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
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.”
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
“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.”
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
- 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
- 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.