Bradley Smith, ATP, is a former DME owner and currently a vice president for American Healthcare Capital and consultant for BMS Consulting, advising DMEs on a variety of management topics. He can be reached at 817-793-3773 or firstname.lastname@example.org.
I have noticed a trend among DME providers that have either received Round 1 Medicare competitive bids or are anticipating receiving bids in Round 2. Many believe that their bid is a golden ticket that makes them magically able to claim an exorbitant price for their business regardless of how much they profit. In today’s new DME marketplace, the Medicare competitive bidding process has created significant changes and false confidence for the sellers of DME businesses. While everyone is proud of their “baby,” sellers need to remember that a bid is just a means to continue doing business in the competitive Medicare arena, and the value of the company is still determined by the numbers. When a DME seller is planning an exit, here are six essential considerations before marketing the business.
Evaluate the impact of any Medicare revenue decreases on your Gross Profit Margin (GPM) while taking into account the anticipated growth in census. Then make sure your census growth projections are based on solid data. Any potential suitor would take into consideration that your Medicare revenues will decrease by at least 30 percent and directly affect your GPM on a per patient basis. This effectively makes each patient less profitable. Most companies expect to rapidly increase their overall patient census, which is very likely. However, increasing your patient base by 30 percent does not mean you will have the same profit as pre-competitive bid.
Build reasonable marketing expenses into your projections, especially relative to your anticipated growth. I have found that new business does not just show up on your doorstep with a winning bid. Rather, new business must be solicited, which costs money. A careful buyer will examine your marketing budget to see if it matches up with the projections.
Evaluate the return on investment (ROI) from the buyer’s perspective. Will the buyer be able to attain a 100 percent ROI within a reasonable timeframe (usually three years)? If not, buyers will resist your price. With a probable 30 percent decrease in Medicare revenues, there is not a lot of incentive for the buyers. However, they (as well as you) know that there are other benefits in competing in a closed market, despite lousy Medicare reimbursement. These advantages include rapidly increasing market share, the benefits of economies of scale and the possibility of owning a significant piece of the marketplace. All of these factors act more as a counterweight to the reimbursement cuts, risks and the other negatives of the marketplace.
In addition to the ROI analysis, make sure that you calculate the adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Buyers typically look at a multiple of adjusted EBITDA as a gross calculation of cash flow for valuation/pricing purposes. A qualified mergers and acquisitions advisor will often help you better understand and apply the adjusted EBITDA analysis for free.
Establish criteria for both an ideal buyer and an acceptable buyer. For example, an ideal buyer might be the owner of a larger DME, who is extremely well-capitalized and in an adjacent market. An acceptable buyer might be a variation of these criteria. An unacceptable buyer might be someone who is brand new to DME and is solely interested because he heard about “all of the Baby Boomers who will need medical supplies” and wants to take advantage of the business opportunities that circumstance is expected to provide.
Outline a general plan for your life post-transaction. This is one of the most often neglected steps in the process, but when you are “selling your baby” it’s very important to understand the implications for your life transition.
If you are fortunate enough to win a Medicare DME bid, congratulations! Remember to take your time to objectively review your business, buyer characteristics and your competition as you prepare to sell. Yes, you won a bid, and yes, there is no guarantee of success. But you have become a more desirable company and there is plenty of opportunity for you to have a very successful sale. Good luck!