Mergers & Acquisitions: Selling

Managing Great Expectations

• Jun 01, 2012

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.”

Public Companies

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 valuations.

“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.

Honest Self-Assessment

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.

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