Mergers & Acquisitions: Buying

Making the Right Buy

Competitive bidding Round Two will see considerable change in this industry, and while no one in the industry wants to talk about it, the biggest change is that there will be sizable consolidation leading up to and after contracts being awarded in spring of 2013 and implementation later that summer.

With a finite number of contracts being awarded for each competitive bidding area, for a finite number of categories, and essentially nationwide, the program will see many providers lose key segments of their businesses. And, because the way the program is arranged, and based on experience from Round One, there will be providers awarded contracts for CBAs or categories for which they might not necessarily have adequate assets in place to immediately serve with optimal care.

For instance, a provider could win a contract in one of the Round Two CBAs, but has only a small presence in that marketplace — or perhaps no presence–at all. Now, a provider that does have a healthy business for that category in that CBA is looking to sell, since it was not awarded a contact. Naturally the two might start discussing the possibility of a merger or acquisition.

But the discussion isn’t exactly simple. The buying and selling of HME businesses has changed over the year, and the process isn’t as straightforward as cutting a check. The values of HME businesses have changed, and HME providers looking to purchase other HME businesses need to consider a number of factors before making a move.

Perhaps the first thing providers looking to buy need to do in their research is to start looking at the market that they want to expand into and start looking at the various HME businesses that can truly help them goal. Bearing that in mind, there are some very basic criteria that can help purchasing providers focus on, says Donald Davis, president Duckridge Advisors LLC, a firm that specializes in consulting with HME providers on mergers and acquisitions.

“They have to do their homework on what the market offers them,” he explains. “If you’re a buyer, you have to be focused on number of patients and referral sources, not on who’s available.”

Purchasing providers must ask themselves, “Who has the patient base I want to acquire, and who has the referral sources that I want to tap into?” The goal is to think strategically about what potential purchases can expand the business, and those two key metrics, along with contracts, should guide the decision-making more than any other, regardless of whether those businesses have contacted the buyer or not.

“Those should be how you start your analysis,” he says. “Not on the provider who calls you first and says that he’s interested in selling. ...If I’m a wheelchair supplier and I somehow just won the oxygen contract for a market I’m not in, I’d be focused on buying the best possible oxygen supplier I could find in that marketplace, not necessarily anything else.”

This might also mean that a buyer might have to approach a provider that might not necessarily have initially considered selling.

Staying Ahead of the Bottom Line

In many cases, purchasing providers will need to move fast. As Round Two revs up, one fact will be clear: There will be many patients that will need to transition to contract-holding providers, whether now or on the future.

“Patient acquisition is the most difficult thing for people right now,” Davis says. “Once half the patients in a marketplace becomes a ‘free agent,’ then everybody has to jump in. What’s the cost of acquisition? The cost of acquisition for a bigger company can be spread around; they can spend the money on acquisition costs. A smaller guy? He can’t. So the best thing to possibly do is to get in front of it, and get the patients.”

Being Realistic

A large company can come in faster and give a provider that wants to sell more money up front, and make the deal sweeter and easier to close, but a smaller purchasing provider might not have access to that level of capital. The decision process for both becomes more difficult; they must manage each other’s and their own expectations about what will constitutes an acceptable deal.

“The biggest thing for sellers and buyers has to be the ability to become creative on how everybody gets what they need to get; it isn’t someone cutting [the seller] a check and letting them go to Florida,” Davis says. “With a mid-size buyer and a mid-size seller, that is not going to happen.”

Thinking Long-Term

Beyond acquisition, purchasing providers might also want to consider some of the back office assets and processes the company for sale might have that could be of value. Most likely, a purchasing provider will probably be confident in its billing and claims department, for instance, but perhaps the delivery operations, warehousing assets or inventory management systems of a company for sale might be of value of the long haul, and should be factored into the purchase.

“If I’m going to be long-term operator, I’d be looking for efficiencies in operations,” Davis says. “Certainly the delivery end of things, because that is, in my mind, what is going to be the most important thing from an operation system. ...Do they have an efficient delivery system or warehousing system that I can learn from or consolidate into my existing system?”

Points to take away:

  • Various funding pressures, but especially competitive bidding Round Two, will force an increased pace of mergers and acquisitions in the industry.
  • That said the valuations of provider businesses and the terms under which deals are made has changed from the buying and selling of HME providers several years ago.
  • The primary criteria on which buyers will purchase providers are number of patients and referral partners, as well as revenue per patient and possibly contracts.
  • Purchasing providers shouldn’t start by looking at which providers are for sale, but which providers in their CBA is the best company for helping them expand.
  • Buyers and sellers, especially those that are mid-sized businesses, will need to work together to strike a deal that satisfies everyone concerned.

This article originally appeared in the June 2012 issue of HME Business.

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