5 Valuation Drivers You Need To Know Before Selling Your DME Company
You are working your tail off to build a profitable DME business that you can see one day. How do you know when the time is right? How do you know what the right valuation for your business is? You are hearing multiple of 4, 6, 8, and even 10 or more, but do you understand what variables determine the difference between a low multiple and an optimized multiple for your DME business?
Boost Advisory Group is comprised of seasoned DME experts who have amassed over 70 years of DME experience buying DME businesses, selling DME businesses, conducting due diligence in the DME buying and selling process, and advising DME business owners on DME business valuation. We have decided to write this article to assist DME leaders in understanding the valuation process and in avoiding mistakes that can cost you millions of dollars.
Below are the 5 biggest impacts to DME business valuations that DME business owners MUST understand when they are looking to sell their companies.
Not Understanding Valuation Methodology
Just because 123 DME company was paid a 8x multiple of does not mean that your DME business is worth an 8x multiple. There are a number of variables that are considered when determining what multiple your business can realistically earn. Let’s go through a few of them.
1. Timing
a. The lower the interest rates, or the cost of money, the more buyers can afford to pay.
b. Who is interested in buying and who is no longer interested, or is currently in the middle of an integration now and is not currently a DME buyer.
c. The types of buyers that are in the market matters. Are they strategic buyers? Buyers looking for a platform company who are willing to overpay a bit in order to get in the game? Are they looking for scale and want a roll up strategy and are looking for value-added DME companies?
d. What is the current and projected future health of your business?
2. Growth Trends
a. No one wants to buy a dying business.
i. Is your revenue and /or EBITDA on the downward trend?
b. No one will pay optimum dollar for a business that is status quo.
i. I have heard more than a few DME executives saying I will grow this business until I can’t grow it anymore and THEN I will sell it.
ii. Just like no one wants a dying business, why would anyone optimize valuation for a business that is status quo?
c. Is your growth sustainable? Will it continue to grow or start to flatten out? Is your growth costing you more and your margins are decreasing and expected to continue to decrease?
d. Is your growth getting to a level that your SG&A expenses around shared services (HR, Compliance, Legal, IT, etc.) will need to be onboarded so you can support your new growth?
e. Are there any regulatory hurdles on the horizon that could slow your growth, or worse, wipe out your growth? Such as competitive bidding, single payor contracts, Medicare for all, focused audits from CMS or OIG, the upcoming termination of a payor contract, etc.
3. EBITDA
The definition of EBITDA is earnings before interest, taxes, depreciation, and amortization.
a. Typically, all stock purchase valuations (those with the highest multiples) are based on a multiple of EBITDA. The higher your EBITDA the higher your valuation. For example, a DME company whose EBITDA is $2,000,000 and is offered a 4x multiple will generate a $8,000,000 purchase offer.
b. Not all EBITDA is considered equal.
i. A DME business with $1,000,000 in EBITDA will typically generate a much lower multiple; such as 2-3x
ii. A DME company with a $10,000,000 EBITDA will typically generate a much higher multiple; such as 10x or higher.
Note: There are numerous variables to consider when choosing valuation, but comparisons are used for illustration purposes and represents a scenario where all remaining variables were considered equal between these two DME companies.
4. Strategic Value and Strength of Payor Network Access
It is no secret that payor networks are closing and becoming more and more difficult to gain access to. DME companies that have strong payor network access have improved value to potential DME buyers. In fact, that is one of the most common reasons for DME acquisition activities. To gain access to networks that currently result in referrals and business being pushed away to competitors.
DME sellers that have limited network access or access to easily accessed networks will not be able to command top tier valuation multiples. If you are strictly a DME Medicare provider or a DME Medicare provider with a handful of payor contracts that are open networks then your contracts do not provide any incremental value.
On the other hand, having DME provider contracts with payors that are closed and/or very difficult to obtain access to provide incredible value to a prospective DME buyer in terms in higher conversion rates due to lower co-insurance and deductibles, improved bill and collect rates, thus resulting in top line revenue growth and cashflows.
5. Type of Transaction
The type of transaction matters a great deal. There are two types of purchase agreements that occur when buying or selling DME business.
A. Asset Purchase Agreements
a. The selling DME business sells their patient list to the DME buyer. All liability, outstanding AR, real estate, cash on hand, and other assets (including payor contracts) and expenses remain with the seller.
b. These types of transactions are common in DME acquisitions, but also result in very low multiples…typically 1-2x
c. These types of transaction are used to build scale for the buyer and allow the seller to get out of the business and still receive fair market value.
d. These types are transaction are used when the seller does not have any additional value to offer the seller other than the patient list. (ex. Payor contracts)
B. Stock Purchase Agreements
a. Here the DME buyer acquires EVERYTHING. The NPI, contracts, real estate, liabilities, staff, etc.
b. These types of transactions are used to acquire platform companies, improve payor network access and potentially improve the overall financial health of the buyer.
c. These transactions carry more risk for the DME buyer because they assume all responsibility for liability including future lawsuits, labor complaints, recoupments, audits, etc.
d. Due to the above, these transactions typically produce a multiple in the 3-10x range based on a number of additional variables.
Buying and selling DME businesses can be incredibly complex and time consuming. Doing it wrong can cost you millions. Boost Advisory Group has extensive experience in helping DME business owners navigate the buying and selling process and optimizing their DME business. We offer business assessment services that can help you level set expectations, provide clarity into your current business valuation and provide action plans to optimize the valuation of your DME business.
If you are thinking of selling your DME company than call us today at 888-304-2480 so we can help you to achieve your goals.
info@boost-llc.com / 888-304-2480 / www.dmeconsulting.boost-llc.com