Volume 5 Issue 17, August 14, 2018
Most owners of Durable Medical Equipment (DME) companies regularly attempt to estimate the value of their company. Unfortunately, their estimates can significantly differ from the marketplace “reality,” depending on a number of factors. “All healthcare related companies sell for 2 times annual revenue”, or “My DME should be worth the sum of all of the monies I invested into the company,” or “I wouldn’t consider selling my DME for less than 10 times annual profits” are common refrains among owners who may be in for a rude awakening when they attempt to sell their company.
The most important step for a prospective DME owner/seller is to understand how buyers may value your DME and incorporate this awareness in your preparation for going to market.
Although there are numerous valuation methods, the most prevalent that are used to value DMEs are the comparable transaction analysis (Market Approach) and discounted cash flow analysis (Income Approach).
Comparable Transaction Analysis (Market Approach) – A reasonable estimation of value can be determined by looking at past sale transactions of comparable DME companies. For example, if you found 20 DME companies of similar revenue and earnings that sold for four times EBITDA ( (pre-tax earnings, plus interest expense, plus depreciation and amortization), you might compare those past sale transactions to your EBITDA. You might also compare the sales price of the past transactions to the annual revenue of those companies and compare the same percentage to your DME’s annual revenue.
The limitation of this approach is that it often assumes all DMEs are relatively the same. What if your DME is growing faster than the industry average? What if your DME specializes in new technology home health monitoring equipment, while most of the comparable transaction companies specialize in mobility? What if your DME’s reimbursement is a mix of public and private payers while the comparable companies rely primarily on public payers?
Nonetheless, understanding this method with the assistance of a valuation professional can help a DME seller to anticipate potential buyer objections and enter the market with the strongest presentation of their upside potential.
Discounted Cash Flow Analysis (Income Approach) – A more typical estimate of value can be determined using a discounted cash flow analysis where future cash flows are projected, and “discounted” back into today’s dollars. For example, if a DME is expected to earn $500,000 a year in cash flow for the foreseeable future, the value of the DME could be estimated at $2,500,000, assuming a discount rate of 20%.
The challenge with this approach is accurately projecting future company performance, and accurately determining the discount rate. The discount rate should reflect the riskiness of the company, and, of course, most DME owners underestimate the riskiness of their company from the buyer’s perspective. As above, this method may not fully assess your DME’s value, but it helps to understand how buyers may look at their investment risk.
The value of your DME is based on many factors such as payer mix, local demographics, quality and tenure of staff, the quality of referral sources, product mix, skilled vs. nonskilled care, type of vendors, and marketability of existing inventory, in addition to traditional measures of profitability and cash flow.
Taking a step back and objectively considering these factors, in addition to typical valuation methods, will only help you strengthen your value proposition when you go to market. You may not like all of what you learn, but if you take it to heart, you may be able to significantly improve your value and the return on a lifelong investment.
David is a seasoned commercial and corporate finance professional with over 30 years’ experience. As part of the VERTESS team, he provides clients with valuation, financial analysis, and consulting support. He has completed over 150 business valuations. Most of the valuation work he does at VERTESS is for healthcare companies such as behavioral healthcare, home healthcare, hospice care, substance use disorder treatment providers, physical therapy, physician practices, durable medical equipment companies, outpatient surgical centers, dental offices, and home sleep testing providers.
David holds certifications as a Certified Valuation Analyst (CVA), issued by the National Association of Certified Valuators and Analysts, Certified Value Growth Advisor (CVGA), issued by Corporate Value Metrics, and Certified Merger & Acquisition Advisor (CM&AA), issued by the Alliance of Merger & Acquisition Advisors. Moreover, the topic of his doctoral dissertation was business valuation.
He earned a Doctorate in Business Administration from Walden University with a specialization in Corporate Finance (4.0 GPA), an MBA from Keller Graduate School of Management, and a BS in Economics from Northern Illinois University. He is a member of the Golden Key International Honor Society and Delta Mu Delta Honor Society.
Before joining VERTESS, David spent approximately 20 years in commercial finance, having worked in senior-level management positions at two Fortune 500 companies. During my commercial finance career, he analyzed the financial condition of thousands of companies and had successfully placed over $2 billion in corporate debt.