With the first half of 2012 in the books, now is a good time to take a step back and evaluate the current M&A climate in the audiology industry. The following report, compiled from data on off-market transactions and conversations with key M&A personnel, provides a snapshot of today’s environment as well as activities planned for the future.
Corporate buyers lead the way in the audiology and hearing aid industry, as they have for the past decade. Deal activity in 2011 significantly outpaced 2010, and the first half of 2012 continued this growth trend with the help of a resurgent buyer who had previously lain dormant. Total deal volume of independent practices in 2012 is expected to reach $60-75 million.
With at least two companies striving to complete one deal per week for the rest of this year and beyond, there is no slowdown in sight. “Deal volume has not yet reached peak levels,” says Craig Castelli, Managing Director of Bridge Ventures. “Deal flow should continue to build into 2013, and should level off for some time before we see any sign of a decline.” With this, says Castelli, valuations should continue to stay strong.
Expect to see competition for acquisitions heat up in the top metropolitan markets. Sellers in the top 20 metropolitan areas, especially markets like Chicago that have yet to be effectively rolled up by corporate buyers, can expect to attract multiple offers from buyers trying to enter these markets or expand their presence. The cutoff for new market entry continues to hover around the $1,000,000 mark. Corporate buyers maintain a strong appetite for practices that generate over $1,000,000 in annual revenues, regardless of location, while they are much more selective when evaluating smaller practices.
Owner employment agreements remain a critical piece of the puzzle for corporate buyers. Having learned from past mistakes, most now require the owner to continue working in the practice after the sale. An owner seeking to maximize their sale price should factor this contingency into their exit plan. Accepting such terms, however, can be rewarding: in a study of deals from January, 2011 through June, 2012 in which Bridge Ventures clients received offers from both individual and corporate buyers, the corporate buyers outbid the individuals by an average of 65%.
Independent practice owners still tend to prefer startups over acquisitions, although this group typically completes a couple dozen acquisitions per year. These tend to be small deals, averaging less than $300,000 per transaction. Hearing aid manufacturers and buying groups continue to make financing readily available to the independent audiologist or dispenser seeking expansion, making the industry less sensitive to changes in banking policies and regulations.
There may be a sharp increase in closings during the fourth quarter of 2012, as owners rush to get a deal done before year-end in order to beat the capital gains cutoff. With the threat of an 8.8% increase to capital gains taxes, and both parties in Congress saying they would rather wait until next year to make any changes (even if that means retroactively extending the current tax structure), many owners are selling now in order to hedge their risk. This flurry aside, the next 18 months promise to provide plenty of action for those following this segment of the industry.