DME Entrepreneurs: Go With a Financial Partner for the ‘Whole Enchilada’
by Bradley Smith, ATP, CM&AA
Volume 6 Issue 21, October 22, 2019
This week, you can find me in Atlanta at Medtrade, the largest home medical equipment trade show and conference. It’s always a terrific meeting. One of the highlights for me is the opportunity to speak with owners of durable medical equipment (DME) companies about their future plans, including exit strategies. One topic that inevitably comes up is whether partnering with a private equity group (PEG) is worth considering.
The good news for these company owners is that financial buyers, particularly PEGs, are currently in heated battles with strategic buyers for quality DME deals. Well-run, well-managed DME companies are at the forefront of such intense competitions as they seek all-time-high valuations from financial and strategic pursuers alike.
While strategic buyers typically look to capture immediate synergies with acquisition targets, PEGs often lack such a luxury for their platform investments. This disparity can leave a gap in valuations between the two types of buyers.
One might ask, “What competitive advantage does that leave PEGs looking to acquire high-priced DME businesses?” The answer should be of interest to DME owners/investors. It may come as a surprise, but PEGs can actually offer a more robust value proposition. Here are six reasons why.
1. Focus on Potential
When PEGs invest in a DME company, they usually consider the total prospects for the entity, not just the upside of future profits, and embrace the growth and success prospects of the company as a whole. Whereas a strategic buyer will typically absorb the company as another product or service line, PEGs are more likely to share the vision of the company as a brand. The nearsightedness of a strategic buyer often constrains the ultimate value and sustainability of a DME enterprise.
2. Team Continuity
When PEGs consider investments, they typically evaluate not only a company’s performance/results, but also the leadership team. PEGs value companies with stable and competent teams that can be trusted with the future of the business. With a strategic partnership, the likelihood of keeping all or even a majority of a leadership team is often difficult because of the buyer’s dominant culture.
Furthermore, when PEGs acquire a DME company, they will often require the company’s ownership/management team to “roll over” a percentage of their equity. This serves as an effective method of keeping the company’s principals aligned with the financial buyer’s short- and longer-term interests.
3. Sophisticated Money
There is an important reason why PEGs tend to be particular with their investments. Long before a target is identified for a potential deal, investment parameters are established for their dedicated fund. The seller must meet the requirements during a vetting process to ensure the PEG’s investment mandate aligns with the targeted company.
4. The Second Bite
The “second bite of the apple” refers to those proceeds sellers realize when their company is sold a second time and they then cash out remaining equity. This can be particularly beneficial to rapidly growing DME companies with a meteoric value trajectory. The second bite approach allows for the formulation of an exit strategy early in the process, with a balance of risk mitigation and greater future value for the seller’s benefit.
5. Growth Opportunities
Once a transaction is completed, PEGs typically identify and pursue additional growth opportunities. In such a scenario, a DME company looking to maintain its identity while increasing operational effectiveness will see the immediate introduction of improvements to processes and systems. In addition, other PEGs’ partners may open up avenues for untapped or not fully tapped growth opportunities. These could include insurance providers, hospital systems and other healthcare industry stakeholders.
6. Likelihood of Close
The likelihood of close is increased in many financial buyer transactions, especially with DME companies. The structure of the deals tends to require creativity and flexibility in negotiations. This is a clear advantage for many financial investors compared to strategic buyers.
PEGs may have investment return goals. How they get there is often achievable via multiple paths.
Look to the Future
I always urge DME owners to take the long-term view of their value. They may attract a bigger initial offer from a strategic buyer — one that can be quite appealing. But if they step back and examine the full value of what is attainable in a financial buyer’s proposal, they may see a more appealing proposal that stokes their enthusiasm and optimism about the future.