed its strategy 
  • The target company failed to meet predetermined milestones
  • There is a change in the target’s leadership

If the money given was non-dilutive and the corporation chose not to pursue M&A, then the money invested will effectively go to waste. Corporations that want to take the safer route can get equity in exchange for the invested money. 

To ensure the build-to-buy option aligns with the corporation's strategic objectives, it's important to monitor the target's progress toward meeting predetermined milestones carefully.

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