Ownership in O&P: A Market Prime to Make a Deal

Inside Boston's Hynes Convention Center during the American Orthotic & Prosthetic Association National Assembly this month, a handful of O&P business owners are meeting privately with Barry Smith, president and CEO of California-based Lloyds Capital, to explore exit strategies. There is a huge appetite for owners to sell and get a deal done, Smith says. They'll likely have a lot of questions about the future of their businesses. What's my business worth? Who is buying, and what kind of deal can I expect? How does the process work? What are my risks of staying private? Or is staying private an option? Should I sell to Hanger, Össur, or Ottobock? Smith has been valuing and selling O&P businesses for almost 30 years, having priced nearly 600 businesses and sold close to 166, so he has a unique perspective on these questions. As the balance of O&P facility ownership continues to change, choosing the best option can be complicated. What should O&P business owners consider when choosing between independent ownership, accepting a buyout offer from a major manufacturer or large national or regional practice, or merging with another care provider. In an evolving O&P market, we spoke with owners, administrators, and consultants to explore reasons for opting for one ownership model over another. Wide-open Market Most industry experts would agree that the O&P market today is healthy, and it is an opportune time to buy, sell, or merge. "It's always more favorable to facilitate this type of change in a stable market," says Jeff Brandt, CPO, director, business development, Ottobock Patient Care North America. Brandt is also chairman and founder of Ability Prosthetics & Orthotics, Exton, Pennsylvania, which Ottobock acquired in 2020. Brandt says while different opportunities might present themselves in a more turbulent market, operators can be more strategic in their approach to match expectations on both sides of the transaction. "It's an eyes-wide-open market," he says. "Which is attractive for sustaining momentum and scaling larger with engaged sellers." Hanger, Austin, Texas, acquired Scheck & Siress, Oakbrook Terrace, Illinois, in April 2020. Michael Oros, CPO/L, FAAOP, was president and CEO of Scheck & Siress until the sale. He became a zone vice president for Hanger in January. If the general state of the profession is healthy, the simple reality is everyone is still operating in an environment of reimbursement pressures combined with labor and supply chain challenges that are not unique to the O&P profession, Oros says. "Bringing some scale, via a merger, can alleviate some of these concerns," he says. And as healthcare networks continue to consolidate, Oros says, "It is reasonable to believe they'll seek out partnerships that can meet their needs at all their locations. This opens opportunities for providers that can respond to that demand." In 2019, Ottobock invested in Scott Sabolich Prosthetics & Research, Oklahoma City. Sabolich Prosthetics started more than 70 years ago in a simple brick building. Today it is housed in a 21,000-square-foot prosthetics center, which includes a 9,000-square-foot clinical lab in Oklahoma City. In 2010, Scott Sabolich, CP, opened a second facility in Dallas. Sabolich, who has been treating patients since 1991, says O&P has changed. "If you take the time to look back on the industry over the last two decades, you will notice things are not as simple and straightforward as they once were," he says. "Today, success is dependent on being a highly skilled clinician, incredibly diligent with delivering outcomes, and a master of your electronic medical records platform. You can't take anything for granted with carriers, and it's critical to find your niche or specialty to differentiate yourself, or your business, from the pack." Sabolich says now is the time to be savvy. "By nature, O&P clinicians are craftsmen and women who give everything they have to their patients," says Sabolich, now CEO of Ottobock Patient Care North America. "Being savvy in business and staying on top of this rapidly changing environment is difficult for some, [and] seeking out partnership with others affords them an opportunity to stay focused on the work that fulfills them—caring for patients." Smith agrees and says the time is right for businesses seeking to sell or merge. "It's a lonely life being a small O&P business owner," he says. "It takes time and energy to manage everything the business needs, labor, human resources, IT, the supply chain." Independent owners are beginning to realize that a national or regional practice can help alleviate the daily pressures of running an independent business, Smith says. "There's strength in numbers," he says. "Owners are starting to see that a larger buyer can take that weight off their shoulders." Advantages and Disadvantages When it comes to being purchased by a larger, independent O&P facility, a major manufacturer such as Össur or Ottobock, or a large patient care provider such as Hanger, there are, as expected, advantages and disadvantages. As a former independent care provider and a recent seller to Hanger, Oros speaks from experience. "Even as a larger regional care provider, you're operating in a challenging business environment. [You're] faced with short- and long-term investment decisions that have uncertain payback periods given the reimbursement climate, because unlike other service providers and manufacturers, we simply can't raise our rates," he says. Companies like Hanger, however, do have the resources to combat rising purchasing costs and reimbursement rate compression, as well as expertise and experience to train and recruit the best clinical staff, Oros says. Of course, there are advantages for independent O&P facilities to stay privately owned, though those benefits are fading, Smith says. "It's possible to stay private," he says. "But it's getting tougher and tougher to compete on price and service." And as buyers get bigger, they can eventually snuff out a smaller provider, Smith says. "There's always room for a mom-and-pop shop, but it's getting increasingly difficult for them to compete." One of the major disadvantages of selling an independent practice are emotional and nostalgic, says Oros, who uses the example of loss of company name and local