Preparing Your Durable Medical Equipment (DME) Company for a Sale

Volume 11, Issue 22, November 19, 2024

By: Gene Quigley

When the time comes for you to sell your durable medical equipment (DME) company, there will be a lot of work required to go from putting the company on the market to completing a successful transaction. If you want that sales process to go smoothly, there's a good deal of work you'll want to complete before you start the sales process.

Here are seven of the key steps you should take that will better ensure your DME company sells for a fair price and to the right buyer.

1. Get your DME house in order

What does it mean to get one's house in order concerning the sale of a company? It boils down to your business functions. Owners of a business typically do not undertake deep dives into their financials and performance, but that's what a prospective buyer will do right off the bat. Owners need to put themselves into a buyer's shoes and assess the balance statement, key financial metrics, employee and payor contracts, assets, processes, the legal structure of the business, and other areas to see what stands out — and not in a positive way. What might be a potential red flag to a buyer? What could be a major hassle for a new owner or lead to difficult questions during the due diligence process of a sale? For example, are you over-indexed on operating expenses? Will buyers ask why your opex exceeds 40%?

Once you have completed this assessment, work to fix the issues you identify — especially the low-hanging fruit — to the best of your ability before you bring your DME business to market. Doing so will allow you to hedge off some of those questions and ultimately make your company more presentable.

2. Tell your growth story

When a buyer is considering your company, they're going to want to see that you're profitable. But more importantly, they're going to want to understand how you can become more profitable — i.e., What is the runway for you to grow? As you are preparing your company for a sale, develop the story that will explain how you are going to grow over the next 3-5 years. What's going to differentiate you in the industry? How are you going to stay ahead of trends?

This is all very important. I've been part of the leadership team for several companies that sold, and for each of them I was the sales or growth leader. When we developed our confidential information memorandum (CIM)*, most of the time was focused on where we expected we could grow. What was our secret sauce? How could we expand sales? Expand payer contracts? How were we going to buy smarter to reduce expenses? A strong growth story is likely to increase your DME company's multiple.

*Note: If the concept of a CIM is new to you, I recommend reading this recent column by my colleague David Purinton. It defines the concept of a CIM, shares best practices, and identifies what to include in your CIM.

3. Put together the right DME transaction team

For most durable medical equipment company owners, the sale of their company will be a once-in-a-lifetime experience. The sale is the conclusion of years of hard work and sometimes even some blood and tears. It's not surprising that some DME owners are on the fence about whether to bring in outside help for the transaction because of the costs involved in engaging an advisor and other support, which is money that comes out of the seller's pocket.

But just as most owners had help setting up their company, they will be best served getting help selling their company. The right assistance can not only translate into a higher sales price but also avoid costly missteps, mistakes, and a prolonged transaction. Experience shows that an outside advisor, whether it's someone from VERTESS or another healthcare mergers and acquisitions (M&A) firm, helps owners better identify and address challenges, take advantage of opportunities, emphasize what makes the company special, and create the competition for the sale that drives up the multiple.

A traditional operator will likely not know how to put a CIM out to market or get it into the right buyers' hands. Owners may have a few people in their index they think could have interest in acquiring the company, but taking this approach means you're missing out on the opportunity to cast the wider net that creates the competition you want and brings in different types of buyers.

In addition to brining on a healthcare M&A advisor, and preferably one with DME experience, other members of the transaction team should include an accountant and legal advisor with healthcare transaction expertise. The right team will make the sales process go more smoothly and help ensure the sale reflects the years of work and investments that have gone into the company.

4. Fully understand your durable medical equipment company's vulnerabilities

This ties back to getting your house in order. You must understand where your company is vulnerable. Will any of your contracts soon be susceptible to compression? How are you going to stay ahead of that development? Is competition coming out with a new product that may put you in a less competitive position moving forward? Is there anything under the hood of the company that could be considered a weakness?

Once you identify your vulnerabilities, you'll want to do one of two things. If you can fix a vulnerability, you should. If it's not a simple fix, at least develop a strategy for how you will overcome it.

5. Understand your value from the buyers' perspective

Nearly every owner I've worked with contemplating a sale has a price they firmly believe they should receive for their company. This figure may be achievable, but there are a lot of factors that will influence the final sale price — and the potential for the price to end up higher than what a seller believes is fair and possible.

To gain a better understanding of how a sale may play out, DME owners will want to start thinking about their likely buyers, what these buyers are looking to get out of the business, and how these buyers may deploy the business following the transaction. Is one potential buyer a private equity platform looking to add more companies? Will the seller's company be an additive to other companies a firm currently owns? Might the acquisition be a strategic buy?

In these and other scenarios, owners should ask themselves: What's the value your company brings to potential buyers? What are the buyer's immediate and longer-term needs? Understanding what the buyer is looking for is helpful in determining how to best present the company in your CIM. You want to position your company to how it will meet those needs so you can secure a price that matches or even exceeds what you may have calculated before the sales process begins.

Putting yourself in buyers' shoes also helps establish more realistic sale expectations. In some instances, this will require an owner to come to terms with the fact that their company is not worth what they hoped or expected. Determining what a buyer will and will not value and what your company is likely to sell for ties back to assembling your transaction support team and leveraging their guidance and expertise.

6. Keep your management team focused on business, not the transaction

A DME company's management team will be involved in the sale. They will be a part of the CIM development process and helping with due diligence. But one of the worst decisions an owner can make is to have their management team focus so much on the deal that they take their eye off the business. You want to make sure your executive team and the management team underneath them are involved in the transaction as much as necessary, but their day-to-day focus should be on delivering your services, growing the business, and executing your strategic plan. The last thing you want is your company's performance to fall off as you are working to complete a sale.

7. Consider your post-deal involvement

A final essential step to take before bringing your durable medical equipment company to market is to consider the role and level of involvement you're looking for in your company following its transaction. That's going to greatly influence the type of buyer you want to target. Do you want to fully exit? If so, understand that this may turn away some buyers who are not interested in investing in finding and onboarding a new CEO or any other executive position you hold.

If you want to stay on with the business, make sure the buyer understands the position you are looking for following the sale. Is it a board position? Do you still want to be in an operator position? Do you want to give up full control? Half control? These are questions to firmly answer before initiating the transaction process.

Selling Your DME Company: Do the Work, Reap the Rewards

When you conclude that it's time to sell your DME company, you may be eager to start the sales process and find out what your business is worth. But rushing into the process is going to do more harm than good. By allocating the time and resources to effectively complete the steps described above and others recommended by your transaction team, including your DME M&A advisor, you will strengthen the performance and appearance of business, become more attractive to buyers, and should end up securing a sales price that rewards you for building a successful durable medical equipment company.

Gene Quigley

For over 20 years I have served as a commercial growth executive in several PE-backed and public healthcare companies such as Schering-Plough, Bayer, CCS Medical, Byram Healthcare, Numotion, and most recently as the Chief Revenue Officer at Home Care Delivered. As an operator, I have dedicated my career to driving value creation through exponential revenue and profit growth, while also building cultures that empower people to thrive in competitive environments. My passion for creating deals has helped many companies’ platform and scale with highly successful Mergers and Acquisitions.

At VERTESS, I am a Managing Director with extensive expertise in HME/DME, Diagnostics, and Medical Devices within the US and international marketplace, where I bring hands on experience and knowledge for the business owners I am privileged to represent.

We can help you with more information on this and related topics. Contact us today!

Email Gene Quigley or Call: (732)600.3297