DME Partner Buyout Financing: How It Works
A DME partner buyout happens when one owner of a durable medical equipment supplier buys out another, whether because of retirement, a disagreement about direction, a health issue or a partner’s desire to move on. Financing the buyout is only part of the challenge. For DME suppliers, a change in ownership can also affect Medicare enrollment and accreditation, so the structure of the transaction can matter as much as the price.
This article explains how partner buyouts are typically financed and what owners should consider before agreeing on terms. Ownership, enrollment and accreditation rules vary by program and state, and nothing here is legal, tax, billing or compliance advice.
Why a DME Partner Buyout Needs Careful Planning
Most partner buyouts involve the same basic questions: what is the business worth, how will the departing partner be paid and how will the remaining owner fund it. DME suppliers face an added question: will the change in ownership trigger regulatory consequences?
Under current Medicare rules for DMEPOS suppliers, a change in a majority of direct ownership within a set period after initial enrollment or the most recent ownership change may require the supplier to enroll and be accredited as a new supplier, rather than simply reporting the change. That can mean a period without Medicare billing. Our article on the DMEPOS ownership rule explains how that window works.
Whether a particular buyout triggers these rules depends on the ownership percentages, the timing and how the transaction is structured. Healthcare counsel should review the plan before terms are finalized. Enrollments, accreditations and payer contracts should not be assumed to carry over unchanged.
Step 1: Review the Operating or Shareholder Agreement
Many partnerships have a buy-sell agreement that sets out how a departing owner is bought out. It may cover valuation methods, payment terms, triggering events and restrictions on transfers. Owners should review these provisions early, since they may determine much of the deal.
If the agreement is silent or outdated, the partners will need to negotiate terms directly, ideally with separate advisors.
Step 2: Establish a Fair Value
Partners often disagree about value, so an independent valuation can help. Value for a DME supplier is generally driven by cash flow, recurring resupply revenue, payer mix, compliance record and referral relationships. Our article on DME company valuation covers these drivers in more detail.
The valuation should also reflect any known risks, such as pending audits, reimbursement changes or dependence on the departing partner for referral relationships.
Step 3: Understand the Regulatory Impact
Before agreeing on structure, the partners should work with counsel to answer:
- What percentage of direct ownership is changing?
- When did the supplier first enroll, and when was the last ownership change?
- Will the buyout require a new enrollment and accreditation, or a reported change?
- How will Medicare Advantage, Medicaid and commercial payers treat the change?
- Do state licenses need to be updated?
If a period without Medicare payments is possible, the financing plan should account for it. Our article on bridge financing for a DME change of ownership explains how some suppliers plan for that gap.
Step 4: Choose a Financing Structure
A DME partner buyout may be funded through one or more of the following, depending on the business, the buyer and lender review.
- SBA 7(a) loans: SBA 7(a) financing may be used for certain partner buyouts when program requirements are met, subject to eligibility, use of proceeds, program rules and lender review
- Conventional loans: lenders may finance a buyout based on the business’s cash flow and the remaining owner’s credit and experience
- Seller financing: the departing partner may accept part of the price over time through a promissory note
- Cash from the business or remaining owner: some equity contribution is generally expected
If seller financing is part of the plan, lenders and programs may limit how it is structured, and seller notes are typically subordinate to the senior lender. Earnouts may also be limited by lenders or programs. Owners can estimate payments with our SBA loan calculator; results are estimates only and not an offer or approval.
Step 5: Decide on Stock vs Asset Structure
Most partner buyouts are structured as a purchase of the departing partner’s ownership interest. In some situations, the parties may consider other structures. Each approach has different tax, liability and enrollment consequences. Our article on DME asset vs stock purchases explains how structure can affect Medicare billing after closing.
Step 6: Plan the Transition
A departing partner often holds relationships with referral sources, payers or key staff. A transition plan may include:
- A period during which the departing partner introduces the remaining owner to key referral sources
- Updated signing authority, bank accounts and payer records
- Communication with staff about leadership changes
- Restrictive covenants, which should be reviewed by counsel because enforceability varies by state
What Lenders Look For
Lenders financing a DME partner buyout generally review:
- Financial statements and tax returns for the business
- The buy-sell agreement and proposed terms
- The valuation report
- Payer mix, receivables aging and audit history
- The regulatory analysis of the ownership change
- The remaining owner’s experience, credit and liquidity
Every loan is subject to approval, and nothing here is a commitment to lend.
Final Thoughts
A DME partner buyout can give the remaining owner full control and the departing partner a clear exit. Because ownership changes can affect Medicare enrollment and accreditation, the most successful buyouts start with a regulatory review, a fair valuation and a financing plan that accounts for any period of disrupted billing.
US Medical Funding helps durable medical equipment owners finance partner buyouts and ownership transitions. Learn more about our DME business acquisition financing.
