There is a new breed of DME owner rapidly gaining ground in the DME marketplace. The mom-and-pop shops are out and private equity firms are in. During the past several years, private equity (PE) has played a larger role, usually behind the scenes. For better or worse, they now comprise a significant portion of our market. What is private equity? A private equity firm is essentially a pool of money looking to invest in or buy companies. Overall, PE firms have no operations other than the buying and selling of companies. However, in reality, more PE firms are providing portfolio companies with resources, management and assets. Private equity differs from the more popular venture capital, which is based in higher risk start-up enterprises, and the equity is purchased up front in hopes of exponential gains. Private equity firms focus on established companies with a strong revenue cycle and often leverage equity against the company’s assets. PE is seeking steady solid geometric growth. How are PE firms funded? Private equity firms raise their money from limited partners that usually include wealthy individuals, capital from companies, endowments and loans and lines of credit from lending intuitions. Do not assume a PE firm is a bottomless pit of money. These firms are savvy money managers that have to answer to their investors. How does private equity work? Generally, a PE firm will begin by buying a platform company. A platform company is typically a larger, profitable company with a business model that the PE partners like. This platform is considered their base of operations. PE firms usually keep the existing management intact while executing a variety of improvements that range in nature from streamlining operations to strategic improvements and so on. Once the platform is in order, they focus on rapidly growing sales either organically, through acquisition or both. The platform company is now in the PE firm’s portfolio of companies. Targeted acquisitions, also referred to as add-ons or tuck-ins, are generally focused on smaller companies that have synergies with the platform company (usually their product lineup). Other acquisitions often target territory growth and market saturation. They then take advantage of economies of scale to continue optimization of their platform. Once they have achieved predetermined metrics or after a certain amount of time (typically three to five years), the platform company is sold. PE firms make money from the divestiture of the company—often referred to as a liquidity event—and they make money while growing the company by way of management fees. How can PE firms help me? As a DME or home care owner, private equity presents a great opportunity to take some chips off the table while staying in the game. A lot of DME owners are opting to deleverage their exposure in our volatile market, but they still have a desire to stay involved. Private equity offers an opportunity to have your cake and eat it, too. In most transactions involving PE firms (either platform or add-on), the current owner remains employed with the platform company. Ideally, PE firms seek transactions in which they pay part in cash at close and the remainder in an equity stake in the platform company. Assuming all goes well, this ultimately creates two liquidity events for the DME owners. One when he/she sells his/her DME company to the PE firm and another when the PE firm sells the platform. The second liquidity event is often as lucrative as, if not more than, the first. How can PE firms hurt me? PE firms are well-oiled machines that are models of efficiency and profit. If you are competing head to head with them in the same marketplace, you will find yourself at a disadvantage—not just a disposable cash disadvantage, but a disadvantage on the service and marketing levels as well. Unlike a large national company such as The Scooter Store or Lincare—which most local DME providers can dance circles around—these platform companies are a large competitor that can compete with the quality of service usually associated with a local DME provider. Some PE firms are fundless sponsors—buyers without money. They seek out a platform to purchase, negotiate a deal with the owner and then find the money to close the deal. As you can imagine, this creates an additional layer of complexity on an already complicated process. A good M&A advisor will be able to help you distinguish your best options in this ever-changing marketplace.
