What does Economic Uncertainty Mean for Selling Your Orthotics & Prosthetics Business?

By Generational Group

04/13/2023

It should come as no surprise that the process of buying and selling businesses is affected by the general health of the economy. More expensive borrowing, market uncertainty, and shifts in consumer demand are all factors that can make both buyers and sellers wary about pursuing transactions. After an unprecedented flood of mergers & acquisitions (M&A) in 2021, M&A activity in 2022 was less stable. 

As we move forward in 2023, business owners in the orthotics and prosthetics industry who are contemplating the sale of their company will benefit most from having a 360-degree view of the demand for and value of their business. After all, economic uncertainty does not mean that these business owners should put their head down and try to weather the storm without creating and maintaining an exit plan. 

Being unprepared and uninformed will almost certainly come back to haunt you when it’s time for you to hand your company off to new leadership. The right advisor will help you develop a successful exit strategy regardless of the current economic backdrop, and will help you maintain that plan through unstable times. 

Buying and selling in the orthotics and prosthetics (O&P) space is particular in a few ways. Due to the industry being highly niche, the typical transaction could take up to 5 years to complete. During that time, the focus is on identifying the risks that might worry potential buyers and affect valuation. 

Many of the sellers we have worked with have done a nice job of eliminating those risks by providing specifics that minimize the liabilities in the buyer’s mind. To that end, it is crucial to begin careful documentation years before the start of a potential sale. Without extensive documentation, you won’t get the best buyers, or any buyers at all.

Buyers won’t miss much while they conduct the due diligence process, so you have to be thoroughly prepared with detailed documentation of your patient base for any potential concerns that are raised. This has helped our clients in this industry avoid any nasty surprises when working with potential buyers and it provides patients with a seamless transition with the new leadership.

When selling an O&P business, it’s important to remember that the buying pool is extremely limited, because owners have stringent requirements for potential buyers. That’s because, unlike other industries, O&P is patient-focused. O&P sellers we have worked with want to make sure that the buyer possesses a high level of knowledge of the field and is acclimated in the industry, making it impossible to sell to an organization that is not in the space. As we saw with one of our own O&P clients in their recent sale, most sellers in this industry are looking for a seasoned buyer who understands their business and puts an emphasis on their patients’ interests and well-being. 

Like most business owners, O&P sellers are cognizant that people are the cornerstone of their operation. With that in mind, it’s important to consider not only on the price a buyer proposes, but also how the new company ownership will fit in with their former employees, suppliers, and customers. Of course, this is especially important if the seller means to stay at the company after a sale, but even if they have no such intention, it’s important to keep in mind the needs of all stakeholders. 

And the work doesn’t end once you’ve identified a buyer. During the transition period, it is essential for an O&P business to continue to show robust activity, or they run the risk of a sharp decline in patient retention. A buyer will hire a third-party accounting firm to assemble a quality-of-earnings report to validate the data that underpins financial performance. It’s a very thorough document, and that’s why documentation, and identifying potential risks ahead of a deal, is absolutely essential. 

The prosthetics industry is no less susceptible to the ebbs and flows of the economy than any other industry. But understanding how transactions affect businesses and consumers is crucial for preparedness in an industry with a lot of moving parts. Through it all, it’s important to have a trusted advisor in your corner who will help you develop an exit strategy, identify potential risks, and make the right decisions for your stakeholders.  

David Fergusson is Executive Managing Director of M&A and Technology Practice Leader for Generational Equity, the leading middle market investment bank for privately held businesses.

This article first appeared in Lower Extremity Review Magazine, February 2023.