If you are contemplating the sale of your business, be advised that it is a buyer’s market out there. And while you won’t exactly leave the bargaining table wearing nothing but a barrel, it should come as no surprise if the purchaser’s final offer is less than ideal, says Richard Glass, president of Steven Richards & Associates Inc, Tarpon Springs, Fla, a consulting group that has facilitated the sale of more than 150 HME companies in the last dozen years (20 of those in 2005 alone), ranging in size from $1 million to $20 million in annual revenues.

Glass is an affable certified public accountant with 30 years of experience who keeps his thumb on the pulse of the HME industry. He was kind enough to chat with Home Health Care Dealer/Provider magazine about trends in HME mergers and acquisitions.

Dealer/Provider: Over the last 12 months, have you seen any shifts in merger-and-acquisition strategies?

Richard Glass, president of Steven Richards & Associates Inc, Tarpon Springs, Fla

Glass: One shift worth noting is that buyers have become a bit more open to companies that have significant non-Medicare revenue sources and that have product mixes other than the traditional high-profit respiratory-dominated mix.

Dealer/Provider: To what do you attribute this new openness?

Glass: The continuing onslaught of cuts, prospective cuts, threats in the form of competitive bidding and Medicare quality standards, most of which are aimed primarily at the respiratory business. Consequently, buyers are looking at the trends to identify other profitable, fast-growing product lines. Sleep is one of those—it has been growing at an annual rate of 25%. Diabetic products are another.

Dealer/Provider: Do buyers still love Medicare oxygen business?

Glass: It is still the most profitable thing going, and there continues to be a high degree of interest on the part of buyers. But there is an awful lot of uncertainty right now. So how profitable Medicare oxygen will remain, and for how long, is a question that no one can answer. And that is what is causing some buyers to be more open-minded about looking at companies with other product and payor mixes.

Dealer/Provider: Is one of those uncertainties the 36-month cap on oxygen rentals?

Glass: It is. Most buyers have sought to answer questions such as, if the cap were in effect today, what percentage of the seller’s patient base would exceed that 36-month limit? The answer will tell them how much less money the company can expect to collect compared to what it made historically before the cap—which they will factor into calculations about what they think the company is worth and what they are willing to offer for it.

Dealer/Provider: It used to be that a company needed to generate 60% to 70% of its revenues from respiratory products and services just to be considered a good candidate for acquisition. Is that still the case?

Glass: Generally, yes.

Dealer/Provider: Any possibility of that changing?

Glass: I do not see a massive sea change ahead. As I look at the landscape and where things might end up, I think respiratory is still going to be a desirable area for buyers, based on the economics of it and, importantly, on the growth potential due to the favorable demographics of the aging population.

Dealer/Provider: Is there growth occurring in the home infusion arena, and to an extent significant enough to attract attention from buyers?

Glass: Yes to both. There is enhanced buyer interest, a surge of interest, which really did not materialize until about a year ago. But I did not mention home infusion in answering the previous question because we don’t really look at home infusion as part of HME—rather, we see it as complementary to HME. Certainly, that is how some buyers look at it. In fact, they see it not just as complementary but as a synergistic pairing. Also, some of the interest in home infusion is coming from hedge funds and private equity investors who have so much money to spend and have been looking for good places to park it—they know about the effects of the Baby Boomers on growing health care utilization and how it is less expensive to deliver care at home. Home infusion is one of the few home health care segments that has not been subject to significant reimbursement cuts this time around. As a consequence, we are seeing signs of significant merger-and-acquisition activity in this sector for the first time since the early 1990s.

Dealer/Provider: Do companies that rely to some degree—or perhaps even primarily—on managed care contracts for reimbursement come across as attractive to buyers?

Glass: There is a bit more interest in them, yes. It is again, as I alluded to earlier, a reflection of this desire among some buyers to find opportunities that are going to be safe from whatever CMS and Medicare can dream up. Traditionally, capitated managed care contracts have not been a plus. But in the last year, some buyers are seeing more value in companies that are providers to a closed insurance product where there are only a few other providers on the panel. It's still not the driver in the transaction, but it is certainly an area of greater focus and interest from some buyers.

Dealer/Provider: What kind of impact will competitive bidding have on M&A interest and activity in 2007?

Glass: Too early to tell. My opinion is we are not going to have much of a competitive bidding program in place in 2007. CMS has yet to announce what competitive bidding means, how it will be done, what areas it affects. It is telling that in the last 4 months, in my discussions with buyers, no one has really been talking about national competitive bidding. They are more concerned about this first-time-ever capping of oxygen—and now this announcement that they are capping NIPPVs at 13 months.

Dealer/Provider: Some experts are predicting there could be as many as 30% fewer HME businesses after competitive bidding takes full effect. How does that figure match up with your own projections?

Glass: I would question it. Is it possible? Sure, it is possible—even plausible. There are a lot of mom-and-pop shops around the country, and it would not be hard to imagine a shakeout in which 30% of them go away, even without competitive bidding being involved. But, again, at this point, no one knows how competitive bidding is going to work. No one knows if they are going to allow unlimited bidders or if it is going to be like a Veterans Administration contract where, if you want oxygen in, say, northern Florida, you can get it from only one company. As a result, no one can say what competitive bidding is going to mean. Until we do, it is impossible to make an intelligent assessment of the number of HME companies that will disappear.

Dealer/Provider: Is this a buyer’s market or seller’s market?

Glass: It has moved in favor of the buyers. Since late 2005, there has been an increase in supply and a decrease in demand. There are HME company owners who are disgusted by the constant rounds of reimbursement cuts, and they want out—but there aren’t any fire sales taking place. Meanwhile, you’ve got a lot of buyers out there scratching their heads and trying to assess what all these developments are going to mean to them, so at least a couple of the big buyers have decided to pause their acquisition programs until they can sort things out. In this type of market, it is even more important than usual that sellers provide buyers with a detailed, accurate presentation of the business.

Dealer/Provider: When do you expect the situation to improve for sellers?

Glass: Probably by the middle of this year, things will start picking up again as all these various confusing issues get resolved or work themselves out. In the meantime, we are working with our seller clients to effect improvements in light of declining reimbursements and are counseling them to be patient until the market improves.

Dealer/Provider: Among HME companies thinking of selling, what do you find to be the biggest misconception?

Glass: One misconception centers around how much demand is actually out there. A lot of them still think it is a seller’s market, which it was for quite a few years leading up to the end of last year. I think another misconception is in knowing how to recognize the right exit point—one of the things we do here is get involved with HME companies far in advance of when they are ready to sell so that we can advise them on how to grow their business to the ideal point where a sale will make the most sense and yield the best possible return on the original investment. DP

Rich Smith is a contributing writer for Dealer/Provider.