What Is A Durable Medical Equipment (DME) Business?
The global Durable Medical Equipment (DME) industry is over $169 billion and growing 6% per year. The DME boom is particularly prevalent in South Florida, with its high senior citizenship population and high demand for healthcare. Medicare defines DME as healthcare equipment which is durable (able to withstand repeated use), used for a medical reason, not usually useful to someone who is not sick or injured, used in the patient’s home, and has a lifetime use of at least three years. A DME business sells DME equipment to patients either via private pay or through third party payors such as insurance companies or Medicare/Medicaid. The sale of some equipment requires physician prescriptions but many do not. .
Examples of DME Businesses
Medicare gives about 20 examples of various types of healthcare equipment that is defined as DME. Examples include hospital beds, nebulizers, canes, wheelchairs, walkers, scooters, nebulizers, oxygen equipment, and hospital beds. Some DME businesses specialize in only selling scooters (both in a showroom or strictly online). Others may specialize in selling oxygen equipment or selling and installing hospital beds and related items that are critically needed by patients in their home. As with home health care companies and nurse registries, DME companies in South Florida have a significant presence in the business sales market due to their profitability and the recession-resistant nature of their business.
DME Licensing Requirements
Florida law requires any person or entity selling DME equipment (with some exceptions) to have a Home Medical Equipment License. This license is granted by the Agency for Healthcare Administration (AHCA). The licensing application process is lengthy, time consuming, and costly. Inspections may need to be conducted and the bureaucracy is often difficult to navigate without professional assistance. The applicant must pass background checks and provide financial proof to AHCA of their ability to operate and fund the business. The insurance accreditation requirements vary by carrier, but is similarly an expensive and time consuming process. The value of a DME business should be placed at a premium because the insular nature of the industry limits competition.
DME Licensing Transfer
Upon the sale of a DME company in Florida, the buyer will have to apply for a new Home Medical Equipment license. This is the case if the seller transfers its interests to a new corporate entity (such as an asset purchase deal) or if the seller in any way transfers a majority of his or her corporate shares and the corporate entity is kept intact (such as a stock purchase deal). A buyer of a DME business must be aware that they will need to apply for a new Home Medical Equipment license, and should be prepared to do so. A competitor of a DME business usually makes a great acquirer because they have the knowledge and expertise of setting up their own licenses as quickly as possible.
Valuing a DME Business
The value of a DME business primarily has three main components. First, the insulated nature of the licensing and insurance accreditation aspects serve as a barrier of entry to new competitors and contribute to a premium valuation. The inventory of a DME business is another component. Inventory consists of product not already sold and held in stock by the business. It is valued at cost (not retail value). For DME companies who rent equipment, inventory can be especially high. The final component of the value of a DME business is its intangible assets such as its brand, customer base, employee relationships, and goodwill in the community. This is represented in the adjusted owner benefit of the business, which in turn may allow one to value its future earnings stream.
Adjusted Owner Benefit of DME Business
The adjusted owner benefit or free cash flow of a DME business is the true economic profit derived by the owner of the business. Determining the annual adjusted owner benefit begins by calculating the EBITDA (Earnings Before Interest Depreciation and Amortization) of the DME business from its financial statement such as a tax return or profit and loss report. Then one must also ‘add-back’ any personal expenses of the owner that flowed through the financial statement, unrecorded sales, and the owner’s salary. The ultimate valuation range for a DME business (without inventory) usually is about 2-5 x the annual adjusted owner benefit, depending on a range of factors such as its growth rate, customer base, margins, total addressable market, and longevity.
Examine Owner’s Role in DME Business
A DME business will generally receive a higher valuation the more absentee the owner is in its daily operations. With a relatively absentee owner who is not dealing directly with patients, physicians or other referral sources, a buyer will have an easier time after the sale. They will not have to replace the seller with themselves or with extra staff. No matter the seller’s daily role, a buyer will want assurances that the referral sources (such as physicians, hospitals, or attorneys) are kept intact after the sale. If the seller has personal relationships with referral sources, it is best to prepare the business for sale by transferring the relationships to company staff members.
Examine Accounts Receivable of DME Business
- Accounts receivable (AR) is money owed to a business from a customer or payor for services rendered or products sold.
- For DME companies with a high amount of sales that are paid by third party insurance companies (including Medicare or Medicaid), getting paid timely can pose a problem.
- A DME business (unless dealing strictly with private pay patients) must pay for caregivers or products prior to getting paid, and this can create a cash crunch.
- Typically, if payment is not received 60-90 days past the date of service, then those accounts may be classified as delinquent.
- The AR is typically not included in the sale of a DME business unless otherwise stated.
- As a part of a formal due diligence process, a buyer will usually ask for an AR aging report in order to determine how quickly the company is getting paid for services rendered or products sold.
Many DME companies in South Florida have a valuable barrier to entry from new competitors in their product category by virtue of the difficulty of obtaining a Home Medical Equipment license. A growing DME business with transferable referral sources and solid cash flow from its payors will typically result in a premium business valuation.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.