Buyers gonna buy, but with later payouts

FORT WORTH, Texas - Despite the challenges of 2020 and the havoc the COVID-19 pandemic has brought to bear on the economy, Brad Smith is bullish on the M&A market for HME. Vertess closed on four deals in the second and third quarters, and is teed up for an even busier Q4 and beyond.

“The strategic buyers are extremely active,” said Smith, managing director/partner at the firm. “There are also buyers outside the industry that aren't strategic coming in, buying into health care and looking for a platform.”

Smith spoke with HME News recently about the ongoing impact of COVID-19, as well as the outlook for next year, with a new president-elect and a halt to the competitive bidding program.

HME News: The fourth quarter has already seen competitive bidding all but cancelled and the election of a new president. What kind of impacts do you expect these to have on transactions, if any?

Brad Smith: With competitive bidding, we have that transparency now. Companies now know there's some stability and it helps them prepare for the future. With the election, we know who the president is, so maybe transactions will speed up. But even if Biden has his way (with tax reform), I doubt he would implement that in his first year because the economy is not recovering yet.

HME: What impact has COVID-19 had on valuations?

Smith: Doing valuations and transactions is always backward-looking and it's difficult to show those COVID dips in April and May as a one-time anomaly that is not going to happen again. What that manifests as is a risk component, so we are still seeing better valuations and higher multiples; however, those are coming in the form of later payouts, not cash at closing. That's because of the risk—buyers are willing to pay more but they want to make sure they are getting the return they expect so they pay out later. More of that is becoming standard.

HME: What's the impact of the uptick in COVID-19 cases that we're now seeing?

Smith: It there's a full lock-down, it will have an impact on performance. People won't be able to see their physician and that will trickle down. However, for outside investors, it has been eye-opening. They are saying, “Maybe we do need to be in health care. Home care is very viable and maybe there needs to be more services in the home.”