brand. In addition, there's the individual challenge of learning to operate within a bigger company, such as differences in workflow, process, and communication, he says. A Time to Sell Since no one has a crystal ball, knowing the right time to sell continues to be a best-guess estimate, industry experts agree. In pursuit of improving patient care and outcomes for patients and the profession, and after eliminating other potential growth avenues, Brandt says he felt Ability P&O had the best opportunity going forward to accomplish this by joining forces with a strategic partner. "When the opportunity presented itself, unless there was a significant market dynamic suggesting otherwise, I was ready to start the next chapter for Ability P&O by scaling and beginning to leverage data and all digital solutions that create better patient outcomes and practitioner workflow efficiencies." When it came time to sell, Sabolich says he drew on past experience. "As I approached 30 years as a prosthetist, I started reflecting on what would be best for patients and employees in the long run. I consider all these people my family, and the decisions I make for the business impacts all their lives," he says. "I couldn't do anything to them that I wouldn't want done to me. I lived through the challenges my father's facilities faced back in the mid-nineties and did not want to relive that experience for myself or any of my colleagues." In Scheck & Siress' yearly strategic planning process, the company took into consideration, among other things, future investments that would be required to continue to allow the business to grow. "That information coupled with concerns about our historical secession plan design led us to consider external investment, mergers, and/or an outright sale," Oros says. Scheck & Siress' initial steps as Oros prepared the business for sale included a decision matrix to help determine a potential partner for the business and its employees. Prospective partners were then judged and scored against that decision tree over a series of formal and informal interactions, Oros says. "This helped keep us focused on what's important and minimized some of the emotional reactions." Getting the Deal Done While there is no shortage of potential sellers looking to find the best solution for their businesses, getting the deal done is often the hard part. Everyone wants their business to be successful and sell, Smith says, but not every business is worth selling, for any number of reasons, including its financial trajectory. One of the most important aspects for a business owner to consider when thinking about selling is the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), experts caution. "EBITDA is the driver in O&P," Smith says. "Businesses with almost no profit and no EBITDA are hard to sell for a meaningful amount." Sabolich says he wishes he had the perspective of time past when he was preparing his business for sale. "Something I wish people would have told me prior to putting the business up for sale is you need to start planning for a move like that two to three years in advance," he says. "You need to shift operational gears and start running it less like a personal business and more like you're working for someone else." Like Smith, Sabolich advises keeping an eye on the business' financial data. "Pay attention to the numbers [sales, growth, EBITDA] and yes, I hate to say it, start living and working on a budget, personally and professionally." Risky Business Any business venture can be risky, and buying and selling an O&P facility is no exception. Smith and Sabolich agree that a business that wants to sell has to be transparent. "If you've been sued by someone, get it out there," Smith says. "If you've had compliance issues, get it out there." Also, most businesses don't devote the level of attention needed to planning and business performance reviews, says Sabolich. "Put the time in early to know your business inside and out so when its value is challenged, you know its worth." Sabolich also adds that looking at a business' success in the past isn't indicative of a successful future. "Know your local market, know your business, and be ready to talk about growth opportunities." Finally, Smith says to be diligent when it comes to starting the process, and be cautious of your plans becoming public—the camel's nose in the tent, as the saying goes. Plan what you will tell your employees and be wary of potential leaks from within the company. Buy, Sell, Merge, Repeat In what ways will the current landscape of buy, sell, or merge affect the future of the profession? Over time there will likely be fewer business entities delivering these services, which may or may not be good for patient care, Oros says. "Ultimately, everyone in O&P should be focusing on serving our patients and our communities in a way that delivers meaningful outcomes," Oros says. "Time will tell how this will play out." By taking a glance at nearly every other medical profession, one can see they have also gone through market consolidation, says Sabolich, who says he can foresee the O&P market continuing to consolidate until there's only a handful of large national or regional providers and fewer independently owned businesses that remain. "It's only natural for our field to follow the same journey as dentistry, physical therapy, and others," he says. In addition, O&P should keep its eyes on venture capital, which continues to gain a foothold in the profession, Sabolich says. "I would encourage anyone considering selling to think hard about the partner they want," he says. "Make sure the business you've built with your blood, sweat, and tears joins forces with a partner committed to the industry's growth." Sabolich remains enthusiastic about the future of O&P. "I am excited for the direction our field is heading regarding delivering outcomes-based standards of care," he says. "We desperately need standards within O&P, and larger provider groups can afford to develop, structure, and implement these standards at a much faster pace. I see this benefitting all of us in the future." Betta Ferrendelli can be contacted at betta@opedge.com. Editor's note: The O&P EDGE reached out to a variety of independent O&P facilities, but they declined to comment.

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