How to Attract a Private Equity Investment

In today’s DME marketplace, we see the growing presence of private equity groups (PEGs) as buyers of lower middle market companies. PEGs have increasingly moved toward smaller companies with adjusted EBITDA as low as $500,000 and even smaller for a “tuck in.” This has increased the opportunities for smaller companies, as long as they understand that the “buyer eyes” of PEGs can be quite different from those of more familiar strategic buyers. But first, why would a PEG investment be something an HME owner would want? Especially an owner whose business is doing well? A PEG investment is attractive for three primary reasons.

1. It allows the current owner to deleverage current risk of holding all (in most cases) net worth in one company. By allowing for a partial cash-out of equity the owner is now able to diversify financial holdings.
2. The current owner almost always stays in the same management role and continues to grow the business at a faster pace with outside (PEG) resources, making the company more profitable a lot faster.
3. Most PEGs look to exit their investments at a planned metric of time or revenue. The second exit is often the same size cash out, or an even larger one, for the original owner.

While each PEG is unique, they often share much in common: a desire to keep existing management in place, a focus on creating a new platform for further acquisition or a “tuck in” to complement an existing platform and the intent to grow a business quickly to conform with a four-to-seven-year investment timeline. Given these parameters, below are practical ways you can make your business more attractive to a PEG.

• Have a strong management team in place. PEGs often place as much value on your team’s potential for even greater success (the future) as financial performance to date (the past).
• Present a clear path to success. PEGs may be less knowledgeable about your market dynamics than a strategic buyer, but your ability to project an understandable picture of the future (e.g. a business plan) increases your credibility and ultimately your value.
• Build the right product/service base. 
Product categories such as CPAP, catheters or NIV have strong margins and recurring revenue. Having a desirable product or service offering with future potential increases your attractiveness.
• Nurture organic scalability. Enhance your options and opportunities to grow even though you may not choose to act aggressively on them for a good reason, such as limited cash flow.
• Identify opportunities to grow through acquisition. Specifically identify what could be horizontal (companies with services/products such as yours) and vertical (complementary companies) acquisitions. Again, you may not choose to act on these possibilities, but knowing about them is part of presenting a path to success.
• Articulate your strengths and weaknesses. Every business has competitive advantages and disadvantages, and being honest about them helps a PEG representative assess the opportunity. Additionally, PEGs have many resources and often can compensate for your weaknesses.
• Be willing to put money where your mouth is. Keeping a strong equity stake in the new venture not only shows good faith but also proves that you are willing to stake your money on future earnings of the company.

If you consider these practical steps apart from a potential PEG buyer, there is still huge value for you and your health care business. That’s because you are focusing on a strong foundation for the future, and that’s attractive to everyone.