Mergers & Acquisitions: Selling
Managing Great Expectations
For a variety of reasons, there comes a time when an HME
business owner needs to sell his or her business. It could
be due to funding factors, such as competitive bidding, or it
could be due to other factors, such as family needs or retirement,
but for one reason or another, an owner begins looking
for a buyer. That said, the marketplace for HME provider businesses
might not be what they initially expected.
Where mergers and acquisitions in the HME space are
concerned, the buying of selling of providers businesses was
put on hold for a while. Four or five years ago, the pace of
M&A in the HME industry was not nearly as hot as it is was
piror to that time — or is getting now. The reason for that
is uncertainty. With rental caps, MIPPA and competitive
bidding all hitting at once, buyers especially were not in a
good position to make informed decisions.
“There was obviously a litany of all these issues that
were impacting the industry was not allowing people
to adequately assess their risk for buying, and therefore
the market just dried up,” says Donald Davis, president
Duckridge Advisors LLC, a firm that specializes in
consulting with HME providers on mergers and acquisitions.
“What we’re seeing now is, with the actual numbers coming
out of Round One, companies that are interested in buying
can now assess their risk better.”
The pivotal thing sellers must understand is that the
industry has changed, and with it the pricing model for
selling an HME business.
Round One’s Impact on Valuations
Where a provider might have once been able to have more ability to set a
higher price for his or her business that is no longer the case. The reason for this
is that sellers can now look to trends such as Round One of competitive bidding
for establishing more realistic cost and revenue models.
Now that bid amounts are in place, buyers can start to model costs, revenues
and other key figures. This helps create a range of risk tolerance, explains Davis,
who has more than 25 years’ experience handling M&A for businesses ranging
from small provider businesses to international manufacturing firms.
“When you were able to sell your business for what would ultimately have
been several multiples higher than what was possible today, there was a lot of
talk along the lines of ‘maybe it will come back, these valuations are too low, I
want more for my business,’” he explains. “[Owners] now realize three, four, five
years later that this business has changed forever, and it’s not something like the
days of being able to sell your business three thousand, five thousand dollars
per oxygen patient. That’s not going to exist any more.”
Also, it’s important to remember that besides the models being set by competitive
bidding, there are publicly traded companies in the industry that must make
public a considerable amount of data regarding their businesses’ cost and profit
structures. Lincare, Apria and Rotech all serve as source material for HME business
“I point to those companies when I do valuations, and I say, ‘These companies
are selling anywhere from three to five times their cash flows, so they cannot
possibly pay you more than that; their shareholders will not allow them to,’”
Davis explains. “In fact, they’ll pay a discount from that, because they need to
show to their shareholders that they paid for something for three times cash flow
or three times EBIDTA, and they turned it into something they can sell on the
market for five times.”
What the Market Wants
In addition to pricing, providers need to be aware of what types of HME businesses
are in demand. Davis gives an example, if buyers are looking for respiratory
businesses, and a selling provider notices that most of the for-sale providers
in its area are respiratory businesses, their value might be driven down if
respiratory is not one of the HME services it provides.
From there, that provider must decide if it needs to adjust its business model
to position itself in that manner, or to convince buyers that while the business
doesn’t offer respiratory they services that it offers are indeed in-demand, and
the business has a key position in that product category.
Ultimately, what providers need to do is better understand buyers’ motivations,
and then see how they measure up against the things buyers want. This practice
can be a little jarring, because no matter how much an owner has done right in
terms of running his or her business, buyers’ criteria are very simplified.
“The only things a buyer cares about are your patients, your referral sources,
and maybe your contracts, and that’s it,” he says. “So all the other things that
you have focused on because you have had to in order to stay in business might
not necessarily be what a buyer is looking for.”
Instead, sellers must look at the sorts of things they does really well, determine
who the potential buyers would be based on those categories, and then
talk to them using the valuation criteria those buyers will likely be using, as well.
It might not be the ideal circumstance for a seller, but a clear understanding of
buyers’ criteria will yield the best results for today’s sellers.
Points to take away:
- While the uncertainty caused by competitive bidding caused a slowdown in
the mergers and acquisitions of HME provider businesses, the implementation
of Round One renewed buyers’ confidence.
- That said, the criteria buyers are using to value HME businesses has
changed, and purchase prices are lower.
- This is due to declining reimbursement rates from Round One of competitive
bidding and other CMS policies.
- Also, large publicly traded national providers are also contributing to
- Providers must be cognizant of these factors when valuing their businesses.
- HMEs must also consider what are the in-demand product categories for
buyers and determine how they will play to those trends, or sell around them.
There are various consulting firms in the industry that help providers with
M&As. Here are a few worth researching:
Duckridge Advisors LLC
Paragon Ventures LLC
This article originally appeared in the June 2012 issue of HME Business.