Exit Strategies

May 1, 2001 12:00 PM, Tom Gray

YOU'VE GIVEN A GOOD PART OF your life to building a home medical equipment business. It's had its ups and down, but right now it's humming along profitably.

Still, you're getting a little tired -- of the long days, the responsibilities and, let's face it, the continuing uncertainty about the future. You've seen enough of the HME industry to know that it's far from a sure thing. You think it might be nice to cash out and live it up a little.

So is it time to sell? And, if it is, how can you get the best deal?

The answer to the first of those questions depends a lot on what you want to do with the rest of your life. Here, outside advice means less than your own long-range plans. Selling your own business means, at the very least, a real change in the way you make your living. Even if you stay on, you give up the independence of ownership and start working for someone else. Or you leave the firm and either retire, start a new business or go into a completely different line of work.

In short, you need to know yourself well to know if you really want out.

Self-knowledge isn't enough, though. You also need to know the ropes of selling a business. That brings us to the second question: How do you sell?

There are certain things you need to know and do to get the best deal, experts say. When it comes to timing, for instance, you might be ready to sell — but your business might not be. And selling might not be the best solution for any problems it might be having.

Here is some key advice from experts in HME mergers and acquisitions -- covering the when, why and how of selling.

The buyers are out there -- for the right kind of company.

It takes two to make a deal, and would-be sellers of HME businesses haven't always had an easy time finding buyers. But long-time observers of the HME market say interest in acquisitions is picking up after the slump that followed the Balanced Budget Act of 1997.

This rising tide might not lift all boats, though. Certain types of HME business are more in demand than others. "Investors are taking a second look at health care," says Gina Bienkowski, vice president of Ultimate Resource, a merger and acquisition firm in Newtown Square, Pa. "We are seeing more buyers. . . but they are much more careful in their acquisitions." What are they looking for? "A strong respiratory base and a strong rental base," reports Bienkowski.

Dexter Braff, president of The Braff Group, a Pittsburgh, Pa.-based M&A firm, says buyers are "overwhelmingly" going for HME companies with Medicare oxygen business. Braff says oxygen offers reliably high per-patient revenue, and Medicare has changed its stripes. It was once considered "one of the most difficult payers," he says, but now, "with sound front-end order intake and electronic claims submissions, Medicare is one of the fastest and [most] reliable payers."

Gary Phillips, chief executive officer of Medical Consultants USA, an M&A firm in Longwood, Fla., says he also sees demand for firms doing "rehab therapy, infusion therapy, diabetic distribution centers, compound pharmacy, radiology and imaging."

Who's buying and where? The big nationals such as Apria and Lincare are still in the game, but Braff says the most active buyers today are regional companies such as Interwest Home Medical, which was recently acquired by Danbury, Conn.-based Praxair and American Home Care Supply.

Phillips says the South is a strong area because of its retired population, but he and others say buyers are also interested in more urbanized regions such as the Northeast. Braff says acquisition-minded firms used to favor rural HME businesses in an effort to avoid managed care. Now that managed care is essentially nationwide, he says, interest has shifted to urban and suburban markets where an HME business can serve a large customer base in a small area.

The time to sell is when things are going well.

Buyers look not just for profit but for profit growth; they want to get on the elevator when it's going up.

"The best time for an owner to sell a company is when that company is experiencing an upward growth trend in revenue and profitability," says Bienkowski. Phillips says the prime time for a sale "is when you are getting close to the peak of your game, not when you're on top." (When you finally do hit the top, of course, the next step is down).

Often, however, a selling decision will have little to do with the state of your business and everything to do with your plans for your own life. It might be unavoidable, says Bob Thornburg, a Seal Beach, Calif.-based consultant, if you want to retire and can't keep the business in the family.

Handing the firm to your children helps you avoid a "big tax hit," he says, but your children have to have the talent and desire to carry on. And family succession isn't a quick process. It "needs to be planned five years ahead of time or more," Thornburg says.

If the family option is out and you want to retire, now might be as good a time as any to sell. But don't sell simply because business is bad. That's the advice of Shelly Prial, founder and president of Melbourne, Fla.-based Homecare Providers Co-op. Prial suggests joining forces with "your neighbor or even an competitor" at such times. "When business is hurting, that's when you want to merge with other business to make you healthy."

Phillips says one of the biggest mistakes HME owners make is "selling when the business is in financial reversal."

Braff sums up the when-to-sell issue with a "simple, yet elusive" question: "Does the future provide me with enough upside opportunity to compensate me for the risk of not selling today?" Braff says his firm uses a software program to help HME owners weigh their options and "balance the emotions of such an important decision."

Get expert help.

