Sell on the cheap or 'ride that pony until it drops over dead'?

Sunday, October 4, 2009

YARMOUTH, Maine - Bob Leonard gets calls all the time from HME providers looking to sell their companies.

"They say, 'I'm just tired of it. They are beating me up. What can you sell my business for?' and I say, 'Not much,'" said Leonard, a broker with the Braff Group, an M&A firm based in Pittsburgh, Pa. "My advice to nine out of 10 people who call me is: Ride that pony until it drops over dead. You'll get more money in your pocket that way than you could ever hope to by selling."

In the go-go days of HME M&A activity five years ago, even a "sleepy, not so great company" would sell for one times revenue; a topnotch company could fetch nearly two times revenue. Today, companies are selling for "less than 50 cents per dollar of revenue," Leonard said.

"There aren't any buyers out there saying, 'I have to buy,'" said Rick Glass, president of Steven Richards & Associates, a Tarpon Springs, Fla.-based M&A firm. "It's driven more by sellers saying, ' I have to sell' or 'I want out of here.' In those cases, there are buyers out there at some price."

Often that price is "opportunistic" for the buyer, which is really just a nice way of saying "cheap," Leonard said.

"Now, if there is some compelling reason for selling--you want to move on, you want to relocate, you hate it--that's fine," he said. "Just understand you'll be selling at a discount."

The specter of competitive bidding and other reimbursement cuts have caused this precipitous drop in company valuations. But what's hurting the HME M&A market most, Leonard said, is Medicare's oxygen cap. It stands now at 36 months, but Congress could decide at some point to drop it lower. Investors and buyers hate that kind of uncertainty.

"For any buyer that looks at these little companies, it's the same thing they've been saying: How do I value that when I don't know what I'm going to be getting paid in a few years?'" Glass said.

That's why, he added, that "companies I would have sold five years ago for one and a half times revenue are going for 70% of revenue today."