Selling a Durable Medical Equipment Company

What a buyer is paying for

Buyers pay for the earnings left after the owner's pay is set at a fair market wage. They also pay for how reliably those earnings arrive. Rental revenue, where a patient keeps a piece of equipment for months and the payer pays each month, is the most valued kind. Oxygen, CPAP therapy with its recurring supplies, and long-term rental beds all create that rhythm. A one-time sale of a walker or a brace brings in cash once, and a buyer values it lower.

Referral sources come next. A DME company grows because discharge planners, home health agencies, sleep clinics, pulmonologists and surgeons send orders. Buyers ask where each month's new patients came from, and they ask how much comes from any single source. A company that depends on one hospital's discharge office will see a buyer worry about what happens if a contract changes or a staff member moves on. We cover the general concern in our post on customer concentration.

Finally, buyers pay for process. A company that gets orders in cleanly, delivers equipment on time, collects the signed paperwork and bills the payer without errors has a machine that a new owner can run. A company that depends on one person to chase paperwork has a risk the buyer will see right away.

What makes one company worth more than another

Payer mix matters a great deal. Companies with a mix of Medicare, Medicaid, commercial plans and a modest amount of private pay usually draw broader interest than ones that live on a single payer. Each payer sets its own fee schedule, and a change to those schedules can move earnings quickly. Buyers will ask how your reimbursement has moved over time and which product lines depend on competitive bidding or on specific contracts.

The product mix also decides value. Respiratory and sleep equipment produce recurring revenue and are often the most prized. Mobility equipment and home accessibility products sell at good margins but come in lumps. Diabetic supplies, wound care and ostomy products are repeat items, though the margins can be thin. A company with a clear focus, such as home oxygen in a particular region, may draw a specialist buyer who pays more than a generalist.

The rental fleet is a large asset, and buyers inspect it closely. They want to know how many units are out, how many are in the warehouse, the age and condition of each type, and whether any are lost or unaccounted for. A fleet that does not match the books is one of the more common surprises in a deal, because equipment gets sent home with patients and never comes back. Buyers will often ask for a physical inventory of the fleet, so start counting early.

Accreditation counts too. Payers expect a DME supplier to hold the right accreditation and to meet standards for staff, record keeping, infection control and delivery. A company with a clean record and current accreditation is worth more than one that has gaps. Buyers will ask for the latest survey results, any corrective plans, and your history with payer audits.

The records a buyer will ask for

Expect requests for the business tax returns, monthly profit and loss statements and a balance sheet. A buyer will want an accounts receivable aging report broken out by payer, because DME companies carry large receivables and the quality of those receivables is a big part of the story. They will ask for the denial rate, the average time to collect, and the share of claims that get paid on the first submission.

They will want a revenue report by product line and referral source, a list of active rental patients and their equipment, the fleet inventory, the staff list with licenses and certifications, and every payer contract. They will ask for any audit letters you have received and how they were resolved. Our post on getting your financials ready explains what clean books look like, and a DME company should add a billing quality report to that package.

Buyers also look closely at documentation. A payer may require a signed order, medical records that support the need, proof of delivery and, for rentals, evidence of continued need. If your files are missing signatures or dates, a payer can claim back money it already paid. A buyer will test a sample of patient files, and a thin file can lower the price or lead the buyer to ask for money held back after closing. Our post on earnouts, holdbacks and working capital describes how those tools work.

What has to transfer

Healthcare payers care who owns the company. In many cases the supplier enrollment with a payer is tied to the owner and the location, and a change of ownership calls for notice or a new enrollment. Some payers treat the buyer as a new supplier, which can leave a gap during which the company cannot bill for services. Rules vary by state and by payer, and your attorney confirms what applies to your company. We bring the buyer's advisors in early so the timing is not a surprise.

Accreditation, state licenses and local permits need the same treatment. Some stay with the business and some must be applied for again. Oxygen and respiratory work often brings additional requirements for storage and delivery, and a buyer will want proof that you meet them.

The lease on the warehouse and showroom needs the landlord's consent, which we describe in our post on the lease as part of the deal. Delivery vehicles, manufacturer and distributor accounts, billing software, referral relationships and patient records follow. Patient records contain protected health information, so the way they transfer needs careful handling and a lawyer's advice. Employees are important in a business where trained technicians set up equipment in a home and coach the patient, and where billing staff know each payer's quirks.

What tends to sink a sale

The same problems turn up in sale after sale. Billing is behind or messy, and receivables are older than the books admit. The documentation in patient files is incomplete. One payer or one referral source makes up too much of the revenue. The fleet does not match the count. An audit from a payer is open and unresolved. The owner is the one who knows every referral source and every discharge planner by name.

Healthcare buyers are also careful about compliance history. A company with an open payer investigation, a pattern of repayment demands or a record of unreported problems will find that buyers either leave or ask for protection that costs the seller money. If you have anything like that, we would rather know early, so we can decide how to present it honestly.

How to prepare

Start a year or more ahead if you can. Clean up billing and clear old receivables. Audit your patient files and fill the gaps. Count the fleet and reconcile it to the books. Spread referrals across more sources and write down what each one brings in. Check that your accreditation and enrollments are current. Build a manager team that can run the company while you step back, as we describe in our post on owner dependency.

At Business Advisors of America we start with a valuation based on your own numbers, prepare the materials a buyer and lender will expect, and screen buyers before they learn who you are. If you want to read more about selling a durable medical equipment company, the sub-industry page is a good first stop.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.