Due diligence: It's intense

Thursday, October 31, 2002

YARMOUTH, Maine — With Lincare advertising that it can complete an acquisition in 30 days and Apria reportedly turning deals just as fast, some wonder if the nationals are skimping on due diligence in their mad dash to add market share.

"I'm not going to say it is worse than it has ever been, but despite increasing regulatory pressure, the due diligence process hasn't improved very much," said a particularly critical industry watcher. "I'm not saying that after the sale they don't look carefully at the sale. They do. But they figure it all into the sale price and just rock 'n' roll."

That's one take. The vast majority of market watchers, however, say due diligence in the HME industry has never been better. The reason: nobody wants to inherit someone else's fraud and come under the scrutiny of federal regulators and law enforcers.

"Due diligence seven or eight years ago was: 'Hey, how are you doing, got some files. Cool. I'm done,"' said M&A expert Dexter Braff of the Braff Group.

Today, Braff said, due diligence is detailed, very analytical and involves high levels of scrutiny. So careful are buyers, Braff said, that he's seen them use handwriting analysis to make sure doctor signatures haven't been forged, that they don't look too much like the seller's.

Added another industry watcher: "Lincare checks underneath the dust. They look at every oxygen chart. Apria looks at every rental chart. These guys don't extrapolate."

In the mid-1990s, a deal would go through if 65% to 70% of a company's patient files proved clean. Today, that number is 85% to 90%, said Bruce Burns, president of Affinity Ventures in Albuquerque, N.M.

Burns and Braff estimate that due diligence takes twice and maybe three times as long as it did seven or eight years ago. Sometimes a company will wait for a seller to get his files up to the new higher standards. Other times they'll get spooked and walk away, Burns said.

"I've talked to people who have had experience with Lincare's due diligence," said Mark Hanley, president and CEO of the HME roll-up O2 Science in Tempe, Ariz. "One previous owner I talked to said that by the time Lincare was done, they knew his company better than he did." HME