Mergers & Acquisitions: Uncover the best deal

Q. When it comes to making an offer to buy an HME provider, how do buyers determine the price?
Friday, January 23, 2015

A. The primary theoretical components are definitely in play—income, growth, and risk. The lower the go-forward risk and the greater the go-forward growth opportunity, the greater the multiple of income a buyer is likely to offer a provider. 

Simple. Until you consider that buyers rarely (i.e. never) actually rigorously quantify these factors. Rather, in practice, they’re used to anecdotally informed company specific variations on industry rules of thumb. Then the pixie dust comes into play: emotionally driven market momentum that, depending on direction, artificially increases or decreases pricing. A private equity group that relies as much on the value they can financially engineer from a company as its innate risk-return fundamentals to determine price. The phenomenon that buyers will almost always pay more for companies that generate modest losses, than those that generate modest profits, believing that the one in the red has substantially greater turnaround potential. The overly confident buyer that sticks closely to pre-determined pricing rules—rules that inevitably undervalue the best performers, but overvalues lesser firms.  

In the end, pricing an HME company is an iterative, dynamic exercise, loosely rooted in risk-return fundamentals, but subject to widely motivated behavioral economics.  

So how does a prospective seller know if they’re getting a good deal? With value being so ephemeral, a good deal can only really be defined as the best deal. And the only way to uncover the best deal is to go to the broad market in a strategically orchestrated and competitive process.

Pat Clifford is managing director, home medical equipment, for The Braff Group. Email him at