Seems everyone wants to be a millionaire these days, and home medical equipment providers are no different. At Medtrade West in Las Vegas (the city where millionaires are made and lost), HME providers got a shot at the big win — well, sort of, anyway — when Dexter Braff of Pittsburgh, Pa.-based acquisition and merger firm, The Braff Group, offered the HME industry version of “Who Wants to be a Millionaire?”

Complete with lights (and a camera or two), the “show” asked some tricky questions pertinent to those in the HME industry. Since how you answer could determine how successful your business is, we at HomeCare asked Braff to share the questions — and the right answers — with you. Why not see if you can hit the jackpot?

1. In pricing companies, what measure of earnings is most commonly used by buyers?

   EBIT (earnings before interest and taxes) is favored because it factors out interest expense related to the financing of assets and income taxes. This is important because from a valuation perspective, how assets are financed is irrelevant to the innate value of the business. Furthermore, with respect to taxes, with companies being taxed varying rates due to many different factors, pre-tax earnings provide a more meaningful and comparable earnings measure.

2. What is the most prevalent method of valuing home medical equipment companies?

   Multiple of Earnings. Buyers acquire companies for the earnings they can generate. The multiples reflect the relative risk of the earnings stream over time — the greater the risk that earnings will deteriorate, the lower the multiple. The lower the risk, the greater the multiple.

3. HIPAA stands for what?

   Health Insurance Portability and Accountability Act. This act will hold virtually all health care providers responsible for maintaining the security and privacy of health care data. This becomes particularly important in a market increasingly using computers and the Internet to transmit data.

4. When a buyer requires that a seller take responsibility for any past wrongdoings, the buyer is requiring what?

   Indemnification. This is the legal language that protects buyers from being held responsible for any reimbursement, legal, clinical, financial, operational, or other irregularities that may have occurred prior to the date of acquisition. Indemnification is a critical element of most definitive purchase agreements.

5. In the accrual basis of accounting, expenses are recognized when …

   Incurred. Under the classic accounting principle of matching, it is imperative to match revenues with the expenses incurred in generating them. This facilitates a measure of profitability that is unaffected by when a bill is received or ultimately paid.

6. When a company seeks protection from its creditors in an attempt to re-organize operations and finances and re-emerge as a health concern, what does it file for?

   Chapter 11. When a company files under Chapter 7, it basically concedes that it cannot overcome its financial difficulties and essentially goes straight to liquidation.

7. In mergers and acquisitions, the concept of synergy is best represented by which equation?

   1 + 1 = 3. In acquisitions, synergies occur when the value of combined companies is greater than the simple sum of its parts. Acquisition synergies are most often realized through cost reductions, enhanced efficiencies, leveraging of infrastructure, and access to new products and services.

8. After signing a letter of intent and before securing a definitive purchase agreement, virtually all buyers do what?

   Perform due diligence. During due diligence, buyers have the opportunity to evaluate financial records, patient files, clinical protocols, billing and collection activities, personnel records, and other operational and legal records and procedures. This is particularly crucial as buyers try to ensure that acquisition targets are in compliance with all reimbursement and regulatory guidelines.

9. Working capital is defined as:

   Current assets less current liabilities. Current assets are those assets expected to turn into cash within 360 days. Current liabilities are those debts expected to be paid within 360 days. Current assets less current liabilities is therefore a critical measure of the firm's liquidity — its ability to meet its short-term financial obligations.

10. What method is considered the best way to account for uncollectible revenues?

    The reserve allowance method: As opposed to the direct write-off method where uncollectibles are written off when the company determines uncollectibility, allowance methods essentially establish reserves when bills are initially generated. As such, revenues, profitability, and accounts receivable balances are substantially less likely to be overstated.

11. The purchase price paid for a company above the net book value of assets acquired is referred to as what?

    Goodwill. From an accounting perspective, goodwill represents the value of a company above and beyond the value of the basic assets being acquired. In structuring a transaction, the determination of goodwill is particularly important as goodwill is taxed differently than other purchase price elements.

12. Which home care sector was least affected by the Balanced Budget Act of 1997?

    Infusion therapy companies. With the bulk of IV reimbursement coming from sources other than Medicare, BBA 1997 had minimal impact on the infusion sector.

13. Which company once owned Foster Medical?

    Ding-dong, Avon calling. In the 1980s, Avon products embarked on a strategy to diversify its holdings. Targeting health care, among other firms, the company acquired Foster Medical.

14. What staff position is a step-variable cost?

    Delivery techs. A step-variable cost is a cost that varies with volume of activity. But unlike pure variables that vary at small changes in volume, step variables change at larger volume intervals. So although a small increase in volume may not require an additional delivery tech, once activity rises to a certain incremental level, a new tech must be hired.

15. In valuing restricted stock, what is the most common discount applied by appraisers?

    30 percent.

16. The value a specific buyer is willing to pay for a specific seller given the buyer's specific goals, objectives and synergistic opportunities is referred to as what?

    Investment value. Fair market value is the value an “average” or typical buyer would pay for a company, with both buyer and seller knowing all the relevant facts and neither being compelled to buy or sell. Investment value, on the other hand, recognizes that for various reasons, a particular company might be more (or less) valuable to one buyer versus another. For sellers, the goal then is to identify the buyer that could make the most of the transaction and would therefore be more inclined to pay an investment value premium.

17. Stock that has not been registered with the Securities and Exchange Commission and therefore cannot be freely traded in the public markets is known as what?

    Restricted stock. Because stock registration can be costly and extremely time consuming, when companies include stock in an acquisition package it is generally unregistered and hence, is restricted. After a one-year holding period however, the stock generally becomes exempt from registration and may be freely traded. Valuation experts typically apply a discount to the face value of restricted stock to account for its lack of liquidity.

18. What “add-backs” to earnings is least likely to be challenged by a buyer?

    Amortization. Unlike depreciation, which recognizes the wear and tear on tangible assets that eventually must be replaced to maintain a business, amortization is the method by which intangible assets such as goodwill, organizational costs, etc. are expensed over time. Since intangibles generally don't have to be replaced, buyers typically consider amortization a pure add-back.

19. What court decision ruled that regardless of the form of acquisition — purchase of stock or assets — Medicare liabilities could travel with the seller's provider number?

    The Vernon decision. Prior to the decision, buyers generally acquired the assets of a home health company (including its provider agreement) instead of its stock, specifically to avoid assuming unknown liabilities. By essentially “piercing” the protection buyers previously had in assets deals, the Vernon decision lead buyers to require greater due diligence and indemnification.

20. How is the expense of a capital lease posted on an income statement?

    Depreciation and interest. In an operating lease where the underlying value of the assets is not recorded on the balance sheet, the costs are generally recorded as lease expenses. Capital leases, on the other hand, are recorded as assets. As such, part of the expense is recognized as depreciation. The balance is interest expense to reflect the cost of financing.