M&A Outlook for the Second Half of 2022

Let me start this article by saying that it’s a great time to be an owner and operator of a home medical equipment (HME) company. If you’re running a good HME company, there are probably multiple buyers who will want it, and with interest from multiple buyers comes increases in sale prices. This is likely to remain the case for quite some time.

With that said, there are numerous factors to keep an eye on that are influencing and could shift the outlook for HME. Let’s look at some of the most significant macroeconomic and microeconomic trends and developments, explore how these are affecting the broader HME market, and then discuss how owners should know when the time is “right” to sell their company.

Trends & Developments

The current economic trends and developments are a mixed bag for the HME market. While there are some positive factors, there are also some substantial negative factors that HME owners will want to understand and watch closely.

Pro: Interest rates. Interest rates are the most important influence on valuations. Now and for the foreseeable future, that’s great news for the HME market. Despite recent increases in interest rates, they remain historically low and reasonable. Even if the Federal Reserve sustains its current rate of hikes for the next few years, rates will remain very good. Thus, valuations should remain high.

Con: Broader economy. Low interest rates are one of the few high points for the broader economy. Factors such as inflation, uncertainty in the stock market, the possibility of a recession, and the prolonged Russia-Ukraine war are placing a damper on the economic outlook and may push some buyers to be more conservative in the number of companies they pursue and the prices they offer.

Pro: Capital overhang. Private equity firms are holding about $2 trillion in cash, and they are looking for places to deploy their capital. Health care remains a very appealing target for investment, with HME among the more attractive sectors.

Con: COVID-19. We are more than two years into the public health crisis, and COVID-19 continues to contribute to uncertainty within health care and the broader economy. Navigating pandemic-related requirements continues to challenge some organizations, while rising cases and the possibility of ongoing spikes going forward are likely to lead to patient safety and staff health challenges.

Pro: Paperwork. It’s odd to be in a position to consider paperwork a positive development, but there’s no denying that the Department of Health and Human Services and the Centers for Medicare & Medicaid Services have taken positive steps toward reducing the amount of documentation required to get patients qualified for services. This has been a win-win for HME companies and the customers they serve.

Con: Staffing. Recruitment and retention are more difficult, time-consuming and expensive. The sudden loss of a key team member or several staff members can create significant disruption for an HME company and give buyers pause.

Pro: Telehealth. One of the silver linings of the pandemic has been the expanded use of and support for telehealth. This has included the ability to use telehealth to diagnose patients and provide prescriptions and then bill for these services. Hopefully these options remain in place after the public health emergency declaration ends.

Con: Supply chain woes. While we’ve seen some positive developments concerning the supply chain and the ability to access supplies and equipment as of late, HME companies continue to face hurdles in securing the items patients need. These barriers include the availability of products, higher prices, slower delivery, and the short- and long-term impact of recalls.

Pro: Reimbursement. HME reimbursement has been on the rise, which has helped counteract rising costs, such as those associated with purchasing, staffing and higher interest rates. Hopefully we will continue to see increasing reimbursement from the likes of Medicare and the states.

Pro: Competitive bidding. Competitive bidding is gone—for now, anyway. As long as this remains the case, that’s good news for most of the HME market. But if competitive bidding returns, it will immediately become one of the most significant cons.

Impact on the HME Market

How are these pros and cons and the other macroeconomic and microeconomic changes affecting the HME market? Here are some key takeaways.

1. There’s an outsized appetite for health care.

There’s still extremely strong demand from financial and strategic buyers for HME companies. These competing forces will help drive up acquisition prices. While valuations are declining a bit, this may spur more acquisitions because prices are—or at least feel—more appropriate and less overblown than they did during 2021.

2. Fewer companies are available.

The number of HME providers coming on to the market has slowed slightly. This should increase interest in those companies available for acquisition.

3. Valuations aren’t as strong but remain very good.

In 2021, valuations for HME companies—and many other health care sectors—were, quite frankly, over the top. In fact, valuations had essentially been running all out for some time. This is not sustainable going forward, and we’re already seeing that play out. Valuations are starting to come down and that’s likely to remain the case over the next few years. However, expect valuations to remain strong; they’ll just be more like a car running at a high RPM rather than flat out. In other words, valuations just won’t be as intense as they used to be, and for good reason: Those multiples were simply not maintainable at such an insane pace.

4. Capital overhang should benefit HME.

The $2 trillion in private equity overhang needs to be deployed somewhere, and HME looks like a great place for it to go. If you’re running a solid company, expect private equity to have interest in investing in you. This will likely be the case for both financial and strategic buyers.

5. The higher cost of borrowing will be a factor.

We’re already witnessing how rising interest rates are affecting investments and we can expect the higher cost of borrowing money to remain an influencing factor. But as noted earlier, interest rates are and should remain reasonable for quite some time, so their impact will not be profound. That may change if we cannot get inflation under control and rates surge.

6. The recession won’t kill deals.

Even if we enter a recession, deals will continue to happen. There may be fewer transactions and multiples paid may decline, but well-run HME companies will still have interested buyers.

7. EBITDA matters.

Sellers showing strong earnings before interest, taxes, depreciation, and amortization (EBITDA) can expect to see outsized valuations in comparison to their competitors with a normal or below normal level of EBITDA.

The ‘Right’ Time to Sell?

Considering these numerous factors, we’re often asked by HME owners how to know if it is the “right” time for them to sell their companies. To some extent, it’s possible to time the market and move forward with a sale when these trends and developments are working in your favor—and a good advisor can help you know when to act.

But for most owners, the best timing is what’s right for their timeline—their desired goals, objectives and outcomes. Owners need to reflect on their personal situation and determine what and when is right or best for them. The market is historically difficult to time. An easier metric to time is when one’s business is on an upward trend with future sustained growth that can be quantified.

These are more important than trying to game the market. What’s driving you? How much longer do you want to run your HME company? If you’re starting to feel burned out, then that’s a good indicator that it’s time to move forward toward a sale. When you’re burned out, your business is not likely to improve and may start to decline. When that happens, you may have lost some of what made your company such a desirable acquisition and you can find yourself with fewer buyer options and lower offers.

Speaking with an advisor before you reach this stage can help ensure your company hits the market at the right time and you are appropriately rewarded for your many years of hard work in building a business worthy of acquisition.