Volume 6 Issue 19, September 24, 2019
There's some good news for owners of durable medical equipment (DME) and home medical equipment (HME) businesses: The transactions market (i.e., mergers and acquisitions) is not too hot and not too cold, but just right at the moment (to borrow the line from the children's story Goldilocks and the Three Bears). We're in what one can describe as a "Goldilocks market": a prime time for business owners considering selling their companies to proceed with those plans. But there's almost certainly a window on this opportunity.
Let's examine why today's market is like a fairy tale, and why if you wait too long to take advantage of it, upcoming developments may leave you with an unhappy ending.
To say DME and HME valuations are in a good place would be an understatement. They are currently at their highest point this decade. The increase in valuations is attributable to hundreds of factors. The most important factor is simple: The supply-and-demand curve has shifted to favor the seller (i.e., there are more buyers than sellers in the market). At the end of the last Medicare competitive bidding, when Medicare began its "any willing provider" program (i.e., any provider that wanted to participate in Medicare was allowed to do so), survivors were able to adapt and grow their companies to scale, achieving profitability in the process. Larger companies were also able to scale but at a faster rate through a buy-and-build strategy (i.e., acquisitions).
With successful operations, these companies are attracting significant attention from interested buyers, such as larger companies aiming to continue their acquisition strategy and private equity firms looking to acquire profitable assets in a thriving market. In addition, these larger players were able to take advantage of economies of scale as well as technology-based efficiencies, enabling them to do more with less.
The factors noted above have put DME and HME owners in a great position to maximize the return on a sale of their businesses. But as in Goldilocks, the good times can only last so long.
At the macro level, the DME market is impacted negatively by a limitation on the number of active buyers engaging on any given process. Headwinds, such as a potential recession — which, according to experts, looks more likely to occur during the latter half of 2020 — will have a great effect on consumer sentiment and the public markets. Private equity, as I previously mentioned, is a dominant force in our market and will be minimally impacted by a recession, if at all. These firms will take advantage of any retraction of valuations. The other notable headwind will be the presidential election, which will create a significant amount of uncertainty for businesses and the economy.
At the micro level, the most significant issue is competitive bidding. While market dynamics will likely not change — in fact, there may be more buyers as we see a trend for companies to "go public" — there will be increased pressure for larger companies to perform acquisitions under a buy-and-build strategy. But competitive bidding will increase the level of risk and uncertainty, which ultimately brings valuations down.
From my experience, such a downward drag on valuations does not truly materialize until about six months prior to the next round of competitive bidding. As always, there remains doubt that competitive bidding will actually happen and that we will witness the subsequent negative impact on pricing. Currently popular consensus is that bidding will happen with the exception of noninvasive ventilation, which pundits believe will be excluded at the last minute due to Congressional intervention.
Whether competitive bidding happens or not, just the likelihood of it occurring will begin to sink in six months prior, meaning that between now and around July 1, 2020, is the "just right" time to undergo a transaction.
For over 20 years, Brad has held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT, and home health care company, and BMS Consulting, where he has provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, he is a regular columnist for HomeCare magazine and HME News, where he focuses on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies. At VERTESS, Brad is a Managing Director and Partner with considerable expertise in HME/DME, home health care, hospice, pharmacy, medical devices, health IT, and related healthcare verticals in the US and internationally.