Buying & Selling a DME Supplier

There are many reasons someone might want to buy or sell a durable medical equipment (DME) company. Perhaps a seller is ready to retire or to try another industry; a buyer may be excited about the prospect of serving a growing aging population. In any case, there are legal guidelines for the seller and buyer to follow for different types of sales. Here are a few, all built around an example in which John Smith owns 100% of ABC Medical Equipment, Inc. and Jim Johnson wants to purchase it.  

Asset Sale Versus Stock Sale

In an asset sale, the seller will be ABC. The buyer will normally be a legal entity (XYZ Medical Equipment, Inc.) set up by Johnson. ABC will sell its “hard” assets to XYZ and will transfer its patient files to XYZ.

After the sale is completed (i.e., after “closing” occurs), Smith will continue to own ABC. However, ABC will be a shell corporation with no assets other than the money paid by XYZ.

In general, XYZ will not assume any of ABC’s liabilities. For example, if closing occurs in March and in July of the same year, a united program integrity contractor (UPIC) audit is opened against ABC for actions it took before the closing, the audit is ABC’s problem, not XYZ’s.

Assume that at closing, XYZ intends to take over ABC’s Main Street facility. ABC’s accreditation and provider transaction access number (PTAN) cannot be transferred to XYZ. Rather, XYZ will need to obtain its own accreditation and PTAN for the facility. XYZ cannot use or bill under ABC’s PTAN until XYZ obtains its own PTAN. Let’s assume that at the time of closing, XYZ has met all of the prerequisites to apply for a PTAN for the Main Street facility (i.e., XYZ is accredited, has a surety bond and has the state DME license). Assume that XYZ submits its Medicare enrollment application, or form 855S, at closing March 1 and receives its PTAN for the Main Street facility June 1. Between March 1 and June 1, XYZ should be able to serve Medicare beneficiaries but hold its Medicare claims. On June 1, XYZ should be able to submit all of the accumulated Medicare claims at once.

Assume that ABC has third-party payer (TPP) contracts. These can include straight commercial insurance, Medicare Advantage and Medicaid Managed Care. It is likely that ABC cannot transfer or assign these TPP contracts to XYZ. As such, XYZ will need to approach the TPPs and ask them to sign new contracts. 

In a stock sale, the seller will be Smith and the purchaser will be Johnson individually. All that Smith will sell is his stock certificate signifying his ownership of ABC. ABC will remain intact as an ongoing corporation. It will have the same tax identification number, PTAN, accreditation, TPP contracts, etc. The only thing that changes is that Smith is out as the stockholder and Johnson is in. As such, ABC (now owned by Johnson) remains in place at the Main Street facility; there is no break in billing.

ABC’s liabilities, known and unknown, will remain with ABC after closing. Any pre-closing liabilities will fall on ABC’s shoulders. 

Change of ownership (CHOW) notifications will need to be submitted to ABC’s accrediting organization, state licensing agency, the National Safety Council and the state Medicaid program. 

The TPP contracts will likely say that ABC cannot transfer or assign the contracts to another party. However, with a stock sale, ABC is not transferring or assigning the TPP contracts; rather, the contracts will remain in place with ABC. The only change is that ABC now has a different stockholder. Some TPP contracts will be silent regarding a change of ownership of ABC. Conversely, some contracts may say that ABC must notify the payer in advance if there is a change of ownership.

Mechanics of a Sale

There are some universal terms and mechanics to adhere to, including:

• Mutual nondisclosure agreement—This says that the parties will disclose confidential information to each other and that they will also keep the information confidential.
• Disclosure of financials—The seller will disclose financial documents about ABC to the buyer.
• Letter of intent—This is detailed, but non-binding. It sets out the terms of the deal.
• Due diligence—Essentially, this means that the buyer will “kick the tires” of ABC so that the buyer will know what it is buying. Due diligence includes:The buyer will order a universal commercial code lien search to determine if there are any recorded liens against ABC’s assets.
  • The buyer will determine whether ABC’s corporate charter is in good standing. This is particularly important with a stock purchase.
  • The buyer will determine whether ABC’s PTAN, accreditation, DME licence and Medicaid provider number are in good standing. This is particularly important with a stock purchase.
  • The buyer will review ABC’s patient files or a sample of them to determine how accurate and complete they are.
  • The buyer will review ABC’s TPP contracts. If the transaction is an asset sale, then the buyer will want to know if any of the contracts are assignable (probably not). If the TPP contracts are not assignable, then the buyer will need to determine if it can secure new contracts. If the transaction is a stock sale, then the buyer will need to determine how to give CHOW notifications to the TPPs.
  • The buyer will need to determine how ABC generates business. If business is generated on the basis of improper marketing practices or improper relationships with physicians and other referral sources, then the buyer will likely want to back out of the transaction. For obvious reasons, this is important with a stock purchase. But it is also important with an asset purchase because the buyer will not want to buy a business that has a flawed operating model.
  • The buyer will need to review past audits, current audits and audits that the seller believes may happen in the future. This is important in a stock purchase. However, it is also important with an asset purchase because a poor audit history will indicate flaws in ABC’s business model.
  • The buyer will want to interview ABC’s employees to determine whom to keep after closing and who will need to be let go. If certain employees need to be let go, then the seller needs to handle this task at or before closing.

• Closing—With an asset sale, the parties will sign an asset purchase agreement, ABC will sign a bill of sale, and other closing documents will be signed. With a stock sale, the parties will sign a stock purchase agreement, the buyer will sign a stock transfer, and related closing documents will be signed.

An important section in these agreements is entitled “Representations and Warranties” (or Reps and Warranties), which is where the parties make certain promises to each other. These promises will be enforced after closing. The seller will want as many Reps and Warranties as possible to be prefaced by the phrase “to the best of seller’s knowledge.” On the other hand, the buyer will want the seller’s Reps and Warranties to be unconditional. 

The buyer will want to pay a portion of the purchase price (e.g., 75%-80%) at closing and hold back the balance until after closing. This will give the buyer a pot of money to offset against in the event that unexpected surprises occur as a result of ABC’s actions prior to closing.