Even at its busiest, the market for HME firms is thin and deals are infrequent. It's not like high-volume stock or real estate markets, where you can quickly see from the latest sales data what your own asset, like stock shares or a home, would fetch if you put it up for sale.

Home care M&A professionals say you need the services of -- no surprise here -- an M&A professional to get an accurate valuation for your business. They point out that an HME owner is busy running a business and doesn't have time to research the HME market and track down buyers.

As Gary Phillips puts it, if you don't hire an M&A firm, "you better be one." He says you should choose one based on factors such as references, professionalism, length of time in the business and "whether the CEO is directly involved with your deal."

Brentwood, Tenn.-based marketing consultant Alison Cherney has a somewhat different view of M&A specialists. They can be good at finding buyers, she says, but "you may do much better making calls to the big guys and little guys in your area if . . . you can be honest about the purchase price of the business."

When it comes to putting a price tag on your firm, though, Cherney recommends getting "an external valuation done by a valuation expert who has expertise in the HME field."

And Prial says, "Make sure you have an attorney from within the industry to review the contract."

Be prepared.

Selling a business is like selling a house, says Cherney. "You need a good house, low interest rates and a good housing market." And as any home seller probably has learned, fresh paint and some general sprucing up can do wonders. Cosmetic work, like spiffing up the showroom and making sure the warehouse is in order, can help a business in the same way.

Prial says one HPC member outfitted all his employees with jackets, featuring the company name and logo and the employee's name. "A potential buyer was so impressed that he made an offer almost on the spot," Prial says.

Financial aspects of the firm, such as leases, might also need updating. Experts advise sellers to have long leases so that buyers don't have to worry about quick rent hikes from landlords.

Getting a firm ready for presentation to buyers means, among other things, pulling together all the facts and figures that can tell a buyer just what and how much business you do. Buyers can only value what sellers show them, says Braff. So, he says, more than just getting the financials together, sellers must assemble the other data -- product, payer and referral mix, receivables aging, staffing, etc. -- as well as capturing the intangibles like "reputation, unique programs, opportunities for growth."

While you're doing all this, though, remember you still have to run a profitable business. "The best advice I can give a seller is, 'Keep your eye on the ball. Don't sit back,'" says Bienkowski. "If a person is thinking about selling, then he or she should be focusing on growth and profitability." But, she adds, sellers should be cautious about making major new investments, such as moving to a new site or putting in a new computer system.

And be sure to remedy any problems that could break a deal. "Surprises of any negative sort can be damaging," says Bienkowski.

One of the biggest threats, says Braff, comes from regulatory compliance problems. "Given the extraordinary pressure buyers are under due to increased scrutiny regarding fraud and abuse," he says, "more deals fall through due to problems in billing paperwork than for any other single reason."

Cash is king.

You might not get quite as high a price if you insist on a cash deal, but experts say the liquidity is worth the cost. Phillips says a typical sale would be 90 percent in up-front cash with 10 percent retained for up to a year.

For her part, Cherney says, "I wouldn't put anything in escrow if I could help it, because there is always wrangling over [which] part of a purchase price to put in escrow as well as future payouts."

Braff says cash is always the "best payment system." Others, such as stock, notes and employment agreements, while not necessarily bad, carry some risk, and "must be evaluated carefully, and possibly discounted to determine their 'real' value."

You might stay on, but it might not be the same.

Cherney advises sellers to "get out of Dodge -- as an entrepreneur, you'll hate working for a big company." But some buyers do stay on, and even Cherney says she has one young client who, with his entire team, remained with the business "and it's worked out well."

And sometimes you have to stay to close the deal, Braff says, "if referral sources are tied to an owner."

Follow the "need-to-know" rule with employees.

You might be used to keeping workers posted on your firm's plans, but you'll probably have to make an exception to that policy if you're planning to sell, experts say.

In selling a business, you're selling not just plant and equipment but the talent and experience of a staff as well. Announcing that you have the company on the block might touch off an exodus of key workers, and that can make your business less valuable to a buyer. So M&A experts advise telling only key employees -- those who are helping with the sale and being interviewed by the buyer.

If you tell everyone else, Phillips says, you might lose whether or not the sale goes through. If you don't sell, "you've created job uncertainty for no reason." If it does sell, "your organization may look different by that time."

Pro-active beats reactive.

If all the advice here could be boiled down to one theme, it might be this: Stay in charge. Make a plan and follow it. If you sell, do so when it fits your goals and your timetable.

"By far the biggest mistake sellers make. . . is responding to unsolicited offers from buyers," says Braff. He says sellers "severely constrain their opportunities" when they let others dictate their moves in this way, rather than developing their own strategy and presenting their firm to multiple potential buyers.

"It's about being pro-active versus reactive," Braff says. "The same degree of effort, creativity and strategic planning it takes to build a business should be employed to sell it.